Prestigious Bank Warns Of Depression-Style Downturn
Years of lax monetary policy has created a dangerous credit bubble, leaving the global economy vulnerable to another Depression-style downturn, according to the Bank for International Settlements, the world’s foremost financial body. In their 77th Annual Report, the BIS, an international organization of central banks, pointed to a number of worrying signs, including “mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system,” according to the Telegraph (UK). The Bank noted that, “Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived.”
Criticizing the policies of the Federal Reserve Bank, the BIS said the Fed’s foreign counterparts were beginning to question the wisdom of letting asset “bubbles” grow on the assumption that they can be prevented from “popping,” which the Telegraph says was more or less the strategy favored by former Fed chief Alan Greenspan. The Bank noted this approach failed in the United States in 1930 and in Japan in 1991 because excess debt and investment built up in the preceding years had negative effects. While lowering interest rates in such a situation may be an option, it only succeeds in transferring wealth from creditors to debtors and “sowing the seeds for more serious problems further ahead.” The world’s oldest international banking organization said it was far from clear whether the United States would be successful in avoiding the consequences of its imbalances, citing a current account deficit of 6.5% of GDP, the growth of external liabilities by over $4 trillion from 2001 to 2005, and a significant drop in the savings rate.
“The dollar clearly remains vulnerable to a sudden loss of private sector confidence,” according to the Bank.
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