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Central banks told to head for exit - FT.com

http://www.ft.com/intl/cms/s/0/455af4a6-dc09-11e2-a861-00144feab7de.html#axzz2X97xajev[6/24/2013 11:12:43 AM]

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Central banks told to head for exitBy Claire Jones, Economics Reporter

Central banks must head for the exit andstop trying to spur a global economicrecovery, the Bank for InternationalSettlements has said following a week ofmarket turbulence sparked by the USFederal Reserves signal that it would sooncut the pace of its bond buying.

US Treasury markets, which saw yields hittheir highest level in almost two years on

Friday, face further challenges this week as they prepare to sell an extra $99bn ofdebt. After last weeks global sell-off, markets in the US will also be knocked bytraders winding down for the end of the second quarter.

One cannot reverse the Feds big bang moment, saidGeorge Goncalves, strategist at Nomura Securities,adding that the scale of foreign demand for this weeksTreasury debt sales would be a crucial test ofsentiment.

The BIS, which counts the worlds leading monetaryauthorities as members, said cheap and plentifulcentral bank money had merely bought time, warningthat more bond buying would retard the globaleconomys return to health. It used its influentialannual report to call on members to re-emphasisetheir focus on inflation and press governments to domore to spearhead a return to growth.

The BIS report comes on the back of last weeksmarkets turmoil, fuelled by Fed chairman BenBernankes comments that the central bank could slowits $85bn monthly bond-buying programme this yearand end it by mid-2014.

Often referred to as the central bankers bank, BISsaid the global economy was past the height of thecrisis and its goal was to return still-sluggisheconomies to strong and sustainable growth.

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Alas, central banks cannot do more withoutcompounding the risks they have already created, theBIS said, adding that delivering more extraordinarystimulus was becoming increasingly perilous.

How can central banks encourage those responsible for structural adjustment toimplement those reforms? How can they avoid making the economy too dependenton monetary stimulus? When is the right time for them to pull back ... [and] howcan they avoid sparking a sharp rise in bond yields? It is time for monetary policyto begin answering these questions, the report said.

Mario Draghis rallying cry, uttered last summer at the height of the eurozoneturmoil, that the European Central Bank would do whatever it takes to preservethe currency bloc was now being misconstrued, it warned.

Can central banks now really do whatever it takes? the BIS asked. It seems lessand less likely. Central banks cannot repair the balance sheets of households andfinancial institutions.

The BIS also railed against critics of eurozone austerity, saying there were reasonsto be sceptical about arguments such as that of the International Monetary Fundthat higher fiscal multipliers meant governments assumptions about the trade-offbetween consolidation and growth had been too favourable. There was nocompelling evidence that [multipliers] are large enough to render fiscalconsolidation more difficult [or actually self defeating].

Stephen Cecchetti, head of the BISs monetary and economic department, said atthe end of last month that the initial rise in yields for US Treasuries and stockmarket reaction following Mr Bernankes hints in May that the Fed would slow itsasset purchases should come as no surprise.

Separately, the BIS said Jaime Caruana, its general manager, would remain in officeuntil March 2017.

Mr Caruana said at the BIS annual meeting on Sunday: Ours is a call for actingresponsibly now to strengthen growth and avoid even costlier adjustment down theroad ... Monetary policy has done its part. Recovery now calls for a different policymix with more emphasis on strengthening economic flexibility and dynamismand stabilising public finances.

Additional reporting by Michael Mackenzie in New York

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ReportRockyusa | June 24 1:11pm | Permalink| Options

I think this argument about QE, monetary policy, etc., misses the far larger picture.

The established ideal of a government nanny state, whether it is labeled socialist, communist, progressive or

whatever, and the idea of larger and larger government that is determined to decide who is entitled and who is

not, and who seeks to control every element of it's population in the name of fairness and national security, is

and has always been a failed ideology of BOTH governance AND economics because they are organically

connected.

All this blather about whether to reign in spending via austerity, or to create more growth via more debt, is

nonsense. Until the back of the social/progressive/communist ideal is broken, and big government is a thing of

the past, these problems will simply escalate or at best morph into different crises.

Of course the conventional wisdom is that there is no way to smaller government, that nations must continue

on a path to a single world governmental body with each nation more a state in a global confederation, and

that greater government control over populations and finances are needed for stability.

