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Central Banks Admit to Dangers of Policies

Posted by Steve Markowitz on June 27, 2013

BIS, a consortium of large international central bankers, released its annual report on Sunday that included a stern warning relating to their policies used to stimulate economies worldwide.   Stephen Ceccchetti, BIS ‘s lead economist, said:  “It is becoming increasingly clear that central banks cannot do ‘whatever it takes’ to return still-sluggish economies to strong and sustainable growth.”

Ceccchetti’s use of the phrase “whatever it takes” was in reference to comments made last year by European Central Bank Pres. Mario Draghi.   Draghi promised to use the Bank’s resources and funds to prop up weaker European countries and their banks.  While Draghi’s actions since have lowered interest costs for some European countries’ debt including Spain and Italy, there is a downside to the policy with Ceccchetti saying: “So far, continued low interest rates and unconventional monetary policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system.”

The BIS’s warning is one reason for the recent volatility in equities and bond markets.  It is unlikely that the central bankers will be able to contain the unintended consequences of their near zero interest policies and bailouts.  The BIS’s recent comment is a warning that should not be ignored.

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