Top Bankers: Too Much Central Bank Easing Is Becoming Dangerous

And the Stock Rally Is Due to Money-Printing

Everyone knows that “too big to fail” banks are bad for the economy. Indeed, even top bankers themselves say the big banks need to be broken up.

Now, top bankers are saying that the amount of liquidity which the central banks are flooding into the economy is becoming dangerous.

Agence France-Presse reports:

An influential group of leading world banks warned Thursday that central banks are pumping out too much easy money and markets risk becoming dangerously addicted to ultra-low interest rates.

The Institute of International Finance, which groups 450 banks, said that if central banks continue to flood money into the global economy, then any future bid to get it under control could itself destabilize the financial system.

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“These conditions — quantitative easing, very low interest rates — cannot last forever, but the risk is that financial markets have become addicted to them,” it warned.

“The longer central bank liquidity is relied on to hold things together, the more excesses and distortions are being accumulated in the financial system. An eventual unwinding of these excesses will become a destabilizing risk event.”

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IIF deputy managing director Hung Tran said that central bankers should be aware of “the unintended consequences of their actions” and make clear how they expect to adjust monetary policy over the long term.

“This would help lessen the risk of large swings in financial markets,” he said.

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US Federal Reserve chief Ben Bernanke last week downplayed worries that liquidity was fueling fresh bubbles in financial markets. But he added that the Fed — which has held its key rate near zero since the end of 2008 — was monitoring the situation.

The IIF is not some renegade group. Its board members include the top brass from many of the world’s biggest banks, including Goldman Sachs, Citigroup, Barclays, HSBC, Deutsche Bank, Société Générale, BNP Paribas, UBS, Credit Suisse, Morgan Stanley, Agricultural Bank of China, Industrial and Commercial Bank of China, Sumitomo Mitsui Financial Group, BNY Mellon, Bank of Tokyo-Mitsubishi UFJ, Commerzbank and Scotiabank,

As we noted in 2008, the problem was never liquidity. The problem is that the big banks became insolvent because of stupid gambling.

In other words, the government’s whole approach to the 2008 financial crisis was entirely wrong. And the easy money policy (quantitative easing) of central banks doesn’t help, but instead hurts the economy and the little guy.

Interestingly:

“Much of the recovery so far has… been heavily reliant on ‘easy money’ conditions fostered by central banks,” the IIF said in a statement,

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The IIF said the US Dow Jones Industrial Average’s had hit an all-time high this week more because of relaxed international monetary conditions than thanks to any recovery in the real economy.

Category: Bailouts, Credit, Federal Reserve, Think Tank

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2 Responses to “Too Much Central Bank Easing Is Becoming Dangerous”

  1. AHodge says:

    im not sure that Hun said “dangerous” i know him and heard himspeak on this tues
    the unwind could be destabilizing is a good quote
    1 QE worked big in my opinion and was one of the not fully appreciated measures in late 08, incl CP rescue, Money mkt rescue and TALF
    2 the zero rate addiction a long term issue and distortion. But the bigger issues now are the big weakening currency effect like japan, and whether you do QE for more questionable junk like mortgages loans etc
    3 Since these IIF bankers are IMO chiefly responsible for stalling reform
    and leaving the credit systems in US Europe disfunctional, it is ironic they complain about what are admitedly heart paddles and adrenaline

    in particular the IIF fought any banking accounting reform tooth and nail
    Goldman who favored good accounting reform withdrew from the IIFover that
    but when they saw writing on the wall and how the rest of wall st was going to demonize them
    for being sucessful, applying good accounting internally and make the rest of them look bad
    –they forgot that issue, shut up about accounting, and rejoined the IIF

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