It is a complete change of ideology back to a (former) USA style of Laissez Fare Capitalism of enlightened self

interest, and a return to fierce national independence and individual national currencies, that is probably the

best of a lot of imperfect options. The game is to move decision making back downstream and closer to the

individual, instead of constantly pushing it upstream to the so-called geniuses and elite whose failed ideologies

only sustains a continuing need to keep them in charge (supposedly).

Report@daviddenton20 | June 24 1:08pm | Permalink| Options

After 5 years of blowing bubbles central bankers need to get back to the day job of managing inflation, they

have had too long in the limelight and have lost the plot - too much celebrity! http://getwd50.blo...owing-

bubbles.html

ReportMusso | June 24 12:23pm | Permalink| Options

@ Equivocation

stagflation? please show me the inflation !

And don't miss that BIS-pearl: "Turning to the more strategic aspects of monetary policy, the crisis has not

discredited the core elements of pre-crisis frameworks: price stability orientation and independence in central

bank decision-making. These features have been essential to achieving low and stable inflation in advanced

and emerging market economies alike over past decades and have proved instrumental in anchoring inflation

expectations. However, pre-crisis monetary policy frameworks did not ensure lasting financial and economic

stability. In an environment of low and stable inflation, financial imbalances ushered in the most severe crisis

since the Great Depression, followed by busts". LOL

ReportHans II | June 24 9:49am | Permalink| Options

Be aware of BIS' conclusions: The Actual BIS General Manager is Jaime Caruana, ex Gobernor of Banc of

Spain from 2001-2007, he was totally useless as regulator not able to see the imbalances of the Spanish

economy and allowing the Banks in their crazy real state finance. Bad Economist even worse manager.

ReportOne_plus_one_still_equals_two | June 24 9:23am | Permalink| Options

One can't create something out of nothing, even if your name is Bernanke. The current bubbles will burst,



destroying all the money created, and then some of course, as markets do not react exactly to cue.

This is the reason we got here in the first place - money out of nothing. Personally, I do not see anything here

in the West except deflation, until we get down to the same level as those countries which are now thought of

as "emerging". This does not include Greece, which is a "dying" economy.

So-called "Democratic" governments thought that they could somehow live on the never-never. Now that they

have found out that they cannot, they are trying Dictatorship by the back door, as they have heard that

dictatorship follows democracy. Dangerous stuff, all this...

ReportKevin Alexanderman | June 24 8:37am | Permalink| Options

Frankly, higher interest rates will help economies significantly, but not necessarily governments.

It will help all societies for governments to have less influence on securities markets.

ReportOldfashioncandid | June 24 8:35am | Permalink| Options

Real dedicated Experts is what is needed; no ideology, no finance guru, and certainly no followers or lobbyists.

Too many people have demonstrated their uselessness over the past 5 years (ok may be last 20 years),

including many journalists of this very paper

BIS where were you these last few years? IMF has already admitted incompetence! OECD serve no purpose;

Central banking system is a subsidiary of GS robots, EU Commission is more and more totally disconnected

and talks about the taxi regulation in Paris or the notary guild in Italy,...

The disconnect between finance sphere, elected officilas and international CIVIL SERVANTS (serving the civil

public internationally) is such that nobody is listening anymore. People will do what they think is best for them

and their families. Trust in major business brand is really low, trust in governement competencies and motives

is really low, trust in international organisation has vanished

Please dear journalists, you are paid to think and report: can you come up with some suggestions which are

not from a press release produced by the 'elites'?

PS: can the entire civil servants community take a good decisions: to reduce their budget and their

compensation and privileges down to the say Greek/Portugese civil servants level???

Reportareyouserious | June 24 8:25am | Permalink| Options

Strange how we're all talking about exiting of QE whereas in Japan they've only just re-started it with gusto.

ReportMartian Mangal | June 24 6:12am | Permalink| Options

Consumer psychology cannot be fixed by central banks when the fear of "winding" down is the air. You know

people can be persuaded to hold demonstrations for some cause, but to ask them to spend "simultaneously" is

an entirely different ball game.

ReportVoice of Truth | June 24 5:52am | Permalink| Options

The sooner we get the depression behind us, the better.

ReportDoug Beattie | June 24 2:42am | Permalink| Options

Sound so 1937. Taking away the punchbowl and expecting the party to rage on is a little disingenuous. The

BIS seems to be saying, higher interest rates will force austerity. How this translates to growth is beyond me.

Reportangus.barber | June 24 2:20am | Permalink| Options



Inflatiion focus? I think you must mean deflation.

