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Last updated: June 23, 2013 6:21 pm

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Central banks told to head for exit

By Claire Jones, Economics Reporter

De La Rue

Central banks must head for the exit and

stop trying to spur a global economic
recovery, the Bank for International
Settlements has said following a week of
market turbulence sparked by the US
Federal Reserves signal that it would soon
cut the pace of its bond buying.

Printing money: quantitative easing policies drawing to

an end?

US Treasury markets, which saw yields hit

their highest level in almost two years on
Friday, face further challenges this week as they prepare to sell an extra $99bn of
debt. After last weeks global sell-off, markets in the US will also be knocked by
traders winding down for the end of the second quarter.

More
ON THIS STORY

One cannot reverse the Feds big bang moment, said

George Goncalves, strategist at Nomura Securities,
adding that the scale of foreign demand for this weeks
Treasury debt sales would be a crucial test of
sentiment.

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The BIS, which counts the worlds leading monetary

authorities as members, said cheap and plentiful
central bank money had merely bought time, warning
that more bond buying would retard the global
economys return to health. It used its influential
annual report to call on members to re-emphasise
their focus on inflation and press governments to do
more to spearhead a return to growth.
The BIS report comes on the back of last weeks
markets turmoil, fuelled by Fed chairman Ben
Bernankes comments that the central bank could slow
its $85bn monthly bond-buying programme this year
and end it by mid-2014.
Often referred to as the central bankers bank, BIS
said the global economy was past the height of the
crisis and its goal was to return still-sluggish
economies to strong and sustainable growth.

http://www.ft.com/intl/cms/s/0/455af4a6-dc09-11e2-a861-00144feab7de.html#axzz2X97xajev[6/24/2013 11:12:43 AM]

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Central banks told to head for exit - FT.com

frequency
Climate bomb warning over
China coolant release
The Macro Sweep Thailand,
eurozone

Alas, central banks cannot do more without

compounding the risks they have already created, the
BIS said, adding that delivering more extraordinary
stimulus was becoming increasingly perilous.

How can central banks encourage those responsible for structural adjustment to
implement those reforms? How can they avoid making the economy too dependent
on monetary stimulus? When is the right time for them to pull back ... [and] how
can they avoid sparking a sharp rise in bond yields? It is time for monetary policy
to begin answering these questions, the report said.
Mario Draghis rallying cry, uttered last summer at the height of the eurozone
turmoil, that the European Central Bank would do whatever it takes to preserve
the currency bloc was now being misconstrued, it warned.
Can central banks now really do whatever it takes? the BIS asked. It seems less
and less likely. Central banks cannot repair the balance sheets of households and
financial institutions.
The BIS also railed against critics of eurozone austerity, saying there were reasons
to be sceptical about arguments such as that of the International Monetary Fund
that higher fiscal multipliers meant governments assumptions about the trade-off
between consolidation and growth had been too favourable. There was no
compelling evidence that [multipliers] are large enough to render fiscal
consolidation more difficult [or actually self defeating].
Stephen Cecchetti, head of the BISs monetary and economic department, said at
the end of last month that the initial rise in yields for US Treasuries and stock
market reaction following Mr Bernankes hints in May that the Fed would slow its
asset purchases should come as no surprise.
Separately, the BIS said Jaime Caruana, its general manager, would remain in office
until March 2017.
Mr Caruana said at the BIS annual meeting on Sunday: Ours is a call for acting
responsibly now to strengthen growth and avoid even costlier adjustment down the
road ... Monetary policy has done its part. Recovery now calls for a different policy
mix with more emphasis on strengthening economic flexibility and dynamism
and stabilising public finances.
Additional reporting by Michael Mackenzie in New York

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http://www.ft.com/intl/cms/s/0/455af4a6-dc09-11e2-a861-00144feab7de.html#axzz2X97xajev[6/24/2013 11:12:43 AM]

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Rockyusa | June 24 1:11pm | Permalink

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I think this argument about QE, monetary policy, etc., misses the far larger picture.
The established ideal of a government nanny state, whether it is labeled socialist, communist, progressive or
whatever, and the idea of larger and larger government that is determined to decide who is entitled and who is
not, and who seeks to control every element of it's population in the name of fairness and national security, is
and has always been a failed ideology of BOTH governance AND economics because they are organically
connected.

All this blather about whether to reign in spending via austerity, or to create more growth via more debt, is
nonsense. Until the back of the social/progressive/communist ideal is broken, and big government is a thing of
the past, these problems will simply escalate or at best morph into different crises.

