By keeping interest rates so low, central banks have no tools left when the next financial crisis hits, according to a Bank of International Settlements report.
Since Puerto Rico and Greece are both in the news this week, as they suffer financial implosions, perhaps we should take a look at the bigger picture. What will the central banks do if this starts a bigger crisis?
According to one report, they can do nothing because they have already done it. The Telegraph reports, “The world is defenceless against the next financial crisis, warns BIS.”
The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises, the Bank of International Settlements has warned.
The so-called central bank of central banks launched a scatching critique of global monetary policy in its annual report. The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies.
These low interest rates have in turn fuelled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.
Claudio Borio, head of the organisation’s monetary and economic department, said: “Persistent exceptionally low rates reflect the central banks’ and market participants’ response to the unusually weak post-crisis recovery as they fumble in the dark in search of new certainties.”
It sounds like the establishment is finally admitting the truth of free market critiques of central banking. They also acknowledge that the central bank strategy has actually worsened the economy.
“Rather than just reflecting the current weakness, they may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates.
“In short, low rates beget lower rates.”
The BIS warned that interest rates have now been so low for so long that central banks are unequipped to fight the next crises.
Why are these people finally admitting it all now? I don’t know. I suspect this kind of honesty is too little too late and that nothing will be done.