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IMF Admits QE Encourages Excessive Risk-Taking; Warns "Sharp Downside Risks Are Rising"

Tyler Durden's picture




 

With the Fed unleashing its bubble-watchers last week, on the heels of warnings from the Central Bankers' Central Bank (BIS), The IMF has decided it is time to chirp in. As Mises' David Howden notes, after promoting QE for years (see here and here), the IMF is finally coming to realize what has been apparent for years now to almost everyone who doesn’t work for the Fed or the IMF: that low interest rates encourage risky decisions. The Guardian reports, excessive risk taking and geopolitical hazards pose new threats to a global economy already experiencing an uneven and weaker than expected recovery, the International Monetary Fund has warned. In a report prepared in advance of the G-20 meetings, The IMF warns, "financial market indicators suggested investor bets funded with borrowed money looked “excessive” and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East."

Some key excerpts from the full report below:

Sovereign bond yields have edged further down and equity prices have generally risen. Sentiment toward emerging markets has improved, as reflected in resilient portfolio inflows and stable or stronger currencies. Implied volatility measures fell to the very low levels prevailing before the May 2013 tapering remarks. This raises concerns that excessive risk taking may be building up, which could sharply reverse in the run-up to U.S. rate hikes or should geopolitical events trigger higher risk aversion.

 

Implied volatilities across asset classes have continued to decline, reaching levels prevailing before the Fed tapering talk. This raises concerns of a buildup of excessive leverage and under-pricing of credit risk which could be abruptly corrected in the run-up to U.S. rate hikes or because of higher global risk aversion.

 

 

Financial stability risks related to a prolonged period of low interest rates bring macro-prudential policies to the forefront. Excessive risk-taking may be building in some sectors (U.S. corporate credit and insurance markets, housing price booms in a number of smaller advanced economies) after more than five years of exceptionally low rates (see annex). Completing the reform of financial regulation and deploying macro-prudential tools as a first line of defense, as needed, are essential to limit financial risks. This will also reduce the risk of premature monetary policy tightening not warranted by the cyclical position. It will also make systemic institutions more resilient, help contain pro-cyclical asset price and credit dynamics, and cushion the consequences of liquidity squeezes if volatility spikes.

 

Misperception of policy intentions in source countries or an autonomous slowdown in EMs may trigger larger spillover effects. Should market participants misperceive central banks’ policy intentions—which could potentially bring about financial volatility and temporary disruptions in short-term interest rates, as during the May 2013 taper episode—spillovers may be amplified, at least initially. Moreover, a deceleration in EMs would exacerbate the global shock. Such a downside scenario is analyzed in the spillover report, which concludes that GDP could fall at the through by 1½–2 percent compared to the baseline.

As Reuters reports,

The global economy faces a growing risk from big financial market bets that could quickly unravel if investors get spooked by geopolitical tensions or a shift in U.S. interest rate policy, the International Monetary Fund said on Wednesday.

 

...

 

But it also warned that financial market indicators suggested investor bets funded with borrowed money looked "excessive" and that markets could quickly deflate if there were surprises in U.S. monetary policy or the conflicts in Ukraine and the Middle East.

And The Guardian adds,

In an assessment prepared for finance ministers and central bank governors of the G20 countries, the Washington-based fund said problems in the US, the eurozone, China, Japan, Russia and Latin America meant growth would not meet the 3.6% pencilled in for 2014 in April.

 

The IMF said it expected the world economy to pick up speed during 2015 because long-term interest rates were low, central banks were supporting activity and share prices were rising. But it issued a warning that new threats could be building even before the global economy had recovered fully from its biggest downturn since the Great Depression of the 1930s.

 

"New downside risks associated with geopolitical tensions and increasing risk taking are arising," the IMF said. It said other risks stemmed from low inflation, a permanent slowdown in growth rates in the west, lower growth in emerging economies and the possible disruption to financial markets that might be caused when the US Federal Reserve starts to raise interest rates.

 

...

 

It said the main challenge in the US was to judge the appropriate speed at which monetary policy – interest rates and the asset purchase programme known as quantitative easing – should return to normal, given the state of the economy and the impact of higher interest rates on consumers and businesses.

*  *  *
As Mises' David Howden concludes,

It’s reassuring that after years of prodding people to borrow and spend by taking advantage of low interest rates, the IMF now wants to warn us of the risks involved. Oh well, better late then never.

