BIS plays with fire, demands double-barrelled monetary and fiscal tightening
The Bank for International Settlements has warned authorities across the
developed world that they cannot rely on ultra-low interest rates to cushion
the blow of austerity measures.

Both fiscal and monetary policy may have to be tightened at the same time
and *before recovery is entrenched, a chilling possibility for asset
markets. "Macroeconomic support has its limits," said the bank's annual
report.

The Swiss-based "bank for central bankers" said ultra-low rates and massive
fiscal stimulus saved the world from an economic meltdown during the credit
crisis, but the balance of advantage has since shifted.

"Such powerful measures have strong side-effects, and their dangers are
becoming apparent. The time has come to ask how they can be phased out," it
said.

"There are limits to how long monetary policy can remain expansionary.
Keeping interest rates near zero for too long, with abundant liquidity,
leads to distortions and creates risks for financial stability. We cannot
wait for the resumption of strong growth to begin the process of policy
correction."

The clarion call for higher rates and an end to quantitative easing is
controversial and pits the BIS against the International Monetary Fund in an
epochal policy battle. If wrong, the BIS strategy risks pushing the global
economy into depression.

Dominique Strauss-Kahn, the IMF chief, warned against zealous
self-flagellation at the G20 summit. "It could be a catastrophe if all the
countries were tightening, it could totally destroy the recovery."

Gabriel Stein, of Lombard Street Research, said the BIS is playing with
fire. "Fiscal and monetary tightening were tried in tandem in the early
1930s and it didn't work then. The BIS ought to know better," he said.

The bank said the US and Europe made the fatal error of holding rates too
low after the dotcom bust, fearing a slide towards deflation. The effect was
to fuel asset bubbles and depress credit yields, pressuring lenders to chase
risk. "Our recent experience with exactly these consequences a mere five
years ago should make us extremely wary this time around," it said.

The BIS warned that central banks are luring banks into a fresh trap by
shoring up lenders with cheap access to short-term funding, which is then
used to buy long-dated bonds at higher yield - the so-called sovereign
"carry trade". Some have already been caught out badly in Greek debt.

"Financial institutions may underestimate the risk associated with this
maturity exposure. They might face difficulty rolling over their short-term
debt. An unexpected tightening of monetary policy might cause serious
repercussions," it said.

The parallel with post dotcom errors is likely to rile critics. Housing
markets and banks were robust at the time, whereas the damage now is deeply
structural in the US, Britain and Europe. Yet the BIS has clearly concluded
that it is better for indebted economies to take their punishment early
rather than dragging out the ordeal as in Japan.

On the spending side, the bank called for "immediate front-loaded fiscal
consolidation" in key industrial states. "Public debt-to-GDP ratios are on
unsustainable trajectories," rising from 76pc of GDP in 2007 to 100pc in
2011. The picture is worse than it looks since the crisis has "permanently"
reduced output, and aging costs are soaring.

Yet fiscal austerity may be less of a drag on recovery than presumed.
Denmark slashed its primary deficit by 13.4pc of GDP from 1983-1986, yet
eked out growth of 3.9pc a year. Sweden grew by 3.7pc during its hair-shirt
episode in the 1990s, Canada by 2.8pc, and Belgium by 2.3pc.

These cases do not tell us what would happen if half the world tightens at
the same time, feeding on each other. Even so, the BIS data challenges
Keynesian claims about fiscal stimulus. State spending merely "crowds out"
private activity.

Besides, governments have no choice. They must retrench to appease the bond
vigilantes in the new era of sovereign frailty. "A sudden loss in market
confidence would be far worse," said the BIS.

--
Crisi immobiliare italiana e prezzi in discesa per molto..molto.. tempo
ancora
http://datamaxy.altervista.org/index.php
--------------------------------------------