Reportjoe222 | June 24 1:50am | Permalink| Options

"The BIS also railed against critics of eurozone austerity, saying there were reasons to be sceptical about

arguments such as that of the International Monetary Fund that higher fiscal multipliers meant governments

assumptions about the trade-off between consolidation and growth had been too favourable. There was no

compelling evidence that [multipliers] are large enough to render fiscal consolidation more difficult [or actually

self defeating]."

This is utter nonsense. The BIS exhibits a profound misunderstanding of the effects of QE. Firstly, QE is not the

same as fiscal stimulus. The multilpliers the IMF refers to are the effects of fiscal contraction or expansion NOT

QE. The effects of fiscal contraction in the Eurozone have consistently overshot expectations! Could there be

any better example of the fact that fiscal consolidation has been more damaging than expected than the

persistently high youth unemployment and stagnant growth across Europe.

And QE has not worked as expected because banks are simply not lending to the real economy due to the lack

of demand and confidence in the real economy(which is resultant from fiscal austerity policies). This really

really isnt difficult to understand!

ReportEvad1ne | June 24 1:45am | Permalink| Options

G.K Chesterton complained about the evils of aristocracy, but his complaints are equally applicable to the E. U.

bureaucracy, the Obama Administration, and vested interests in general:

"... it places everything in the hands of a class of people who can inflict what they will never suffer."

ReportWinemaker | June 24 1:42am | Permalink| Options

Yes, the central banks have given their best shot by creative digimagic and now only a minor problem remains,

the unconfronted issues of the real economy.

ReportEquivocation | June 24 1:42am | Permalink| Options

@ William Campbell,

What?!? Quoting the latest BIS end of year report is irresponsible? Quoting the central banks' central bank?

Have you heard of selectivity bias?

ReportEquivocation | June 24 1:35am | Permalink| Options

@Muso,

So.... You consider that printing is successful? Please show me the growth! Where are the jobs? I see asset

prices going exponential, but fail to see any form of recovery.

Central banks have finally driven us into stagflation, which will eventually revert into a new financial crisis.

Unfortunately, this time our conventional options are even more reduced.

By the way. Have you read the report? It has more common sense than any report I have seen coming out of

the Fed (well the St. Louis Fed seems to be a bit of a rebel)

Reportyasuaki torii | June 24 1:31am | Permalink| Options



The tide is ebbing. Maybe financial society vaguely recognized it's power and limit. How long can one regime

push the economy stimulus without adding real added value to society as a whole,.....How the effects for ever

creating the artificial leverage to finance will bring to real economy,....est. Fed, European Central Bank

president(Mr. Mario Draghi), (lesser) Bank of Japan's Mr. Kuroda(and Mr.Abe) have to re-think their policy.

Somehow Kenneth Rogoff and Carmen Reinhart (Harvard University) survived. The pendulum swing to the

direction B.I.S.'s....."Too much government debt is a brake on growth."..... ( Japan's Abenomics have finished.)

ReportMichael Heller | Project Syndicate | June 23 11:51pm | Permalink| Options

Hooray. If now's the moment to decide to exit -- praise the infinite wisdom of the BIS which has proven time

and time again to have been right -- it must also be the moment to reread my piece of 2 weeks ago:

http://www.project...-by-michael-heller

Reportshare-price.blogspot.com | June 23 11:06pm | Permalink| Options

Pop goes the re-flated bubble before arab summers multiply around the globe.

ReportMusso | June 23 9:45pm | Permalink| Options

* "re-emphasise their focus on inflation"??? Inflation in the midst of the Great Depression??? Which inflation

are they talking about??? The BIS "influential annual report" is very likely to be remembered as a late piece by

Herbert Hoover.

* However, it seems Mr. Caruana is the only man sure to keep a job until 2017. I understand he can feel very

comfortable ... he alone.

ReportFX_Bandit | June 23 9:33pm | Permalink| Options

Is a triple, or quadruple dip recession on the cards? Or are we still in the original single dip recession?

I've lost count now.

All I hear is "build more houses!"

Why?

Nobody can afford them!

Fin.

ReportRusfuture | June 23 9:17pm | Permalink| Options

Bravo for the BIS! It is time someone in authority said what is painfully obvious. Triggering inflation by

moneyprinting is unwise and dangerous. And the longer this "stimulus" continues, the more extreme the risk

grows of ugly consequences. The zero-interest rate policy destroys financial return on capital - so it is savers

who bear the painful cost of this unwise policy in the immediate here and now. But there is also a real risk that

a rapid loss-of-confidence could cascade, and bring an even worse future outcome.

