Monday, June 27, 2011

Basel III and the BIS

Two news from Basel this Monday. None good. First, in their just released Annual Report, the Bank of International Settlements (BIS) complements the IMF's demands for fiscal contraction, with their own calls for monetary contraction.  In their view:

"Inflation risks have been driven up by the combination of dwindling economic slack and increases in the prices of food, energy and other commodities. The spread of inflation dangers from major emerging market economies to the advanced economies bolsters the conclusion that policy rates should rise globally. At the same time, some countries must weigh the need to tighten with vulnerabilities linked to still-distorted balance sheets and lingering financial sector fragility. But once central banks start lifting rates, they may need to do so more quickly than in past tightening episodes."
It is bad enough not to have sufficient fiscal stimulus in the developed world, but to export the behavior of the ECB to other central banks would be a terrible idea.  In this case, they think that developing countries are exporting inflation, and developed countries should act swiftly.

In part, the misguided recommendation of the BIS follows from an incorrect view of what caused the crisis.  For them low rates of interest now will create new risks in the financial system.  Yet, the crisis was not the result of low rates of interest, but a consequence of deregulation.

And that leads to the second news.  The Basel Committee on Banking Supervision has added a surcharge of extra capital (on top of the Basel III ones) requirements between 1 and 2.5% of the value of risk adjusted assets for large banks (here; subscription required).  I'm sure people more qualified will discuss the nitty gritty details of this proposal, but from my point of view the problem is that this perpetuates large institutions, and avoids the old New Deal commitment to break them up and separate the speculative activities from the financing of productive activities.  There is no reversing of the so-called "revenge of the rentiers."

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