Thursday, July 3, 2008

Bank for International Settlements Economic Warning

http://online.wsj.com/article/SB121482012286515509.html?mod=googlenews_w...

July 1, 2008
Wall Street Journal
"Central Bankers Warn of 'Tipping Point'"
by PAUL HANNON and NINA KOEPPEN

BASEL, Switzerland -- "The global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said Monday.

In its annual report, the central bank for central banks said the impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control."

• Econ Blog: 'Unsustainable Has Run Its Course':
http://blogs.wsj.com/economics/2008/06/30/bis-the-unsustainable-has-run-...
• See the full text of the 2008 BIS report:
http://www.bis.org/publ/arpdf/ar2008e.htm

"Over time, this could potentially even lead to deflation," it said.

For central bankers from around the world gathered in Basel for the BIS's annual meeting Sunday and Monday, the report made for chastening reading. Not only does it highlight the difficulty of the dilemma facing central banks -- confronted with slowing growth at a time when inflationary pressures are rising -- it also lays much of the blame for their predicament at the feet of the central banks themselves.

High inflation rates may not ease in 2009, as expected, and central bankers need to be extra vigilant to stop inflation expectations from creeping upward, Malcolm Knight, the BIS general manager told a news conference. There is "a clear and present danger of rising global inflation and inflationary expectations," Mr. Knight cautioned.

The BIS said that in the early part of this decade, central banks had failed to set interest rates high enough to restrain an unsustainable credit boom...

While a severe slowdown is not inevitable, it believes that the risks of a sharp downturn are very real, and centered on the financial system."

http://www.bankingtimes.co.uk/09062008-central-bank-body-warns-of-great-...

June 9, 2008
Banking Times
"Central bank body warns of Great Depression"
by Gill Montia

"The Bank for International Settlements (BIS), the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s.

In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.

According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.

The report points out that between March and May of this year, interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future.

It also raises concerns about the Chinese economy and questions whether China may be repeating mistakes made by Japan, with its so called bubble economy of the late 1980s."

"EDITORS NOTE: Quite a few comments have been made that there is no direct reference to the Great Depression in this month’s BIS report. While this is strictly true, BIS warned in June 2007 - just before the Credit Crunch really hit - that the global economy was vulnerable to a major economic set-back because of extraordinary exposure to collateralized credit. BIS directly made references to the 1930’s as an example of a similarly serious credit bubble, and this month’s BIS report describes the conditions of this being lived out. So, to be pedantic, the warning “BIS warns of Great Depression” is actually a year old already. What BIS discusses now is the fragility of existing conditions of the fall-out from a massive credit bubble bursting - which has already been made clear across their reports historically can be similarly referenced to the 1930’s, though stated in a typically conservative and non-alarmist language. Even what optimism BIS had about a weak recovery to the end of May 2008 have been dashed by extreme shorting of financial stocks across the US and UK - Lehman Brothers, HBOS, and property developers such as Barratts, have all taken extreme beatings in June 2008. So back to the headline - BIS have indeed already warned of repeat of conditions that could be as extreme as the Great Depression, and are now describing that process as we move through it. In the meantime, unemployment is already on the rise on both sides of the pond, and the analogy some people have concerns about I’m afraid is still salient." - Brian Turner, Editor, Banking Times.

Aloha, Brad