ReportOne_plus_one_still_equals_two | June 23 9:14pm | Permalink| Options

Are these comments not a little late? Shouldn't they have been uttered years ago? It is now too late to repair

the damage done by the Fed, and then the ECB, SNB, et al.

You cannot put the genie back in the bottle. Pandoras' box has been opened, and we all have to pay the price

for the central banks and governments around the world making absolutely astoundingly stupid decisions,



because they thought it would stop us getting a headache. Now we have double pneumonia, and they still

continue on their track to nowhere. They thought they could control everything, and now they have found that

not only can they not do this, they have created a brand new pile of problems.

When will all this idiocy end?

ReportEcoLord | June 23 9:07pm | Permalink| Options

Surely central banks have [rightly] been concerned with avoiding DEFLATION which would have caused

massive economic contraction.

Yes we also need de-leveraging, more innovation, more trade agreement, pension reform, deregulation and

other structure changes - but all of those are in progress. Governments could and should do better in

progressing these items and there is no room for complacency.

Central banks have bought time and avoid possible calamity. All good work considering where we were in

2007.

ReportTJG | June 23 9:03pm | Permalink| Options

As I recall the BIS has always supported austerity. This is just more of the same from them.

ReportWilliam (Bill) Campbell | June 23 7:44pm | Permalink| Options

Alarmist article... poor for the FT.

Dated and irresponsible.

ReportGulliver | June 23 6:14pm | Permalink| Options

@Moshe, Das Kapital doesnt work, what we need to do is:

1 to go back to old fashion capitalism and re-instate Glass- Steagall Act,

2 to end the US dollar reign as a global currency and adopt a basket of currencies (Dollar, Euro, Yen,

Renmimbi, Real, Rand and Riyal) or maybe come up with a global currency,

3 to stop the practice of trading oil in US dollars only,

4 - the UK needs to stop trying to be a global power leveraged by the US and fully join the EU and

consequently enter the Eurozone.

We will see what else needs done once the dust settles down.

ReportMoshe | June 23 5:47pm | Permalink| Options

Should one lose any sleep really over 'market' likes and dislikes ? The greed is obviously unlimited. Time to

read 'Das Kapital' perhaps ?

Reportricgf | June 23 5:44pm | Permalink| Options

@tomorourke1:

He won't - if Mr Summers gets the main spot as Head of the Federal Cabal System, expect to see more of his

anti-austerity moves.



Reporttomorourke1 | June 23 4:59pm | Permalink| Options

Somebody better let Larry (the lounge lizard) Summers know this before he gets in at the Fed and starts up

QE4

ReportEquivocation | June 23 4:54pm | Permalink| Options

@Graham,

There is no exit. There is no Plan B. Central Banks have painted themselves into a corner.

They reflated a credit bubble and have called it a success. Except that bubble will inevitably pop again. It is a

cycle (business/credit cycle). The problem is that every time the bubble get bigger and the pops become more

painful and disruptive.

ReportEquivocation | June 23 4:51pm | Permalink| Options

@Alanson,

Really? You do know that the private sector in the US is at pre-2007 leverage levels? (the public sector is way

above). Even a small rise in interest rates will wreck havoc on US consumers and companies.

The cure to excess debt is delevering. Bernaneke just kicked the can down the road, just like Greenspan

before him. The problem is you eventually run out of road.

Just watch a couple of quarters before the US goes back into a new financial crisis.

ReportAlanson | June 23 4:34pm | Permalink| Options

Inflation in the US has been lower in the 5 years since 2008 than in the five years prior to 2008. When did the

Fed lose its "focus" on inflation? The answer is that the focus has been on maintaining stability in the price

level in the face of tremendous deflationary shocks to the financial system and to the economy. God help us if

Bernanke had pursued Euro-style austerity, because evidently the BIS would have been of no assistance.

ReportGraham Cox | June 23 4:26pm | Permalink| Options

For such a prestigious and indeed these days critical publication, the authors do not state what they mean by

'exit' .

I suspect it is partly because each monetary area is different and their's is a global summary and partly

because they are perhaps not even sure themselves. But if they are willing to make such heavy use of the

Taylor Rule for short term interest rate policy anchor, they need some kind of benchmark for long term open

market operations, re long term interest rates, given the complex mix of the various components: ( net

purchases, stocks, interest receipts and maturity events) and the interactions with the private long term credit

market and with fiscal policy .

If no guidance is given, the word 'exit ' may be interpreted by the many readers with as much coordinated

clarity as that engendered by title of the film ' Every which way but loose' .



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