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Tuesday, October 21, 2014
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Published: Monday, 6/30/2014 - Updated: 3 months ago

Asset bubbles threaten global economy

Central bankers say new crisis could be lurking

NEW YORK TIMES
The Bank for International Settlements in Basel, Switzerland, warns in its latest annual report that investors are driving up prices, causing the risk of a new financial crisis even as the world recovers from the last. The Bank for International Settlements in Basel, Switzerland, warns in its latest annual report that investors are driving up prices, causing the risk of a new financial crisis even as the world recovers from the last.
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FRANKFURT, Germany — An organization representing the world’s main central banks warned 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 even as 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 Switzerland said Sunday in its annual report.

Recovery from the crisis that began in 2007 could take several more years, said Jaime Caruana, general manager of the Bank for International Settlements. The recovery could be especially slow in Europe, he said, because debt remains high.

“During the boom, resources were misallocated on a huge scale,” Mr. Caruana said, “and it will take time to move them to new and more productive uses.”

The Bank for International Settlements acts as a clearinghouse for transactions among national central banks and as a place where central bankers can discuss monetary policy and other issues such as fiscal stability or regulation.

Its board includes Janet Yellen, U.S. Federal Reserve chairman; Mario Draghi, European Central Bank president, and the heads of central banks in Japan, China, India, and many other countries.

The organization often uses its annual reports to send a message to political leaders, commercial bankers, and investors. It reflects a widespread view among central bankers that they are bearing more than their share of the burden of fixing the global economy.

The 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 deja vu in all this,” said Claudio Borio, head of the monetary and economic department at the bank. He described the new report “as a call to action.”

The Bank for International Settlements said governments should do more to improve the performance of their economies, like reducing restrictions on hiring and firing.

The report also urged banks to raise more capital as a cushion against risk and to speed up efforts to deal with past problems. Countries that are growing quickly, such as some emerging markets, must be alert to the danger of overheating, the banking organization 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 report said debt levels in many emerging markets and Switzerland “are well above the threshold that indicates potential trouble.”

In contrast to many economists and analysts, the BIS 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, there has been an intense debate 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 there would be a repeat of the kind of catastrophic deflation that occurred during the Great Depression in the 1930s.

He noted that prices have been falling in Switzerland for several years but that 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 bank 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, according to the report.

“Despite the euphoria in financial markets, investment remains weak,” it said. “Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions.”



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