A BIS report falls in the forest
IT IS becoming an annual ritual. The Bank for International Settlements’ annual report is a clarion call for economic orthodoxy. The central bankers’ bank urges its rich-world members to tighten monetary policy, its emerging market members to encourage domestic consumption, and both to counter global imbalances. It is promptly ignored by the central bankers it is aimed at, and their political masters. Compare this year’s report out yesterday: Highly accommodative monetary policies are fast becoming a threat to price stability…once central banks start lifting rates, they may need to do so more quickly than in past tightening episodes.To the 2010 report: Macroeconomic support has its limits...Immediate, front-loaded fiscal consolidation is required in several industrial countries…there are limits to how long monetary policy can remain expansionary. The diagnosis reflects policy criticisms from other international institutions. This year the BIS focuses on four issues. High public and private debt in the developed world; global current account imbalances, which may not be sustained by capital flows from the developing to the rich world; excessively easy monetary policy in the developed world; and incomplete financial regulatory reform. The BIS' concerns are not without merit. Indeed, the Leader pages of this newspaper regularly warn about some of the same ills—though not about too-loose monetary policy. The BIS is already attracting significant attention for its call for higher interest rates and its demand that central banks slow economic growth. The problem is that nearly all of these issues have significant political economy elements. Yet the BIS completely ignores the political, focusing only on the economic. In the language of the dismal science, the BIS says current policies are simply “delaying necessary adjustment”. The political language would be much more stark. Were the Federal Reserve to immediately tighten monetary policy, foreclosures would rise and several years of slow (or negative) growth would probably be the result. Easy monetary policy may be likened to a drip feed for heavily indebted households, but with the patient still in intensive care, it's a necessary one. In China, allowing currency appreciation in the interest of global rebalancing would require the economy to find a replacement for an export-led growth model. There is little sign of that yet. Of course the BIS is right that these policies may interact perniciously. In the long term, easy monetary policy in the developed world countered by capital controls and exchange-rate manipulation in the emerging world will leave all worse off. Should the BIS be praised then? By calling its central bank members back to the straight and narrow, is it doing its job? That argument made sense when we could take for granted the independence of central bankers. That is increasingly hard today. In America, with Congress deadlocked even over raising the debt ceiling, fiscal stimulus is off the table. Surely that impacts on the Federal Open Market Committee’s indication that interest rates will remain near zero for the foreseeable future. In Britain, Mervyn King and George Osborne seem to have struck a Faustian pact. Rein in the deficit chancellor, and the governor will keep rates low. We can blame the consistent inflation overshoot on “temporary” high oil and food prices. Even in Europe, where the ECB has begun the process of monetary tightening, the central bank is fighting tooth and nail against German plans to restructure Greek bond debt; its very involvement in the sovereign-debt crisis has drawn it into politics. All this stems from the financial crisis. Until then central bankers could be seen as technocrats divorced from national politics. Now that the state has become intimately involved in national economies, that seems a fiction increasingly hard to sustain. If the BIS’ own members are involved in questions of political economy, it might be time for the bank itself to acknowledge that.