The Bank for International Settlements is stepping up its assault on ultra-easy monetary policies at a time when central banks in Europe and Japan are pressing down on the monetary gas pedal and others remain reluctant to step on the brakes.
More than half a dozen years of unprecedented loose fiscal and monetary policies have resulted in "extraordinarily buoyant" financial markets, with rising asset values and unsustainable debt levels that are out of touch with the reality of a slow, grinding global economic recovery, the BIS says in its annual report.
"The overall impression is that the global economy is healing but remains unbalanced," the BIS notes. "Growth has picked up, but long-term prospects are not that bright. Financial markets are euphoric, but progress in strengthening banks' balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre to deal with any untoward surprises that might be sprung, including a normal recession."
The BIS singles out Canada, Australia, Sweden and other "small advanced economies" for maintaining ultra-low interest rates, pushing back a return to more normal levels. This has prompted a surge in credit growth – and housing values – relative to gross domestic product that is far beyond historic standards. The result of a sharp upturn in rates once central banks start the inevitable tightening cycle will be considerable pain for borrowers and lenders.
The Swiss-based organization, whose membership consists of 58 central banks, has long cast a jaundiced eye over the ultra-easy monetary policies adopted to combat the global financial crisis and still largely in place across much of the world. It highlighted the same risks in last year's report, but has raised the decibel level on its warning siren.
"The strong post-crisis monetary policy easing in the major advanced economies has spurred a surge in global liquidity. Near zero policy rates and large-scale asset purchases by the Federal Reserve and other major central banks have boosted asset prices around the globe and fuelled investors' appetite for risk."
Policy makers and regulators need to heed the early warning signals of financial distress, including soaring real estate and credit expansion, the BIS argues. "Many years of strong credit and, often, property price growth have left borrowers exposed to increases in interest rates and/or sharp slowdowns in property prices and economic activity."
The central bankers' central bank plainly dismisses concerns about the risks of deflation and spending cutbacks that could emerge in weak economies if nervous authorities tighten policy too early. Which is exactly how Japan ended up in a brutal deflationary spiral that it is finally casting aside thanks to hyper-aggressive fiscal and monetary stimulus. The International Monetary Fund, which used to be as rigorous as the BIS in opposing the race to zero rates, changed its tune in the wake of the euro-zone debt debacle, when a handful of hard-hit economies teetered on the brink of a deflationary collapse.
The BIS, though, seems to prefer the old German model of restraint and structural reform that even the Germans have had to modify of late.
"It is time that we stepped out of the shadow of the [financial] crisis," BIS general manager Jaime Caruana told the annual meeting. "Stronger growth provides an opportunity to push through structural reforms and set balance sheets on a firmer footing. We can hardly expect such efforts to be popular. But they may pay off even in the short run if they help to restore confidence."
In 1955, then Fed chief William McChesney Martin famously reminded an audience of investment bankers that the task of the central bank is akin to the chaperone who has the punch bowl removed just as the party is getting rolling.
If it had been up to the BIS, the bowl would never have been filled to the brim in the first place and would certainly have been taken off the table long ago.