More than seven years after the worst of the last financial crisis, critics are still scolding the Fed and other central banks for their role in the downturn.
And while many of us are still preoccupied with the post-crisis recovery, the Bank for International Settlements (BIS) — an international organisation of 60 central banks — says that its member organisations could already be laying the groundwork for the next crisis.
On Sunday, the BIS released it’s 85th annual report, warning that political systems are encouraging policies that buy ‘short-term gain at the cost of risking long-term pain.’
For example, in response to the last crisis, central banks continue to have record-low interest rates as national debts reach new highs. The BIS — the world’s oldest international finance organisation — worries that these factors, especially super low long-term rates, are hurting long-term growth and productivity.
“Domestic policy regimes have been too narrowly concerned with short-term output and inflation stabilisation, losing sight of slower-moving but more costly financial cycles,” the report said, adding that the global monetary and financial system have worsened the situation.
More from the BIS report:
We argue that the current malaise may to a considerable extent reflect a failure to come to grips with how financial developments interact with output and inflation in a globalised economy. For some time now, policies have proved ineffective in preventing the build-up and collapse of hugely damaging financial imbalances, whether in advanced or in emerging market economies (EMEs). These have left long-lasting scars in the economic tissue, as they have sapped productivity and misallocated real resources across sectors and over time.
And easy money policies are not only hurting the countries that have them.
“As monetary policy in the core economies has pressed down hard on the accelerator but failed to get enough traction, pressures on exchange rates and capital flows have spread easy monetary and financial conditions to countries that did not need them, supporting the buildup of financial vulnerabilities,” the BIS added.
“The system’s bias towards easing and expansion in the short term runs the risk of a contractionary outcome in the longer term as these financial imbalances unwind.”
Finally, the BIS warned that the global economy is relying far too heavily on monetary policy to boost output, an alarming and unsustainable trend. Plus, they say the policies being used today are the same ones that helped contribute to the recession.
“The policy mix has relied too much on measures that, directly or indirectly, have entrenched dependence on the very debt-fuelled growth model that lay at the root of the crisis,” the report said.
“These tensions manifest themselves most visibly in the failure of global debt burdens to adjust, the continued decline in productivity growth and, above all, the progressive loss of policy room for manoeuvre, both fiscal and monetary.”
And when the next crisis comes, the BIS fears that central banks will have far fewer tools at their disposal to deal with it.
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