Markets and economic policy: As difficult as ABC: Austrians, the BIS and credit

IN THE run-up to the financial crisis, some of the most prescient warnings came from Bill White, the economist at the Bank for International Settlements. The BIS is sounding the alarm bells today, and once again its message is unwelcome. But its latest report, and the reaction to it, are a very interesting case study of the difficulties that bedevil economic policy.The longer-term case that BIS makes relates to the cycle where central banks cut rates to rescue markets, which creates the incentives for more risk-taking, which generates even bigger crises, and requires even more monetary stimulus. So we end up where we are today, with near-zero rates and massive asset purchase schemes by the big central banks. The BIS writes thatFinancial fluctuations (“financial cycles”) that can end in banking crises such as the recent one last much longer than business cycles. Irregular as they may be, they tend to play out over perhaps 15 to 20 years on average. After all, it takes a lot of tinder to light a big fire. Yet financial cycles can go largely undetected. They are simply too slow-moving for policymakers and observers whose attention is focused on shorter-term output fluctuations.adding thatThe fallout from the financial cycle can be devastating. When financial booms turn to busts, output and employment losses may be huge and extraordinarily long-lasting. In other words, balance …

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