Of course the conventional wisdom is that there is no way to smaller government, that nations must continue
on a path to a single world governmental body with each nation more a state in a global confederation, and
that greater government control over populations and finances are needed for stability.

It is a complete change of ideology back to a (former) USA style of Laissez Fare Capitalism of enlightened self
interest, and a return to fierce national independence and individual national currencies, that is probably the
best of a lot of imperfect options. The game is to move decision making back downstream and closer to the
individual, instead of constantly pushing it upstream to the so-called geniuses and elite whose failed ideologies
only sustains a continuing need to keep them in charge (supposedly).

@daviddenton20 | June 24 1:08pm | Permalink

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After 5 years of blowing bubbles central bankers need to get back to the day job of managing inflation, they
have had too long in the limelight and have lost the plot - too much celebrity! http://getwd50.blo...owingbubbles.html

Musso | June 24 12:23pm | Permalink

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@ Equivocation
stagflation? please show me the inflation !
And don't miss that BIS-pearl: "Turning to the more strategic aspects of monetary policy, the crisis has not
discredited the core elements of pre-crisis frameworks: price stability orientation and independence in central
bank decision-making. These features have been essential to achieving low and stable inflation in advanced
and emerging market economies alike over past decades and have proved instrumental in anchoring inflation
expectations. However, pre-crisis monetary policy frameworks did not ensure lasting financial and economic
stability. In an environment of low and stable inflation, financial imbalances ushered in the most severe crisis
since the Great Depression, followed by busts". LOL

Hans II | June 24 9:49am | Permalink

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Be aware of BIS' conclusions: The Actual BIS General Manager is Jaime Caruana, ex Gobernor of Banc of
Spain from 2001-2007, he was totally useless as regulator not able to see the imbalances of the Spanish
economy and allowing the Banks in their crazy real state finance. Bad Economist even worse manager.

One_plus_one_still_equals_two | June 24 9:23am | Permalink

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One can't create something out of nothing, even if your name is Bernanke. The current bubbles will burst,

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Central banks told to head for exit - FT.com

destroying all the money created, and then some of course, as markets do not react exactly to cue.

This is the reason we got here in the first place - money out of nothing. Personally, I do not see anything here
in the West except deflation, until we get down to the same level as those countries which are now thought of
as "emerging". This does not include Greece, which is a "dying" economy.

So-called "Democratic" governments thought that they could somehow live on the never-never. Now that they
have found out that they cannot, they are trying Dictatorship by the back door, as they have heard that
dictatorship follows democracy. Dangerous stuff, all this...

Kevin Alexanderman | June 24 8:37am | Permalink

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Frankly, higher interest rates will help economies significantly, but not necessarily governments.

It will help all societies for governments to have less influence on securities markets.

Oldfashioncandid | June 24 8:35am | Permalink

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Real dedicated Experts is what is needed; no ideology, no finance guru, and certainly no followers or lobbyists.
Too many people have demonstrated their uselessness over the past 5 years (ok may be last 20 years),
including many journalists of this very paper
BIS where were you these last few years? IMF has already admitted incompetence! OECD serve no purpose;
Central banking system is a subsidiary of GS robots, EU Commission is more and more totally disconnected
and talks about the taxi regulation in Paris or the notary guild in Italy,...
The disconnect between finance sphere, elected officilas and international CIVIL SERVANTS (serving the civil
public internationally) is such that nobody is listening anymore. People will do what they think is best for them
and their families. Trust in major business brand is really low, trust in governement competencies and motives
is really low, trust in international organisation has vanished
Please dear journalists, you are paid to think and report: can you come up with some suggestions which are
not from a press release produced by the 'elites'?

PS: can the entire civil servants community take a good decisions: to reduce their budget and their
compensation and privileges down to the say Greek/Portugese civil servants level???

areyouserious | June 24 8:25am | Permalink

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Strange how we're all talking about exiting of QE whereas in Japan they've only just re-started it with gusto.

Martian Mangal | June 24 6:12am | Permalink

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Consumer psychology cannot be fixed by central banks when the fear of "winding" down is the air. You know
people can be persuaded to hold demonstrations for some cause, but to ask them to spend "simultaneously" is
an entirely different ball game.

Voice of Truth | June 24 5:52am | Permalink

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The sooner we get the depression behind us, the better.