*  *  *

So it seems only The Fed is left unaware of the implications of its policies?

*  *  *

Full report below:

IMF Warning

 

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Thu, 09/18/2014 - 12:26 | 5230438 Groundhog Day
Groundhog Day's picture

FU IMF, The Fed's got my back

Thu, 09/18/2014 - 12:31 | 5230465 nuclearsquid
nuclearsquid's picture

The masters of the universe must all finally be short.  Time to start chipping away at the foundation of this pile of shit so it comes crashing down on all the retail muppets.

 

Thu, 09/18/2014 - 12:41 | 5230499 PT
PT's picture

Re "Excessive Risk Taking":

Isn't that just code for "Borrowing money with no idea on how to pay it back"?

Or is it really, "Borrowing money to buy shares and real estate but no-one would be dumb enough to lend you money to take some real risks, i.e borrowing money to start your own business, because that would be no risk at all, it would just be another guaranteed failure unless you figure out how to sell stuff to people with no money, i.e. do a deal with a finance company to lend your customers money and sell everything for 50 months "interest free" i.e. jack up the price to compensate for the "0% interest"?

Thu, 09/18/2014 - 12:48 | 5230529 PT
PT's picture

Now I understand all them years ago when the propagandists said "Young people need to take on more risk":

Translation:  Let us help you.  We'll eliminate all your savings and then instead of building a business from savings, you can borrow all the money and that way we will have made the business "more risky" for you.

Note:  In the beginning, the propaganda was "Young people need to take on more risk".

Later on the message was changed to, "Young people need to learn how to manage risk.  i.e.  Find a fall guy onto who you can dump all your losses.  Pension funds are popular for this role because it will take so long before anyone notices that the money is missing.  You should be dead by then.  Or at least retired and hidden away on a secluded island somewhere.

Ridiculously high student loans:  That was a good way to dump more risk on to young people.  Whoops, there I go again, mistaking a certain loss for a "risk".

Thu, 09/18/2014 - 13:15 | 5230639 Save_America1st
Save_America1st's picture

"...suprises in U.S. monetary policy."???

Hmmm....like what?

Well the House did just pass the Audit the Fucking Scumbag Criminal Sociopath Federal Reserve Bill or the AFSCSFRB ;-)  for lack of a better acronym or initialism.

Will the scumbag Harry Reid allow it to hit the floor for a vote in the psycho-Senate?  Probably not...but the pressure's on for the Fed and the sheeple, they are awakening, albeit more slowly than I'm sure any of us can stand anymore.

Or perhaps they mean the end of the U.S. dollar as world reserve currency and the one and only "petro-dollar"???  That certainly is coming at us quickly now. 

Regardless...the excrement is most certainly going to hit the quickly rotating metal blades in the very near future for the U.S. dollar, our economy, and global monetary policy.

I just hope the NWO scumbag psychos don't win this war and we can bring in some kind of a decent, accountable, and hopefully honest monetary system backed by a good amount of monetary metals. 

 

Thu, 09/18/2014 - 12:52 | 5230552 Boris Alatovkrap
Boris Alatovkrap's picture

<-- "Excessive Risk Taking" by Central Bankster

<-- "Gamble with other people money"

Thu, 09/18/2014 - 12:44 | 5230518 Boris Alatovkrap
Boris Alatovkrap's picture

If you are wait for TPTB (political class, central banker, spend-thrift wife) for admission of ponzi scheme and utterly failure of programme de jour, you are too late my friend.

Thu, 09/18/2014 - 12:27 | 5230446 RaceToTheBottom
RaceToTheBottom's picture

I am sure that there is enough collateral that can be applied against the risk.....

 

Thu, 09/18/2014 - 12:51 | 5230545 PT
PT's picture

Collateral to cover the risk?  Where's the risk in that?  You need to take on more, I mean, manage your risk!

Many years ago MSM told me this several times so it must be true.

