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Secret Australian Summit of Top Bankers

“Secret Summit of Top Bankers”; news.com.au; 2/6/2010.

THE world’s top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets.

Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.

Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.

Speculation that the chairman of the US Federal Reserve, Dr Ben Bernanke, would make an appearance could not be confirmed last night.

The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India.

The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt.

Fears countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.

Australia’s ASX 200 slumped 2.4 per cent, to a its lowest close since November 5, echoing a sharp fall on Wall Street.

Asian share markets were also pummelled, with Japan’s Nikkei 225 down almost 3 per cent and Hong Kong’s Hang Seng slumping 3.3 per cent.

The damage was also being felt by European markets last night with London’s FTSE 100 down sagging 1 per cent in early trade.

Sovereign debt fears rippled through to the Australian dollar which was hammered to a four-month low of US86.43 and was trading at US86.77 cents last night.

“This does feel like ’08 and ’07 all over again whereby we had these sort of little fires pop up and they are supposedly contained but in reality they are not quite contained,” said H3 Global Advisors chief executive Andrew Kaleel.

“Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.”

It wasn’t all bad news with the RBA yesterday upping its Australian growth forecasts and flagging more interest rate rises this year.

The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.

The outlook for global growth is likely to be a key theme of the high level central bank talks.

The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system which will include new capital rules applying to banks and more stringent standards regulating executive pay.

A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Dr Zeti Akhtar Aziz.

Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.

Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.

Discussion

2 comments for “Secret Australian Summit of Top Bankers”

  1. Here’s the latest reminder that the Very Serious People running the globe are suffering from some very serious learning disabilities:

    The Conscience of a Liberal
    Dead-enders in Dark Suits
    June 24, 2013, 2:16 am
    Paul Krugman

    The Bank for International Settlements is the central bankers’ central bank; accordingly, it tends to exhibit the prejudices of the tribe in especially concentrated form. In particular, it has been relentless in making the case for higher interest rates, on the grounds that … well, the logic keeps changing. For a while it was warning about inflation and commodity prices; when the inflation failed to materialize and commodity prices slumped again, it simply changed the argument to one against bubbles, plus the quite amazing argument that central bankers must not keep rates low because that would take the fiscal pressure off governments. Who, exactly, elected these people to run the world?

    But in its latest report the BIS really transcends itself.

    Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length. Early on, for example, it declares that

    studies have repeatedly shown that as government debt surpasses about 80% of GDP, it starts to become a drag on growth.
    Somebody didn’t get the memo (or, more likely, the report had already been sent to the printers when Reinhart-Rogoff-Wrong broke).

    And that’s just one of many. For another example, the BIS goes on at length about the alleged difficult of shifting workers out of housing into other sectors, and the role of this alleged lack of flexibility in causing sustained high unemployment. What about all those studies showing that employment fell broadly across sectors and regions, indeed across occupations and skill classes, all of which is inconsistent with this story? Never mind.

    But the real reason to be horrified by this report doesn’t lie in the details, it lies in the destructive incoherence of the whole vision.

    The BIS largely accepts a balance-sheet, debt-overhang view of the crisis; indeed, it inveighs a lot against both public and private sector debt. And it demands that everyone, public and private both, deleverage fast, starting immediately.

    Hello? Does anyone see the problem? If everyone is slashing spending, who will buy what they have to sell? And won’t a global depression — because that, in effect, is what they’re calling for — both undermine attempts to save and actually raise debt/GDP ratios, though a falling denominator?

    In fact, their own data are trying to tell them this story. They lament the fact that debt ratios have risen, not fallen, in most countries:
    [see image]

    But they fail to note that some of the biggest increases have come in countries pursuing savage austerity. This is not, of course, a mystery: Greece has made budget cuts amounting to around 15 percent of GDP, the equivalent of $2.5 trillion in the United States, but it has been chasing a rapidly falling GDP. To some of us, this is evidence of the futility of austerity; to the BIS it’s evidence that people need to cut much more.

    Now, you could argue that we need sharp spending cuts by private and public debtors, but that we can avoid a global depression by using expansionary monetary policy to encourage whoever is left to spend more. But noooo [/end Belushi]: the BIS is fiercely opposed to easy money, which it says just encourages irresponsibility.

    So the BIS is calling both for sharp cuts in public spending and for sharp cuts in private spending, encouraged by an end to easy money. I’m not sure how this is supposed to work; maybe the idea is for everyone to run a large trade surplus, at the same time.

    In the end, though, this isn’t about analysis, it’s about attitude. The BIS is basically embodying the notion that we must pay for our past sins, never mind the arithmetic.

    And the worst of it is that these views will carry some weight, because the BIS still, for some reason, retains substantial credibility.

    Posted by Pterrafractyl | June 24, 2013, 9:02 am
  2. How helpful: The BIS just released a new study on the impact of deflation. Its conclusion? Deflation is nothing to worry about. At least not now. The lessons of the Great Depression were historically anomalous and don’t really apply to today. Instead, worry about loose monetary policies causing inflation.

    The BIS: ‘helpful’ as always:

    Bloomberg Business
    The Central Bank of Central Banks Says Keep Calm About Deflation

    by Simon Kennedy
    6:00 AM CDT March 18, 2015

    (Bloomberg) — The central bank for central banks has some advice for policy makers fretting about deflation: Don’t.

    In a study bound to prove controversial in the corridors of power and academia, economists at the Bank for International Settlements concluded the connection between economic growth and shrinking prices is weak.

