The world must be topsy-turvy when the BIS (Central Bank to Central Banks) thinks monetary policy is too expansionary!

The BIS annual report was released today. In the section “Limits to Monetary Policy” we read:

The major advanced economies are maintaining extraordinarily accommodative monetary conditions, which are being transmitted to emerging market economies (EMEs) in the form of undesirable exchange rate and capital flow volatility. As a consequence of EME efforts to manage these spillovers, the stance of monetary policy is highly accommodative globally. There is widespread agreement that, during the crisis, decisive central bank action was essential to prevent a financial meltdown and that in the aftermath it has been supporting faltering economies. Central banks have had little choice but to maintain monetary ease because governments have failed to quickly and comprehensively address structural impediments to growth. But the need for prolonged accommodation has to be carefully weighed against the risk of generating distortions that will later produce financial and price instability.

JohnTaylor doesn´t miss the opportunity to advance his namesake rule as THE GUIDE to monetary policy:

At the meeting held today, the BIS issued their Annual Report which addresses key monetary policy issues. BIS analyses often contain useful warnings, including their prescient warning in the years around 2003-2005 that monetary policy was too easy, which turned out to be largely correct, as the boom and the subsequent bust made so clear. So the Annual Report is always worth reading.

This is especially true of the Annual Report released today because it devotes a whole chapter to serious concerns about the harmful “side effects” of the current highly accommodative monetary policies “in the major advanced economies” where “policy rates remain very low and central bank balance sheets continue to expand.” Of course these are the policies now conducted at the Fed, the ECB, the Bank of Japan, and the Bank of England. The Report points out several side effects:

  • First, the policies “may delay the return to a self-sustaining recovery.” In other words, rather than stimulating recovery as intended, the policies may be delaying recovery.
  • Second, the policies “may create risks for financial and price stability globally.”
  • Third, the policies create “longer-term risks to [central banks’] credibility and operational independence.”
  • Fourth, the policies “have blurred the line between monetary and fiscal policies” another threat to central bank independence.
  • Fifth, the policies “have been fueling credit and asset price booms in some emerging economies,” thereby raising risks that the unwinding of these booms “would have significant negative repercussions” similar to the preceding crisis, which in turn would feed back to the advanced economies

Just go tell that to the ‘people’ in this image Becky Hargrove and I love so much!

22 thoughts on “The world must be topsy-turvy when the BIS (Central Bank to Central Banks) thinks monetary policy is too expansionary!


    “Under previous management, the Bank for International Settlements was one of the few institutions – official, or otherwise – to correctly diagnose the problems in the credit market that developed in the run up to the Feb 2007 – Dec 2008 period of unravelling. Most of those who are today happy to take credit for their market call were right for the wrong reason (viz Roubini, who expected a typical emerging-market style crisis in the US triggered by a widening current account deficit and which would have led to a dollar collapse, rather than a very sharp dollar rally), with Marc Faber, Kurt Richebacher and Jim Walker being some notable exceptions.

    William White has now retired from the BIS, and it is under new leadership. Nonetheless, the proper attitude towards this body perhaps ought to be one of seriousness and to the extent that it does not accord with one’s views, a degree of self-questioning to consider whether – given their correct understanding in the past – they might perhaps have identified some phenomenon at work unknown to the analyst.

    Instead, in response to their reasoned setting forth of the risks to the present very-easy monetary policy pursued by the developed world, we have a simple dismissal – apparently on the grounds that things are so difficult now that we cannot possibly afford not to act.

    • CB – My point was exactly that their understanding of the past (rates too low for too long) during 2002-04 is misplaced as a “cause” of the crisis. And they are again wrong now in saying MP is, again, too easy!

      • So is your position that things would have been just fine if only the Fed had eased quickly enough in July-Sep 2008?

        What do you think about the clear evidence of sloppy lending during the 2002-2007 phase, such manic lending historically almost always associated with excessively easy monetary policy?