Doug Beattie | June 24 2:42am | Permalink

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Sound so 1937. Taking away the punchbowl and expecting the party to rage on is a little disingenuous. The
BIS seems to be saying, higher interest rates will force austerity. How this translates to growth is beyond me.

angus.barber | June 24 2:20am | Permalink

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Central banks told to head for exit - FT.com

Inflatiion focus? I think you must mean deflation.

joe222 | June 24 1:50am | Permalink

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"The BIS also railed against critics of eurozone austerity, saying there were reasons to be sceptical about
arguments such as that of the International Monetary Fund that higher fiscal multipliers meant governments
assumptions about the trade-off between consolidation and growth had been too favourable. There was no
compelling evidence that [multipliers] are large enough to render fiscal consolidation more difficult [or actually
self defeating]."

This is utter nonsense. The BIS exhibits a profound misunderstanding of the effects of QE. Firstly, QE is not the
same as fiscal stimulus. The multilpliers the IMF refers to are the effects of fiscal contraction or expansion NOT
QE. The effects of fiscal contraction in the Eurozone have consistently overshot expectations! Could there be
any better example of the fact that fiscal consolidation has been more damaging than expected than the
persistently high youth unemployment and stagnant growth across Europe.

And QE has not worked as expected because banks are simply not lending to the real economy due to the lack
of demand and confidence in the real economy(which is resultant from fiscal austerity policies). This really
really isnt difficult to understand!

Evad1ne | June 24 1:45am | Permalink

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G.K Chesterton complained about the evils of aristocracy, but his complaints are equally applicable to the E. U.
bureaucracy, the Obama Administration, and vested interests in general:

"... it places everything in the hands of a class of people who can inflict what they will never suffer."

Winemaker | June 24 1:42am | Permalink

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Yes, the central banks have given their best shot by creative digimagic and now only a minor problem remains,
the unconfronted issues of the real economy.

Equivocation | June 24 1:42am | Permalink

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@ William Campbell,

What?!? Quoting the latest BIS end of year report is irresponsible? Quoting the central banks' central bank?

Have you heard of selectivity bias?

Equivocation | June 24 1:35am | Permalink

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@Muso,

So.... You consider that printing is successful? Please show me the growth! Where are the jobs? I see asset
prices going exponential, but fail to see any form of recovery.

Central banks have finally driven us into stagflation, which will eventually revert into a new financial crisis.
Unfortunately, this time our conventional options are even more reduced.

By the way. Have you read the report? It has more common sense than any report I have seen coming out of
the Fed (well the St. Louis Fed seems to be a bit of a rebel)

yasuaki torii | June 24 1:31am | Permalink

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Central banks told to head for exit - FT.com

The tide is ebbing. Maybe financial society vaguely recognized it's power and limit. How long can one regime
push the economy stimulus without adding real added value to society as a whole,.....How the effects for ever
creating the artificial leverage to finance will bring to real economy,....est. Fed, European Central Bank
president(Mr. Mario Draghi), (lesser) Bank of Japan's Mr. Kuroda(and Mr.Abe) have to re-think their policy.
Somehow Kenneth Rogoff and Carmen Reinhart (Harvard University) survived. The pendulum swing to the
direction B.I.S.'s....."Too much government debt is a brake on growth."..... ( Japan's Abenomics have finished.)

Michael Heller | Project Syndicate | June 23 11:51pm | Permalink

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Hooray. If now's the moment to decide to exit -- praise the infinite wisdom of the BIS which has proven time
and time again to have been right -- it must also be the moment to reread my piece of 2 weeks ago:

http://www.project...-by-michael-heller

share-price.blogspot.com | June 23 11:06pm | Permalink

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Pop goes the re-flated bubble before arab summers multiply around the globe.

Musso | June 23 9:45pm | Permalink

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* "re-emphasise their focus on inflation"??? Inflation in the midst of the Great Depression??? Which inflation
are they talking about??? The BIS "influential annual report" is very likely to be remembered as a late piece by
Herbert Hoover.
* However, it seems Mr. Caruana is the only man sure to keep a job until 2017. I understand he can feel very
comfortable ... he alone.

FX_Bandit | June 23 9:33pm | Permalink

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Is a triple, or quadruple dip recession on the cards? Or are we still in the original single dip recession?

I've lost count now.

All I hear is "build more houses!"

Why?

Nobody can afford them!

Fin.

Rusfuture | June 23 9:17pm | Permalink

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Bravo for the BIS! It is time someone in authority said what is painfully obvious. Triggering inflation by
moneyprinting is unwise and dangerous. And the longer this "stimulus" continues, the more extreme the risk
grows of ugly consequences. The zero-interest rate policy destroys financial return on capital - so it is savers
who bear the painful cost of this unwise policy in the immediate here and now. But there is also a real risk that
a rapid loss-of-confidence could cascade, and bring an even worse future outcome.

