“The overall, somewhat gloomy message from the central bankers was that the world is drunk on easy money and has already forgotten the lessons of recent years.”, New York Times
“This is more than a little “rich” coming from the Bank for International Settlements (an organization representing the world’s main central banks). The central bankers themselves have been the world’s brewer and bartender (when it comes to easy money) and now they are complaining that the markets have gotten too drunk off their own brew?”, Mike Perry, former Chairman and CEO, IndyMac Bank
Central Bankers, Worried About Bubbles, Rebuke Markets
By Jack Ewing
FRANKFURT — An organization representing the world’s main central banks warned on Sunday that dangerous new asset bubbles were forming even before the global economy has finished recovering from the last round of financial excess.
Investors, desperate to earn returns when official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements in Basel, Switzerland, said in its annual report published on Sunday.
Recovery from the financial crisis that began in 2007 could take several more years, Jaime Caruana, the general manager of the B.I.S., said at the organization’s annual meeting in Basel on Sunday. The recovery could be especially slow in Europe, he said, because debt levels remain high.
“During the boom, resources were misallocated on a huge scale,” Mr. Caruana said, according to a text of his speech, “and it will take time to move them to new and more productive uses.”
The B.I.S. provides financial services to national central banks and also acts as a setting where central bankers can discuss monetary policy and other issues like financial stability or bank regulation. The board of directors includes Janet L. Yellen, chairwoman of the Federal Reserve; Mario Draghi, president of the European Central Bank; and the heads of central banks from Japan, China, India and many other countries.
The organization, which reflects a widespread view among central bankers that they are bearing more than their share of the burden of fixing the global economy, often uses its annual reports to send a message to political leaders, commercial bankers and investors. But the B.I.S.’s language in the 2014 edition was unusually direct, as was its warning that the world could be hurtling toward a new crisis.
“There is a disappointing element of déjà vu in all this,” Claudio Borio, head of the monetary and economic department at the B.I.S., said in an interview ahead of Sunday’s release of the report.
He described the report “as a call to action.”
The organization said governments should do more to improve the performance of their economies, such as reducing restrictions on hiring and firing. The report also urged banks to raise more capital as a cushion against risk and to speed efforts to deal with past problems. Countries that are growing quickly, like some emerging markets, must be alert to the danger of overheating, the group said.
“The signs of financial imbalances are there,” Mr. Borio said. “That’s why we are emphasizing it is important to take further action while the time is still there.”
The B.I.S. report said debt levels in many emerging markets, as well as Switzerland, “are well above the threshold that indicates potential trouble.”
Yet investors show no sign of being deterred. This month, for example, investors snapped up $1.5 billion worth of bonds sold by the government of Kenya. The debt paid an interest rate of 6.875 percent, very low for a country that has deep economic problems and has been rocked by terrorist bombings.
In contrast to many economists and analysts, the B.I.S. played down the risk of deflation, a downward spiral in prices that can have devastating economic effects. When deflation takes hold, people stop spending because they expect prices to fall further. Company profits slump, and unemployment rises.
In Europe, an intense debate has taken place about whether the region could slip into deflation, and whether the European Central Bank should be pumping more money into the euro zone economy as a countermeasure.
Mr. Borio said it was unlikely that there would be a repeat of the kind of catastrophic deflation that occurred during the Great Depression. He noted that prices have been falling in Switzerland for several years, but the country has continued to grow, and unemployment is low.
“We are not saying deflation is not a problem,” Mr. Borio said. “But we would like to try to take a little bit of the emotion out of the debate.”
The organization also had harsh words for corporations, which it said were not taking advantage of booming stock markets to step up investment. That is one reason that gains in productivity — the foundation of sustained economic growth — have slowed in most advanced economies, the bank said.
“Despite the euphoria in financial markets, investment remains weak,” the B.I.S. said. “Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions.”
The overall, somewhat gloomy message from the central bankers was that the world is drunk on easy money and has already forgotten the lessons of recent years.
“The temptation to postpone adjustment can prove irresistible, especially when times are good and financial booms sprinkle the fairy dust of illusory riches,” the report said. “The consequence is a growth model that relies too much on debt, both private and public, and which over time sows the seeds of its own demise.”
A version of this article appears in print on June 30, 2014, on page B2 of the New York edition with the headline: Central Bankers, Worried About Bubbles, Rebuke Markets.