Latest BIS Warning Echoes POM Analysis

Economics, Premium POM

Promoting the Script of Central Bank Fault

By JC Collins

Last December I wrote a piece titled The Globalization of Central Banks, where I introduced readers to the Committee on the Global Financial System.  This committee is a working group within the Bank for International Settlements which is focused on bringing stability to the international monetary framework.

The scripting of central bank inefficiency is building from within the international institutions themselves.  Both the IMF and BIS continue to issue warnings on global growth and the need for monetary reforms.  The Latest BIS warning specifically states the role which central banks have played in rigging the financial markets.

The BIS also mentions that it is “unrealistic” to expect that changes to domestic monetary policy, such as a normalization of interest rate policies, would be sufficient to “cure all the global economy’s ills”. The connection between recent market “turmoil is not caused by isolated incidents” is also mentioned.

A few years ago it would have been unthinkable to hear the Bank for International Settlements stating something as truthful and bold as “the central banks are rigging the markets”.  The obvious shift away from the existing central bank model is beginning, and will facilitate the transition to a multilateral financial framework.

The pretext for such a framework is built within the flaws of the existing system.  The BIS, and as such, the Committee on the Global Financial System, are specifically drawing our attention to not just central bank rigging, but also to the fact that low interest rate policies have caused problems and that unsustainable debt levels are threatening the financial system.

There is also discussions and statements surrounding the need to reverse massive dollar borrowing.  This would follow with the POM analysis that the large amounts of USD which has accumulated in the foreign exchange reserve accounts around the world will need to be reduced through diversification and substitution.

From the POM article last December:

Central bank mandates and monetary policy frameworks have been insufficient at addressing these broader imbalances.  As such, the frameworks of the central banking system needs to be restructured around the same lines as the IMF Reforms.

The Bank for International Settlements has set the mandates and policy frameworks of the central banks since its inception.  The BIS holds regular meetings with the governors of the banks but these meetings are also insufficient at developing alternative frameworks and creating the atmosphere of transparency which would be required to minimize the spillover effect of inconsistent policies.

The coordination between the central banks of the world is necessary in order for any adjustments and restructuring of mandates and framework policies to be effectively implemented. Within the BIS organization is a working group called the Committee on the Global Financial System, which is mandated with designing and implementing these adjustments and building transparency between the banks themselves, and between the banks and other global institutions, such as the IMF.

The move to the multilateral system requires the broader integration and coordination between central banks and institutions such as the IMF and BIS, with governments giving up more of their financial autonomy in regards to financial regulation.  The alternative is a deepening and continuation of financial instability, which is now beginning to become more entrenched as deflation and a growing liquidity crisis.

The globalization of financial institutions is mandatory in order for the world to enact orderly sovereign debt restructuring.  An important component of this debt restructuring is the exchange of foreign reserve accounts with SDR’s, or Special Drawing Rights of the IMF. This exchange will be completed through substitution accounts, which will allow for the creation of SDR liquidity, as currently SDR’s are only created through allocation, which is insufficient at meeting the global demands for liquidity.

The ability of the BIS to get governments to handover more financial autonomy to global institutions is found in the fact that it was the BIS itself, the governing body of all central banks, which has allowed the existing monetary policies to flourish and cause havoc within the financial system.

Now we have that same BIS turning against the central banks themselves and beginning to promote a broader globalization of those central banks.  The original intent of having each country’s financial system governed by a central bank could be viewed as a slight of hand whose long term goal was to consolidate those central banks under global mandates further down the road.

The promotion of ineffective domestic monetary policy is also being established from within the central banks themselves.   William Dudley, who plays the dual role of President of the Federal Reserve Bank of New York, as well as the current Chairman of the Committee on the Global Financial System within the BIS, in a recent speech stated the following when discussing the ineffectiveness of macroprudential policy alone:

“Second, in the U.S., even if such a framework existed, there would still be a problem in terms of timely implementation.  The U.S. regulatory structure is fragmented, so that in most cases, no single regulator is able to implement macroprudential tools in a comprehensive manner.  As a result, imposing macroprudential tools in the United States would almost certainly leave significant gaps in coverage.  Such coverage gaps would likely lead to distortions within the financial sector, as the tool would have differential impacts across financial intermediaries inside versus outside a particular regulatory boundary.  Also, activity would migrate toward those areas outside the scope of the macroprudential tools that had been implemented.” 

When we begin to connect all the pieces and trend both the data and information available, it is clear that a process of macro-consolidation of monetary policy and reform is building from both the domestic level and the international level.  Governments will follow along with this scripting because to not do so will subject their domestic economy to additional and extended financial hardship.  – JC