One_plus_one_still_equals_two | June 23 9:14pm | Permalink

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Are these comments not a little late? Shouldn't they have been uttered years ago? It is now too late to repair
the damage done by the Fed, and then the ECB, SNB, et al.

You cannot put the genie back in the bottle. Pandoras' box has been opened, and we all have to pay the price
for the central banks and governments around the world making absolutely astoundingly stupid decisions,

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Central banks told to head for exit - FT.com

because they thought it would stop us getting a headache. Now we have double pneumonia, and they still
continue on their track to nowhere. They thought they could control everything, and now they have found that
not only can they not do this, they have created a brand new pile of problems.

When will all this idiocy end?

EcoLord | June 23 9:07pm | Permalink

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Surely central banks have [rightly] been concerned with avoiding DEFLATION which would have caused
massive economic contraction.

Yes we also need de-leveraging, more innovation, more trade agreement, pension reform, deregulation and
other structure changes - but all of those are in progress. Governments could and should do better in
progressing these items and there is no room for complacency.

Central banks have bought time and avoid possible calamity. All good work considering where we were in
2007.

TJG | June 23 9:03pm | Permalink

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As I recall the BIS has always supported austerity. This is just more of the same from them.

William (Bill) Campbell | June 23 7:44pm | Permalink

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Alarmist article... poor for the FT.

Dated and irresponsible.

Gulliver | June 23 6:14pm | Permalink

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@Moshe, Das Kapital doesnt work, what we need to do is:

1 to go back to old fashion capitalism and re-instate Glass- Steagall Act,

2 to end the US dollar reign as a global currency and adopt a basket of currencies (Dollar, Euro, Yen,
Renmimbi, Real, Rand and Riyal) or maybe come up with a global currency,

3 to stop the practice of trading oil in US dollars only,

4 - the UK needs to stop trying to be a global power leveraged by the US and fully join the EU and
consequently enter the Eurozone.

We will see what else needs done once the dust settles down.

Moshe | June 23 5:47pm | Permalink

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Should one lose any sleep really over 'market' likes and dislikes ? The greed is obviously unlimited. Time to
read 'Das Kapital' perhaps ?

ricgf | June 23 5:44pm | Permalink

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@tomorourke1:

He won't - if Mr Summers gets the main spot as Head of the Federal Cabal System, expect to see more of his
anti-austerity moves.

http://www.ft.com/intl/cms/s/0/455af4a6-dc09-11e2-a861-00144feab7de.html#axzz2X97xajev[6/24/2013 11:12:43 AM]

Central banks told to head for exit - FT.com

tomorourke1 | June 23 4:59pm | Permalink

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Somebody better let Larry (the lounge lizard) Summers know this before he gets in at the Fed and starts up
QE4

Equivocation | June 23 4:54pm | Permalink

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@Graham,

There is no exit. There is no Plan B. Central Banks have painted themselves into a corner.

They reflated a credit bubble and have called it a success. Except that bubble will inevitably pop again. It is a
cycle (business/credit cycle). The problem is that every time the bubble get bigger and the pops become more
painful and disruptive.

Equivocation | June 23 4:51pm | Permalink

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@Alanson,

Really? You do know that the private sector in the US is at pre-2007 leverage levels? (the public sector is way
above). Even a small rise in interest rates will wreck havoc on US consumers and companies.

The cure to excess debt is delevering. Bernaneke just kicked the can down the road, just like Greenspan
before him. The problem is you eventually run out of road.

Just watch a couple of quarters before the US goes back into a new financial crisis.

Alanson | June 23 4:34pm | Permalink

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Inflation in the US has been lower in the 5 years since 2008 than in the five years prior to 2008. When did the
Fed lose its "focus" on inflation? The answer is that the focus has been on maintaining stability in the price
level in the face of tremendous deflationary shocks to the financial system and to the economy. God help us if
Bernanke had pursued Euro-style austerity, because evidently the BIS would have been of no assistance.

Graham Cox | June 23 4:26pm | Permalink

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For such a prestigious and indeed these days critical publication, the authors do not state what they mean by
'exit' .

I suspect it is partly because each monetary area is different and their's is a global summary and partly
because they are perhaps not even sure themselves. But if they are willing to make such heavy use of the
Taylor Rule for short term interest rate policy anchor, they need some kind of benchmark for long term open
market operations, re long term interest rates, given the complex mix of the various components: ( net
purchases, stocks, interest receipts and maturity events) and the interactions with the private long term credit
market and with fiscal policy .

If no guidance is given, the word 'exit ' may be interpreted by the many readers with as much coordinated
clarity as that engendered by title of the film ' Every which way but loose' .

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Central banks told to head for exit - FT.com

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