A Warning From the Bank for International Settlements (BIS): The Calm Before the Storm?

Thursday, March 10, 2016
By Paul Martin

By Mike Whitney
Global Research
March 10, 2016

The Bank for International Settlements (BIS) is worried that recent ructions in the equities markets could be a sign that another financial crisis is brewing. In a sobering report titled “Uneasy calm gives way to turbulence” the BIS states grimly: “We may not be seeing isolated bolts from the blue but the signs of a gathering storm that has been building for a long time.”

The authors of the report are particularly concerned that the plunge in stock prices and the slowdown in global growth are taking place at the same time that investor confidence in central banks is waning. The Bank Of Japan’s announcement that it planned to introduce negative interest rates (aka–NIRP or negative interest rate policy) in late January illustrates this point. The BOJ hoped that by surprising the market, the policy would have greater impact on borrowing thus generating more growth. But, instead, the announcement set off a “second phase of turbulence” in stock and currency markets as nervous investors sold off risk assets and moved into safe haven bonds. The BOJ’s action was seen by many as act of desperation by a policymaker that is rapidly losing control of the system. According to the BIS:

“Underlying some of the turbulence of the past few months was a growing perception in financial markets that central banks might be running out of effective policy options.”

This is a recurrent theme in the BIS report, the notion that global CBs have already used their most powerful weapons and are currently trying to muddle-by with untested, experimental policies like negative rates that slash bank profitability while having little impact on lending.

While the BIS report provides a good rundown of recent events in the financial markets, it fails to blame central banks for any of the problems for which they alone are responsible. The sluggish performance of the global economy, the massive debt overhang, and the erratic behavior of the stock market are all directly attributable to the cheap money policies coordinated and implemented by central banks following the Great Recession in 2008. It’s hard to believe that the BIS’s failure to insert this fact into its narrative was purely accidental.

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