    Their number-crunching found that since World War II there were more than 100 years of short-term deflation across 38 economies studied, yet the average growth rate in those periods was higher than otherwise at 3.2 percent versus 2.7 percent. When inflation was more long-lasting, average growth was 2.1 percent.

    In keeping with past warnings that the easy money now being targeted at sluggish prices risks generating financial market bubbles, the BIS found a stronger link between output growth and sliding asset prices. In the wake of equity and property price peaks, economic expansion is about 10 percentage points lower over five years.

    The research “raises questions about the prevailing view that goods and services price deflations, even if persistent, are always pernicious,” said economists led by Claudio Borio, head of the BIS’s monetary and economic department. “There is a case for policy makers to pay closer attention than hitherto to the financial cycle — that is, to booms and busts in asset prices.”

    Deflation Fears

    The assumption that deflation spells economic weakness is based on the idea it reflects a slump in demand and can prompt consumers and companies to retrench, pushing prices down further, the BIS economists said.

    Still, “good” deflation can be driven by supply forces such as cheaper oil or greater competition and can also spur output by increasing spending power and making export markets more competitive, they said.

    Modern-day deflation fears are rooted in the outlying experience of the Great Depression era of 1929 to 1938 when average growth was 4 percentage points weaker than usual, according to the BIS report.

    As for the recent experience of Japan, which is said to have suffered “lost decades” because of deflation, the BIS said on a per capita basis, economic growth actually rose from 2000 to 2013 by 10 percent compared with 12 percent in the U.S.

    The findings, which echo those of a January report by Deutsche Bank AG, may prove contentious as central bankers from the euro-area to Japan step up monetary stimulus to stop their economies suffering a collapse in prices driven by declining commodity costs and soft economic growth.

    Shareholder Reprimand

    The BIS, which is owned by central banks and serves as a counterparty for them, has not been shy of crossing its shareholders. After sounding the alarm on asset price excesses which helped trigger the global financial crisis of 2008, it subsequently warned against ultra-loose monetary policy.

    It last year drew rebukes from central bankers including Federal Reserve Chair Janet Yellen and economists such as Nobel laureate Paul Krugman for declaring rates risked being raised “too slowly and too late” to counter asset-bubbles.

    Today’s attempt to quell deflation worries suggests it’s sticking to its guns.

    That’s right, who cares about deflation! It’s the inflationary low interest rates you really need to worry about. *wink*

    It’s the kind of ‘helpful’ analysis the BIS is known for:

    The New York Times
    The Conscience of a Liberal
    Liquidationism in the 21st Century
    By Paul Krugman
    July 12, 2014 3:20 pm

    Brad DeLong professes himself confused:

    I confess that I do not understand the recent BIS Annual Report. I have tried–I have tried very hard–to wrap my mind around just what the BIS position is. But I have failed.

    Actually, I don’t think it’s that hard. But you need to see this in terms of an attitude, not a coherent model.

    At least since 2010 the BIS position has basically been the same as that of 1930s liquidationists like Schumpeter, who warned against any “artificial stimulus” that might leave the “work of depressions undone.” And in 2010-2011 it had an intellectually coherent — factually wrong, but coherent — story underlying that position. The BIS basically claimed that mass unemployment was the result of structural mismatch — workers had the wrong skills, and/or were in the wrong sectors. And it therefore claimed that easy money would lead to a rapid rise in inflation, despite the high level of unemployment.

    But it didn’t happen. So you might have expected the BIS to revise its policy prescriptions. What it did, instead, however, was to look for new justifications for the same prescriptions. Partly this involved playing up the supposed damage low rates do to financial stability. But the BIS has also gone in heavily for the notion that we’re suffering from a balance-sheet recession, that is, that over-indebtedness on the part of part of the private sector is exerting a persistent drag on the economy.

    That’s a reasonable story — it’s a model I like myself. But the BIS either doesn’t understand that model’s implications, or doesn’t care.

    Throughout the annual report, balance-sheet problems are treated as if they were equivalent to the kind of real structural problems the bank used to claim were at the root of our troubles. That is, they’re treated as a good reason to accept a protracted period of high unemployment as somehow natural, and to reject artificial stimulus that might alleviate the pain.

    That, however –as Irving Fisher could have told them! — is not at all the correct implication to draw from a balance-sheet view. On the contrary, what balance-sheet models tell us is that left to itself, the process of deleveraging produces huge, unnecessary costs: debtors are forced to cut back, but creditors have no comparable incentive to spend more, so there is a persistent shortfall of demand that leads to great pain and waste. Moreover, the depressed state of the economy can cripple the process of deleveraging itself, both because debtors don’t have the income to pay down their debts and because falling inflation or deflation increases the real value of debt relative to expectations.

    So the balance-sheet view actually makes a compelling case for activism — for fiscal deficits to support demand while the private sector gets its balance sheets in order, for monetary policy to support the fiscal policy, for a rise in inflation targets both to encourage whoever isn’t debt-constrained to spend more and to erode the real value of the debt.

    The BIS, however, wants governments as well as households to retrench — I’m kind of surprised that it doesn’t also call for everyone to run a trade surplus; it wants interest rates raised right away; and — in a clear sign that it isn’t being coherent — it includes a box declaring that deflation isn’t so bad, after all. Irving Fisher wept.

    Are the BIS’s methods unsound? I don’t see any method at all. Instead, I see an attitude, looking for justification.

    And that was the enthusiastic response to one of last year’s BIS reports, which sounds about as ‘helpful’ as this year’s report.

    ‘Helping’ is just what the BIS does! Over and over and over. And over. It’s like The Giving Tree of bad advice!

    Posted by Pterrafractyl | March 23, 2015, 1:48 pm

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