Thu, 09/18/2014 - 12:30 | 5230455 SpanishGoop
Thu, 09/18/2014 - 12:33 | 5230469 nakki
nakki's picture

Love all the talk of "wealth affect" in housing and how all this helps the average to above average Joe. So let me get this right. You loan me money to buy a house. Over an extended period of time 15-30 years the banks will lend me money so that the $250,000 home ends up costing me $500,000. I pay for the upkeep of the property, and the taxes. If I miss payments the bank gets it back. Basically if you don't own it outright, you don't own it you're renting it and paying everything for it. Sounds like a deal for the banks, but just remember the FED is doing this so the "illusion of weather" comforts you.

Thu, 09/18/2014 - 13:03 | 5230598 PT
PT's picture

Close, but no.  They want you to buy ten houses, rent them all out and get them re-valued every year.  Don't bother making any repayments yourself because you can't afford it.  As long as your capital gains exceeds your increase in debt, you are winning*.  Just borrow more money and buy more houses.  Yes, that is the very definition of Ponzi Finance and yes there are "investment" companies in the world today that actively promote this very activity.  And if you expect that everyone can get rich by doing this then you are actively promoting a Pyramid Scheme.

Errr, and if that doesn't happen then you get a repeat of 2008 or worse.  So don't sell.  Just keep borrowing, buying and getting your houses "re-valued" so that no-one can find out what the true value really is.  Other wise the whole Ponzi falls over.  Note that banksters and other businesses actually want you to keep this system going, errr, until they decide that they'd rather just own your assets themselves, at which point they'll foreclose on your loan and repossess your assets and sell them to one of their friends.  It's nice to have good friends...

Thu, 09/18/2014 - 12:35 | 5230471 LawsofPhysics
LawsofPhysics's picture

...and real capital and talent contnue to go where they are respected....

same as it ever was....

Thu, 09/18/2014 - 14:28 | 5230864 TeethVillage88s
TeethVillage88s's picture

Integrity in USA:

http://news.yahoo.com/u-contractor-gets-seven-years-passing-secrets-chin...

HONOLULU (Reuters) - A former U.S. military contractor in Hawaii was sentenced on Wednesday to more than seven years in prison for passing national defense secrets to his Chinese girlfriend and illegally keeping numerous classified documents at his home.

Benjamin Pierce Bishop, 60, a retired Army lieutenant colonel assigned to the U.S. Pacific Command on Oahu, admitted in March to the espionage offenses and agreed to cooperate with investigators in a plea deal that staved off additional charges.

Thu, 09/18/2014 - 16:53 | 5231402 LawsofPhysics
LawsofPhysics's picture

Threadjack?  If you are trying to say that capital and talent is leaving the U.S., especially when it comes to leadership, I agree.  The fish rots from the head down, execute this small fish for all I care, you are not addressing the root of the problem.  Moral hazard is a bitch like that.

Thu, 09/18/2014 - 12:35 | 5230472 vote_libertaria...
vote_libertarian_party's picture

...said the entity trying to pump as much printed money as possible into every nook and cranny of the globe

Thu, 09/18/2014 - 12:35 | 5230481 Ban KKiller
Ban KKiller's picture

Said it before....Russian roulette mixed with musical chairs. One crook selling shit to another crook until the last crook is left holding the bag of shit. Lehman, Bear Stearns, etc. 

So how much am I bid for this steaming pile of shit? You may use fiat to purchase or, better yet, an EFT or other digiatl "money". You can even buy it from the discount window! Come and get it!

Did I mention it is high yeild and triple A rated? 

Big banks? Doing devil's work. 

Thu, 09/18/2014 - 12:36 | 5230484 Dungholio
Dungholio's picture

Clearly not a damn thing is ever going to stop this fucking "market" from continuing to rise and rise and rise.... NOTHING!!!!  It has become an unstoppable juggernaut!!!

Thu, 09/18/2014 - 12:39 | 5230491 yogibear
yogibear's picture

Keep the drugs and the booze going banksters.

Thu, 09/18/2014 - 12:58 | 5230579 Town Crier
Town Crier's picture

One thing I know will reverse it: If I buy into it.

Thu, 09/18/2014 - 13:01 | 5230593 Dungholio
Dungholio's picture

You should sacrifice yourself for the rest of us.  The show alone would be worth your price of admission.

Thu, 09/18/2014 - 13:04 | 5230603 Town Crier
Town Crier's picture

I can't afford the price of admission.

Thu, 09/18/2014 - 13:12 | 5230632 Dungholio
Dungholio's picture

Not to worry, the FED and the social safety net will have your back.  Bring your own lube though.

