Sunday 22 Jul 2018 | 01:30 | SYDNEY
Sunday 22 Jul 2018 | 01:30 | SYDNEY

A great big 'I told you so'


Mark Thirlwell

2 July 2008 10:02

On Monday, the Bank for International Settlements (BIS) released its latest annual report. With its warnings of a clear and present threat from global inflation and concerns that the world economy may be close to a major tipping point the report has already received a lot of media attention.

The Bank’s 78th annual report can easily be read as a great big ‘I told you so’. The BIS has been fretting for some time about the dangers of low real interest rates, rapid credit growth, and asset prices bubbles, worried that it would all end in tears. And of course it all did. Again: as the BIS points out in the introduction to its report, there are strong parallels between the current period of financial and economic turmoil and a bunch of historical predecessors.

The report’s conclusion asks the interesting question about possible cures for ‘what is the same’ in the current financial turmoil — it identifies common factors as ‘the inherent procyclicality of the financial system and excessive credit growth’. Its answer is a ‘new macrofinancial stability framework’ that would utilise ‘macroprudential regulatory instruments’ and ‘monetary tightening to lean against the upturn’. In other words, the BIS advises central banks and financial regulators to take a more active role in dampening exuberance during good economic times as well as easing policy in the bad times.

Reducing any asymmetry in policy responses makes a lot of sense, but it’s not a proposal that is going to make bankers and regulators very popular. Recent examples of asset price bubbles have been share prices — dot.coms — and house prices. While these bubbles are inflating, how many voters are going to be happy to be told not only that the value of their share portfolio or their house price is rising too quickly, but also that policymakers are effectively going to be trying hard to stop it going up any further, or even make it go down? ‘Making your house worth less’ doesn’t make for an attractive mission statement to sell to the punters, no matter how good it (might) be for the economy in the longer term.