The 83rd annual report from the the Bank of International Settlements (BIS) released over the weekend has jumped into the debate between neo-Keynesians and so-called austerians over how to heal the global economy. And the BIS sides mainly with those who favor a more restricted role for central banks.
BIS Speaks Out Against Central Banks
In its annual report released Sunday, the BIS argued that cheap-money policies of central banks cannot by themselves return growth to pre-2008 levels. That approach has also introduced side effects that may be hindering a recovery. It spoke out against the central banks’ “whatever it takes” approach to monetary policy in the aftermath of the global financial crisis, warning the extraordinary accommodation of recent years has bought time for structural reforms but is not a substitute for them. With that in mind, it called on the private sector to hasten balance sheet repairs, on governments to redouble efforts to achieve fiscal sustainability, and on regulators to reform oversight and ensure banks are adequately capitalized.
The BIS has made these arguments before, but its latest report is even more forceful. The BIS says the most damaging consequence of central bank actions has been to relieve pressure on governments to rein in debt and restructure their economies in ways that promote growth (tax reform, more prudent regulation).
BIS On Government
The BIS also wants governments to take up more of the slack, which is sensible. The chart below comes from the report, and tells a familiar but important tale. The U.S., U.K. and Euro Zone all saw their economies shrink sharply in 2008/2009 but the pace of recovery from the recession is strikingly different. The U.S. is back to a slightly slower pace of growth; the U.K. is growing but slowly, and Euro Zone growth has stopped completely. Just another reminder of why the Federal Reserve needs to taper first the ECB and MPC need to keep policy easier for longer, and the dollar is going to go up a lot further.
Paul Krugman View
Neo-Keynesians immediately lashed out at the BIS, saying the organization’s prescriptions are wrong-headed and contradictory. The Economist magazine also also called the BIS approach irresponsible.
Others said that the BIS cites rising commodity prices and rising implied inflation forecasts based on interest rate spreads. The thing about reports like this, however, is that they have to be written and approved by committees, which means that they’re based on lagging data — and sure enough, both interest spreads and commodity price inflation are telling quite different stories these days.