Thu, 09/18/2014 - 14:35 | 5230877 TeethVillage88s
TeethVillage88s's picture

News today:

House Votes To Audit The Fed... And Deregulate Wall Street (Sounds sort of Schizophrenic)

http://www.huffingtonpost.com/2014/09/17/wall-street-deregulation_n_5838...

One deregulation bill, H.R. 5405, would exempt a significant swath of the market for derivatives -- the complex financial products at the heart of the 2008 meltdown -- from Dodd-Frank's new trading rules.

The other deregulation bill, H.R. 5461.

The latter legislation would give banks a way around the Volcker Rule, a ban on their speculating in the securities markets with taxpayer backing. It would weaken rules on bank ownership of collateralized loan obligations, a type of derivative that is dominated by big banks and that pools together many loans into one security. Weakening the rules would make it easier for banks to make big speculative bets with these derivatives and thereby get around the Volcker Rule.

Thu, 09/18/2014 - 13:16 | 5230641 insanelysane
insanelysane's picture

These things can go on forever.  Story in UK Daily Mail today about a straight up pyramid scheme.  The organizers were prosecuted but I am amazed that people continually fall for these schemes.  People come up to them and say, give me X amount of money and then go find some people to give you X amount of money and so forth.  The sheeple are stupid and you can't fix stupid with public education.  

Public education is a success.

- your leaders

Thu, 09/18/2014 - 12:38 | 5230486 yogibear
yogibear's picture

The Fed and IMF are pumping assets to insane levels.

Fed and the IMF are the drug pushers giving ever more hits of drugs until the patient overdoses.

Thu, 09/18/2014 - 12:44 | 5230513 skbull44
skbull44's picture

Crisis? What crisis?

http://olduvai.ca

Thu, 09/18/2014 - 12:50 | 5230539 Itchy and Scratchy
Itchy and Scratchy's picture

Raise the debt ceilin'!

Thu, 09/18/2014 - 12:56 | 5230541 SheepDog-One
SheepDog-One's picture

$15 trillion in debt and $1 trillion more every year just to keep the wheels on central banks and Wall St 'risky'? Nah surely this must end well, it's fantasy football season.

Thu, 09/18/2014 - 12:55 | 5230557 starman
starman's picture

Haha IMF itself has  29 trilllion in this world ponzi! 

Fuckem all!

Thu, 09/18/2014 - 12:55 | 5230564 BullyBearish
BullyBearish's picture

Guaranteed the market continue to go up and make new highs as interest rates rise, global GDP craters, and Putin gets serious.

Thu, 09/18/2014 - 12:57 | 5230580 buzzsaw99
buzzsaw99's picture

the imf is full of beans as usual

Thu, 09/18/2014 - 13:02 | 5230597 insanelysane
insanelysane's picture

IMF is worried that the dog might actually catch its tail.

Thu, 09/18/2014 - 13:10 | 5230626 Ariadne
Ariadne's picture

Translation: We have assumed control. Do as we say or starve.

Thu, 09/18/2014 - 13:29 | 5230691 Farmer Joe in B...
Farmer Joe in Brooklyn's picture

Been playing the lever, purchase, and flip game in Brooklyn for last 5 years...  unloading the last one currently (hope to close within a month).  I'm taking my chair while the music is still playing... it won't be much longer now.....

Thu, 09/18/2014 - 13:49 | 5230722 Schmuck Raker
Schmuck Raker's picture

Er....shouldn't that be G-19?

Thu, 09/18/2014 - 23:04 | 5232664 AdvancingTime
AdvancingTime's picture

The recent drum beats and flames of war have distracted many people from focusing on the economy. The markets are extended beyond beyond, all this comes at a time when the IMF is calling for more QE. It seems this might be a good time to review the reasons this is economically unsound and a bad idea while markets are setting new record highs and economies continue to struggle.

The policies of the last six years have yet to produce the desired and expected results promised. As a consolation many economist, bankers, and those who have benefited greatly tell us we would be in far worse shape if we had not taken this course. Now it seems Central Banks and the IMF are clueless on how to proceed and a policy going forward. More on the lack of a clear path in the article below.

http://brucewilds.blogspot.com/2014/09/central-banks-and-imf-clueless-on...

Do NOT follow this link or you will be banned from the site!