Wednesday, November 26, 2014

The BIS Bashers

PRAGUE – It might seem an unlikely proposition, but central banking has become exciting. This is not necessarily a welcome development. Decisions taken by the leading monetary authorities since the 2008-2009 global financial crisis have been unorthodox, creative, and at times risky. Their high-stakes choices today will affect the global economy for decades to come.

Moreover, central bankers have become more vocal in expressing strongly held positions in the mass media, as if seeking to win over popular opinion. It is a potent and dangerous mix. In this environment, sober, informed voices, like that of the Bank for International Settlements, the central bank of central banks, should also be given a fair hearing. Unfortunately, many central bankers have sought to marginalize the BIS rather than engage with it.

One of the most contentious debates has been over when to end the “unconventional” monetary-policy measures that were introduced in the aftermath of the financial crisis to ensure that banks continued to lend, thereby stimulating growth and averting deflation. Some central bankers now worry that ending these measures prematurely will tip the economy back into recession. Yet others fear that the current strategy, though originally intended to prevent an economic collapse, is now sowing the seeds of future instability, including the emergence of another asset-price bubble.

In their efforts to resolve such dilemmas, policymakers are also wrestling over whether to focus on traditional monetary tools such as interest rates, or make greater use of so-called “macro-prudential measures,” such as capital add-ons and buffers or adjustments to banks’ loan-to-value ratios.

At the heart of the debate – currently being conducted within leading economies’ treasuries and central banks, as well as in supranational bodies such as the International Monetary Fund and the BIS – is the relationship between monetary policy and financial stability. The BIS, for example, has suggested that financial stability is closely connected with monetary policy, and has advised policymakers to start weaning their economies off of easy money sooner rather than later. Central bankers, however, seem to want to try macro-prudential tools first (and sometimes exclusively).

It is unusual to witness a clash of views among monetary policymakers that is so radical and clear-cut that it has grabbed wider political and media attention. And, under the public spotlight, some central bankers have sought to downplay the BIS’s assessment, arguing that it is all too easy to issue far-reaching policy recommendations when one suffers none of the consequences should one’s prescription turn out to be wrong.

To be sure, a country’s domestic economic circumstances, and the tools available to policymakers, should guide policy. And, though monetary tightening may well be advisable in some economies, it might be inappropriate in others.

But the harsh reactions to the BIS’s analysis seem misplaced and unfair. It is always difficult to find the right monetary-policy stance for any given economy at a given moment. Central banks employ an army of experts to try to get it right, and other institutions are seldom so well resourced to present equally sophisticated counter-arguments. The BIS, however, is one of the few organizations that not only has the necessary research and analytical capabilities, but also a track record of making good calls. One should not forget – as many central bankers appear to have done – that the BIS was one of the first to warn of the dangers of financial excesses, several years before the 2008 crisis.

The BIS has a right to be heard. It exists not just to represent central banks, but also to offer ideas and intellectual feedback. Indeed, it serves policymakers well by challenging, debating, and perhaps swaying opinion. Rather than bash the BIS, monetary authorities should be grateful for the informed perspectives that it provides.

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    1. Commentedpieter jongejan

      II totally agree with Mr.Hampl of the Czech National Bank that the BIS bashers such as Bradford Delong are again and again trying to manipulate public opinion in favour of further financialization. I would like him and Mr Prestingt to read the excellent articles on ths subject in the Harvard Business Review of june 2014 by Gautam Mukunda, Clayton M Christenden and Derek van Bever. Most recently Bradford Delong wrote that the steady decline of real middle class income is the result of technological progress. Investments in the real economy are however declining for more than a decade. The deepest cause of the decline of middel class real income is the ultra low interest rate of the FED (the shares of the FEd are owned by ten influential Wall Street families. People in trhe real economy get unemployed and as a consequence see ntheir real income decline due to the ultra low interest rate policy of the FED. The stagnating western economies are creating political unrest (islamic yougsters in Paris, Madrid, Brussels are becoming jihad fighters). It seems that Bradford Delong and the Wall street families have learned nothing from the rise of Hitler in 1923 resulting in the second world war. Ultra low interest rates lead to unemployment and ultimately war. Bashing the BIS is shortsighted

    2. CommentedKen Presting

      Mr. Hampl's article would have been more useful if he had included a few links to the criticisms of the BIS which he mentions. I did follow his link to the recent BIS report itself, where I found the following truly remarkable assertion:

      "The only source of lasting prosperity is a stronger supply side"

      Um, don't most economists learn about a so-called Law of Supply and Demand?

      Well, anyway, that is why I read Project-Syndicate instead of BIS reports. At least the editors here are aware of two sides for most issues. My only objection is when they print authors who deliberately obscure the other side.

      And now I have to go search for the critical articles myself. Bother.