BIS Sounds Cautionary Note to Central Bankers

The Bank for International Settlements — the Swiss-based financial institution that acts as a counterparty to national central banks — has declared that stock markets are in a "euphoric" state and has urged central banks globally to begin tightening interest-rate policies now while economies are growing rather than wait for another recession, when it will be too late.

Those are scary words coming from a set of economists whose job it is to monitor how capable central banks are of responding to economic conditions with flexible monetary policy.

The subtext (and not so subtext) of BIS's annual report is that, because many central banks have reduced interest rates to zero — the U.S. and Japan included — they are without weapons to boost the economy should another crisis hit. You can't go lower than zero, basically.

These words from the BIS ought to terrify anyone who thought central banks were unprepared for the last recession in 2007, when U.S. interest rates were "high" at about 5.3%:

Financial markets are euphoric, but progress in strengthening banks’ balance sheets has been uneven and private debt keeps growing. Macroeconomic policy has little room for manoeuvre [sic] to deal with any untoward surprises that might be sprung, including a normal recession.

Read the rest here.