        What do you make of people who warned in early 2008 that a terrible deflationary episode was coming? These people being not in the habit of doing so idly, and having had great track records over many previous business cycles. If somebody predicts a building is going to burn down, and it does despite some others insisting it is perfectly safe, shouldn’t you pay attention to those who warned of it before it happened? You might pay some attention to those who – once the building ignited – warned that it was not being extinguished quickly enough, but it strikes me you would pay more attention to those who told you it would catch fire before it happened, particularly since these observers gave the warning because they saw conditions that have typically preceded Great fires throughout the ages.

        Therefore I am puzzled at your unwillingness to consider the role of easy money preceding the bust, although of course I realize this does not entirely fit with your narrative.

  2. Most people just aren’t very smart. They are like what Richard Feynman said about his cousin.

    They are so obsessed with what they picked up early on (thanks a bunch, Keynes and Wicksell) about monetary policy “being” interest rates that they refuse to see common sense. In what world is a falling price level extremely accommodative monetary policy?

  3. The Basel Idiots Symposium said the same thing in its June 2011 annual report:
    “Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks. It is also crucial if central banks are to preserve their hard-won inflation fighting credibility, which is particularly important now, when high public and private sector debt may be perceived as constraining the ability of central banks to maintain price stability. Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”

    Also, here was the Cecchetti interview from June 2011:
    * inflation is rising across the world and monetary policy has not kept up
    * slack is reduced or disappeared
    * concerned with rising commodities
    * “things are getting very HOT”
    * risk of second round effects, just like the 1970s
    * concerned inflation could “get out of control”

      • Messrs Steve and Nunes,

        I certainly have read Mr Steve’s comment.

        So far, all I see is name-calling, without much of an argument.

        The BIS is staffed by economists, so of course they have not succeeded especially in identifying inflection points in markets – that is not what economists do. I do not hold them up as a paragon of forecasting virtue for the near term, but merely point out that in the past they have been right about the only thing that mattered – ie the bigger picture – when almost everybody else was wrong.

        I personally do see my role as identifying inflection points, and therefore – as I wrote in brief form on my blog, and in longer form elsewhere – I did correctly identify the downturn in Europe starting in May 2011, as well as the turn in industrial commodities (actually I nailed the downturn commencing May – July 2011, the bounce from Dec – Feb, and the renewed leg down from Mar 31 2012). One can sometimes get things wrong of course, but the point is that in the general envelope of things the BIS have been more right than most other forecasters, and I think they continue to be so.

        So I think you owe them more than just namecalling – if you believe that they got the credit bubble diagnosis right for the wrong reason (which seems to be implicitly your view), then you ought to set out your case more thoroughly. Also, if you are setting out your stall as a superior prognosticator of macro trends (which I suppose you are, by criticizing them in such harsh terms) you ought to be transparent about it – set out your expectations for economic and market variables including what would prove you wrong. And then if reality doesn’t match up to your expectations, you can at least learn from it and inform your readers of what modifications you need to make to your ideas.

        This is what I understand to be the spirit of true science. Of course it may be more entertaining merely to throw rotten tomatoes, but I wonder if that will be a truly satisfying use of time.

  4. Pingback: The world must be topsy-turvy when the BIS (Central Bank to Central Banks) thinks monetary policy is too expansionary! « Economics Info

  5. Cantillon, you are right that the BIS has not succeeded in IDENTIFYING inflection points in the markets, but they have succeeded in CREATING downward inflection points!!!

    I would gladly go through the report and point out its many errors, but I don’t have a “staff of economists” nor a public teat to draw revenue from to hire economists. A quick search of the report shows nine references to the 1970s (all hyperventilating about inflation), but only one to the 1930s (and only in a reference to the date the BIS was created!).

    They also have a Taylor Rule graphic, which seems to imply that monetary policy was far to easy in 2008 and then far too tight in 2009 before becoming far too easy again by 2011.

    It is a report deserving of rotten tomatoes!

  6. So you have time only to throw tomatoes, and call the BIS names, but not to set out a brief but integrated big-picture perspective on why they are wrong, and what your view of the world implies that might be at variance to theirs and what events might prove your present understanding of the world to be wrong.

    I see.

