Monday, June 30, 2014
BIS: Wouldja stop with the QE edibles, already?
By "financial cycle" they mean debt cycle. This is the table of contents. When you read headings such as Global financial markets under the spell of monetary policy, you sense skepticism.A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis. This will involve adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth.The global economy has shown encouraging signs over the past year but it has not shaken off its post-crisis malaise (Chapter III). Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows (Chapter II), and unusually accommodative monetary conditions (Chapter V), investment remains weak. Debt, both private and public, continues to rise while productivity growth has extended further its long-term downward trend (Chapters III and IV). There is even talk of secular stagnation. Some banks have rebuilt capital and adjusted their business models, while others have more work to do (Chapter VI).To return to sustainable and balanced growth, policies need to go beyond their traditional focus on the business cycle and take a longer-term perspective - one in which the financial cycle takes centre stage (Chapter I). They need to address head-on the structural deficiencies and resource misallocations masked by strong financial booms and revealed only in the subsequent busts. The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth.
When you start reading, you realize they are throwing down the gauntlet:
Financial cycles differ from business cycles. They encapsulate the self- reinforcing interactions between perceptions of value and risk, risk-taking and financing constraints which translate into financial booms and busts. They tend to be much longer than business cycles, and are best measured by a combination of credit aggregates and property prices. Output and financial variables can move in different directions for long periods of time, but the link tends to re-establish itself with a vengeance when financial booms turn into busts.In other words, if you're not fixing Main Street, you're not fixing Wall Street if the cause of Main Street's problems was originally the financial cycle rather than the business cycle.
While there is no consensus definition of the financial cycle, the broad concept encapsulates joint fluctuations in a wide set of financial variables including both quantities and prices. BIS research suggests that credit aggregates, as a proxy for leverage, and property prices, as a measure of available collateral, play a particularly important role in this regard. Rapid increases in credit, particularly mortgage credit, drive up property prices, which in turn increase collateral values and thus the amount of credit the private sector can obtain. It is this mutually reinforcing interaction between financing constraints and perceptions of value and risks that has historically caused the most serious macroeconomic dislocations.I would recommend reading at least this section. There's a lot of detail in it, and one of the central implications is that easy monetary policy in large countries has created a new set of correlations which are likely to be even more independent of central bank policy.
Lower taxes and less regulation - especially of the energy industry - should lead to increased confidence. Who wants to take chances in an environment where the government is at war with the energy companies, imposing new taxes via Obamacare, always raging about people not paying their fair share, etc. Not many people.
The wonder of it all is that we are not in another deep dive. Of course, the abyss may be approaching.
Seriously, though, your posting of this is a public service to all of us who would have otherwise not seen the BIS report. It will be studiously avoided by the mainstream business news/ financial news outlets.