The BIS bash­ers

Financial Mirror (Cyprus) - - FRONT PAGE - By Mo­jmir Hampl

It might seem an un­likely propo­si­tion, but cen­tral bank­ing has be­come ex­cit­ing. This is not nec­es­sar­ily a wel­come de­vel­op­ment. De­ci­sions taken by the lead­ing mon­e­tary au­thor­i­ties since the 2008-2009 global fi­nan­cial cri­sis have been un­ortho­dox, cre­ative, and at times risky. Their high-stakes choices to­day will af­fect the global econ­omy for decades to come.

More­over, cen­tral bankers have be­come more vo­cal in ex­press­ing strongly held po­si­tions in the mass me­dia, as if seek­ing to win over popular opin­ion. It is a po­tent and dan­ger­ous mix. In this en­vi­ron­ment, sober, in­formed voices, like that of the Bank for In­ter­na­tional Set­tle­ments, the cen­tral bank of cen­tral banks, should also be given a fair hear­ing. Un­for­tu­nately, many cen­tral bankers have sought to marginalise the BIS rather than en­gage with it.

One of the most con­tentious de­bates has been over when to end the “un­con­ven­tional” mon­e­tary-pol­icy mea­sures that were in­tro­duced in the af­ter­math of the fi­nan­cial cri­sis to en­sure that banks con­tin­ued to lend, thereby stim­u­lat­ing growth and avert­ing de­fla­tion. Some cen­tral bankers now worry that end­ing th­ese mea­sures pre­ma­turely will tip the econ­omy back into re­ces­sion. Yet oth­ers fear that the cur­rent strat­egy, though orig­i­nally in­tended to pre­vent an eco­nomic col­lapse, is now sow­ing the seeds of fu­ture in­sta­bil­ity, in­clud­ing the emer­gence of another as­set-price bub­ble.

In their ef­forts to re­solve such dilem­mas, pol­i­cy­mak­ers are also wrestling over whether to fo­cus on tra­di­tional mon­e­tary tools such as in­ter­est rates, or make greater use of so-called “macro-pru­den­tial mea­sures,” such as cap­i­tal add-ons and buf­fers or ad­just­ments to banks’ loan-to-value ra­tios.

At the heart of the de­bate – cur­rently be­ing con­ducted within lead­ing economies’ trea­suries and cen­tral banks, as well as in supra­na­tional bod­ies such as the IMF and the BIS – is the re­la­tion­ship be­tween mon­e­tary pol­icy and fi­nan­cial sta­bil­ity. The BIS, for ex­am­ple, has sug­gested that fi­nan­cial sta­bil­ity is closely con­nected with mon­e­tary pol­icy, and has ad­vised pol­i­cy­mak­ers to start wean­ing their economies off of easy money sooner rather than later. Cen­tral bankers, how­ever, seem to want to try macro-pru­den­tial tools first (and some­times ex­clu­sively).

It is un­usual to wit­ness a clash of views among mon­e­tary pol­i­cy­mak­ers that is so rad­i­cal and clear-cut that it has grabbed wider po­lit­i­cal and me­dia at­ten­tion. And, un­der the pub­lic spot­light, some cen­tral bankers have sought to down­play the BIS’s as­sess­ment, ar­gu­ing that it is all too easy to is­sue far­reach­ing pol­icy rec­om­men­da­tions when one suf­fers none of the con­se­quences should one’s pre­scrip­tion turn out to be wrong.

To be sure, a coun­try’s do­mes­tic eco­nomic cir­cum­stances, and the tools avail­able to pol­i­cy­mak­ers, should guide pol­icy. And, though mon­e­tary tight­en­ing may well be ad­vis­able in some economies, it might be in­ap­pro­pri­ate in oth­ers.

But the harsh re­ac­tions to the BIS’s anal­y­sis seem misplaced and un­fair. It is al­ways dif­fi­cult to find the right mon­e­tary­pol­icy stance for any given econ­omy at a given mo­ment. Cen­tral banks em­ploy an army of ex­perts to try to get it right, and other in­sti­tu­tions are sel­dom so well re­sourced to present equally so­phis­ti­cated coun­ter­ar­gu­ments. The BIS, how­ever, is one of the few or­gan­i­sa­tions that not only has the nec­es­sary re­search and an­a­lyt­i­cal ca­pa­bil­i­ties, but also a track record of mak­ing good calls. One should not for­get – as many cen­tral bankers ap­pear to have done – that the BIS was one of the first to warn of the dan­gers of fi­nan­cial ex­cesses, sev­eral years be­fore the 2008 cri­sis.

The BIS has a right to be heard. It ex­ists not just to rep­re­sent cen­tral banks, but also to of­fer ideas and in­tel­lec­tual feed­back. In­deed, it serves pol­i­cy­mak­ers well by chal­leng­ing, de­bat­ing, and per­haps sway­ing opin­ion. Rather than bash the BIS, mon­e­tary au­thor­i­ties should be grate­ful for the in­formed per­spec­tives that it pro­vides.

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