    • I already did set out a brief picture of what is wrong. They are obsessed with the 1970s as a historical analogue and pretend the 1930s didn’t happen. I guess history denial must be comforting to middle-Europe. And they are obsessed with plugging backward looking commodity prices into a Taylor rule. Garbage in-garbage out. I could go on, but what’s the point in repairing a house that’s built on a sinkhole?

  7. The events of 1837 also did take place, but one would need to argue for their relevance to the situation today – just as with the economic events of the 1930s. One can always point both to similarities and differences with past historical episodes, but if it is your view that we are at serious risk of an imminent Great Depression, then surely you ought to set forth your case.

    What are the similarities; why are the differences only apparent and of little significance; what do you expect to unfold over the next few months and years, and what events would you absolutely rule out – what things could take place that you think will not, and if they did they would prove you wrong?

    It ought to be below you to insinuate that the research activities of the BIS are tantamount to Holocaust denial. (If that is not what you meant, then you ought to make it pretty clear what you did intend to say by the use of that term).

  8. CantillonBlog wrote: “what you did intend to say by the use of that term”

    What “term” exactly bothered you? Denial? Gold buggery denial? Debt deflation denial? Tight monetary policy denial? Austerity denial? Beggar-thy-neighbor denial? Creditor attempts to collect on foreign debts denial?

    Actually, you prove my point. I am talking about 1930s and economic history, and you bring up the Holocaust, which *mostly* occurred in the 1940s. That’s precisely why the economic history of the 1930s seems to be a verboten analogue. Too many people are uncomfortable with what came next. And the BIS has a political imperative to issue sanitized white-washed analysis, where no one’s national sensitivities are offended.

    • “I guess history denial must be comforting to middle-Europe. ” Most people – especially middle-Europeans – would wonder at your intent here. Why else would you speak of middle Europe, when the BIS are very specifically a Swiss institution – not at all German, Austrian, or Polish in spirit?

      Perhaps you intended no comparison to Holocaust denial – if that is the case, then in the circumstances, I should think you would agree it is a most infelicitous turn of phrase. Perhaps that was indeed your intention, in which case you ought to own up to it. Or perhaps you intended to evoke Holocaust denial, whilst maintaining plausible deniability. Perhaps you will understand if I fail to have a sense of humour about such topics. I do after all live in Europe, and our European cousins do not have free speech in respect to these topics; therefore it is not just highly tasteless, but utterly inappropriate to make such comparisons.

      Your implicit assertion that the events of the 1940s were not connected to those of the 1930s is a most peculiar one. I am not aware of a single serious economic historian who holds to this point of view.

      • Middle America is, roughly, the states neither bordering the Pacific, nor the Atlantic proper. Middle Europe? Losely speaking, neither bordering the Atlantic Proper, nor the Mediterranean.

        Your attempts to imagine Holocaust comparisons are truly pathetic. No one is claiming that the events of the 1930s and 1940s weren’t related. But using discomfort with the 1940s as an excuse to avoid talking about the economic rigidities of the 1930s is stupid. The parallels to the 1930s today are clear, at least more so than the imaginary similarities to the 1970s dreamt up by the BIS. Of course, the only reference the BIS makes to the 1930s this year is to “deny” (dare I say it???) any similarity between the central bank responses from then and now. Hollande is correct; solidarity is lacking. Instead different peoples are standing guard over their little piles of money and sneering at one another.

    • I note by the way that you jump on the emotionally intense topic but fail to address the key question at hand.

      “One can always point both to similarities and differences with past historical episodes, but if it is your view that we are at serious risk of an imminent Great Depression, then surely you ought to set forth your case.

      What are the similarities; why are the differences only apparent and of little significance; what do you expect to unfold over the next few months and years, and what events would you absolutely rule out – what things could take place that you think will not, and if they did they would prove you wrong?”

      • “what do you expect to unfold”

        Perhaps if you believed in free will instead of prophecy, you would advocate fixing Europe’s problems rather than watching them explode. I guess that’s just my ugly Americanism showing.

    • Steve If only that were true! But Scott Sumner has also posted today on the topic. And don�t miss the Clark Johnson installments at Lars�blog. Installment 1 today.

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