Bank for International Settlements

It is now almost universally accepted that the major central banks were woefully mistaken in ignoring the build up of credit risk in the years before 2008. Whether they should have acted through raising interest rates or by tightening regulations on the financial system is still under dispute, but the abject consequences of doing nothing are plain for all to see.

This has naturally made policymakers very determined not to make the same mistake again. But they are also aware that they do not want to be a group of generals focused on winning the last war. In the past, these decisions have not proved easy to make in real time. Consequently, a great deal of recent research has been aimed at doing better in future.

The Fed has been in the front line of this work, but the Bank for International Settlements has joined in with some very valuable insights and empirical work, led by Claudio Borio. Although there is clearly a very active exchange of views occurring at the Fed, the bottom line for investors is that restrictive monetary action in the US, in response to a build up of excessive financial risk, is not likely for quite some time. Read more

The FT led its front page on Monday with a startling headline: “Economic growth must slow, warns BIS“. That’s right, economic growth must slow. As Martin Wolf cogently argues in the FT today, simultaneous deleveraging by private and public sectors, encouraged by all wings of macro policy, could result in a prolonged slump in global demand. Yet the BIS is not alone in its thinking. More and more policymakers seem to be gravitating towards similar conclusions. Read more