Established on 17 May 1930, the Bank for International Settlements (BIS) is the world’s oldest international financial organisation. The BIS has 60 member central banks, representing countries from around the world that together make up about 95% of world GDP.
So it is quite remarkable that two days following my note on central banks as failed institutions, no less an authority than the BIS seems to be confirming this viewpoint in its annual report.
Just a few statements highlight the depth of self-criticism.
First of all, as I pointed out almost 2 years ago in the article linked below, just the first 2 charts show that over the last 45 years, exponential debt growth has been actually coinciding with a relentless decline in long term growth.
Central banks have clearly been drivers of the debt-fuelled growth model. The BIS in its overview directly criticizes this model with the following statement:
“Beneath the surface, though, the medium-term risks and tensions have increased, inherent as they are in a faulty debt-fuelled global growth model.”
The BIS goes on to say how much “influencing financial markets and financial risk-taking” is a substantial part of what they do now, but their influence on the real economy is minimal:
“the evidence suggests that central banks have been very successful in influencing financial markets and financial risk-taking but less so in boosting risk-taking in the real economy and hence output.”
Finally, the BIS admits that so “influential” is their impact on markets that now markets provide less and less information in a “self-referential relationship”:
“Financial markets have compressed reaction times and policymakers have chased financial markets more and more closely in what has become an ever tighter, self-referential, relationship.”
So not only is policy not working, but also the markets have now been compromised beyond natural recognition.
The BIS also suggests that central banks have now found themselves in a low interest rate trap, from which there does not appear to be any easy exit.
“Our lens suggests that the very low interest rates that have prevailed for so long may not be “equilibrium” ones, which would be conducive to sustainable and balanced global expansion. Rather than just reflecting the current weakness, low rates may in part have contributed to it by fuelling costly financial booms and busts. The result is too much debt, too little growth and excessively low interest rates. In short, low rates beget lower rates.”
Overall this is stunning criticism of its members.
What are the solutions? The BIS suggests central banks should do less as their policies are counterproductive at this point. As for solutions they are for the most part beyond their orbit. To oversimplify, the BIS suggests solutions relate to productivity improvements and fiscal policy.
If investors have any doubts about market function and central bank policy you can read about it all from no less a source than the central bank’s own forum.