Bank of International Settlements issued a blunt report on Sunday, warning that over-reliance on monetary policy has left central banks with little capacity to deal with the next global crisis.
As the Telegraph reports, BIS asserts that central banks have “backed themselves into a corner” by repeatedly cutting interest rates in order to stimulate flagging economies.
These low interest rates have in turn fueled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.
Claudio Borio heads the monetary and economic department at BIS. He described central bank actions as “fumbling in the dark in search of new certainties.”
Rather than just reflecting the current weakness, they may in part have contributed to it by fueling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates.
“In short, low rates beget lower rates.â€
In fact, central bankers in Sweden, Demark and Switzerland have pushed interest rates below zero as they attempt to keep their economies afloat, and the European Central Bank launched a €1 trillion quantitative easing program last spring.
A Wall Street Journal report emphasizes the BIS contention that low yields on bonds brought about by this monetary policy may fuel further booms and busts that could hamper growth in the long-term. Borio called the entire system unstable.
Our concern, not just this year but in previous years, is that if you look at what’s going on from a longer-term perspective these rates don’t appear to be fully consistent with lasting financial stability… It’s hard to believe that interest rates that are so extraordinarily low are consistent with a fully rational allocation of resources.
According to the Wall Street Journal “from December 2014 until the end of May, an average of $2 trillion in global long-term government bonds—much of it in the eurozone—carried a negative yield.”
