BIS is fearful of bubbles, but is not always right (remember the gold standard?)

I think there is a bubble in bubble fears. This is particularly the the case for central bankers and institutional monetary institutions.

Here  in the Telegraph:

The two watchdogs launched broadsides against central bank largess last week. The BIS — the forum of central banks — was particularly blunt, seeming to imply that quantitative easing “does not work”.

Critics say this risks undermining the credibility of radical measures when more may yet be needed. They fear central banks could repeat the mistake made in 1937 when the Federal Reserve lost its nerve and tightened too soon, tipping America back into depression.

And here is my response in the same article:

“The BIS and the IMF are deeply misguided and risk doing the world a grave disservice. The biggest threat right now is irrational fear of bubbles among central banks,” said Lars Christensen 

Particularly the advise of BIS is taken to be very important as the general perception is that the BIS “got it right” prior to the crisis – the fact that it got it mostly wrong over the past five year apparently is less important. Paul Krugman has some not too kind words about BIS – or the Sadomonetarists of Basel as Krugman calls the institution headquartered in Switzerland:

I guess we can check the record here and see just how prescient the BIS was. What I do recall, however … is that the BIS has spent years warning about the dangers of low interest rates. Except that a couple of years back it was telling a completely different story about why we needed to raise rates; you see, the big danger was of imminent inflation…

…In fact, inflation is running below target just about everywhere. You might therefore think that the BIS would step back a bit and reconsider both its policy recommendations and the framework it uses to derive those recommendations.

I can, however, do better than Krugman. BIS’ Sadomonetarist tendencies date back more than five years. This is from BIS’ third annual report publish in May 1933:

“For the Bank for International Settlements, the year has been an eventful one, during which, while the volume of its ordinary banking business has necessarily been curtailed by the general falling off of international financial transactions and the continued departure from gold of more and more currencies, culminating in the defection of the American dollar, nevertheless the scope of its general activities has steadily broadened in sound directions. The widening of activities, aside from normal growth in developing new contacts, has been the consequence, primarily, of a year replete with international conferences, and, also, of the rapid extension of chaotic conditions in the international monetary system. In view of all the events which have occurred, the Bank’s Board of Directors determined to define the position of the Bank on the fundamental currency problems facing the world and it unanimously expressed the opinion, after due deliberation, that in the last analysis “the gold standard remains the best available monetary mechanism” and that it is consequently desirable to prepare all the necessary measures for its international reestablishment.”

And this is what I earlier had to say about that report:

Take a look at the report. The whole thing is outrageous – the world is falling apart and it is written very much as it is all business as usual. More and more countries are leaving the the gold standard and there had been massive bank runs across Europe and a number of countries in Europe had defaulted in 1932 (including Greece and Hungary!) Hitler had just become chancellor in Germany.

And then the report state: ”the gold standard remains the best available monetary mechanism”! It makes you wonder how anybody can reach such a conclusion and in hindsight obviously today’s economic historians will say that it was a collective psychosis – central bankers were suffering from some kind of irrational “gold standard mentality” that led them to insanely damaging conclusions, which brought deflation, depression and war to Europe.

Unfortunately BIS’ view haven’t changed much since 1933. Should we listen to the Sadomonetarists in Basel today?

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  1. James in London

     /  May 21, 2013

    Great to see the Daily Telegraph article. The way things are going we might see Evans-Pritchard writing an article pointing out that low interest rates are a sign that money is really tight as opposed “ultra-easy” as the majority of the “commentariat” and trained economists think. So an unchanged ECB rate of, say, 0.5% “signals a continuation of ultra-tight money”. Wouldn’t that be great.

    Sligthly off-topic, Lars, I did leave a challenge on TheMoneyIllusion. The paradox of the finanancial markets so clearly “getting” the current tight stance of monetary policy, but the financial market types that Scott and you and I meet who so clearly don’t get it.

    The traders must listen to their trained economist colleagues and simply ignore them. It is puzzling.

  2. TravisV

     /  May 22, 2013

    Here is an idea for a new blog post:

    Scott Sumner and other Market Monetarists have complained about how “inflation” gets a bad rap with the general public. What Bernanke & Co. want is “more demand” and some inflation is fine because it accompanies higher real growth. But the public doesn’t get that. All they hear is “inflation” which to them means “lower purchasing power.”

    Somebody needs to write a post that explains how Shinzo Abe successfully managed to get the Japanese public–which HATES inflation–to embrace it after all these years of flat prices.

  1. “The gold standard remains the best available monetary mechanism” | The Market Monetarist
  2. The Melaschenko-Reynolds banking resolution model makes a lot of sense (damn that is not a sexy headline) | The Market Monetarist
  3. BS from the BIS? | TVHE

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