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Biderman On The Bernanke Put, Black Swans, And The Failure Of 'Perceived Truths'

Tyler Durden's picture


The underlying premise for much of the management of other-people's-money (OPM) is that if the market drops by an appreciable amount, then Bernanke will step in and save the day. The problem with these 'perceived truths', as Charles Biderman of TrimTabs notes, is that they come-and-go; much like buy-and-hold and China-as-the-engine-of-the-world's-growth. The belief in the Bernanke Put has been around since the end of 2009 and is why the biggest holders of stocks are today mostly fully invested because they really believe that the Fed will remain the buyer of last resort. Unfortunately, as Charles points out, 'market truths always end badly' and in this case what is underlying the belief is that sooner of later the US economy will grow fast enough to allow the Fed to stop priming the pump with newly minted money into stocks; and in this case, he fears, "the headwinds are just too big and that rapid growth will not happen any time soon".




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Mon, 06/25/2012 - 20:39 | 2560045 bmusic
bmusic's picture

Headwinds bitchz!

Mon, 06/25/2012 - 21:00 | 2560085 sunaJ
sunaJ's picture

Oh God, I just got a vision of a soused and nancing Bernank perched on a pedestal, flinging his limp body onto the mattress, in what is his command performance - while exclaiming softly to himself, tear in his eye: "it was perfect!"  As he pathetically flops on the mattress, he realizes he has stabbed himself in the stomach with his broken mirror in a fit of drunken madness.

Mon, 06/25/2012 - 22:45 | 2560187 Kitler
Kitler's picture

Those aren't headwinds son, that's a Cat5 financial haboob shitstorm on the horizon.

Someone tell Biderman to put the crack pipe down.

Last time I checked Bernanke was still the CEO of Bankster Inc., also affectionately known as the Federal Reserve. As CEO it is his duty and obligation to effectively deliver the known universe to his shareholders who as we all know are not the citizens of the United States of America.

When the 'Black Swan' lands he will download gigabites of digital currency to his pals to valiantly 'support' asset prices and 'save' the economy yet again by avoiding a deflationary systemic crash. Stocks, commodities and net worth of those connected to the Fed spiggot will soar, and the national and consumer debt will disappear through the magic of hyperinflation.

Hell. the currency will crash so hard the USA will soon be manufacturing goods for the Chinese if he does a good enough job.

When all you have is lemons you make lemonade,

He may be evil but the man is a fucking genius.

Mon, 06/25/2012 - 23:45 | 2560514 TheFourthStooge-ing
TheFourthStooge-ing's picture

Kitler meowed:

He may be evil but the man is a fucking genius.

Don't miss this summer's surprising smash hit, the Bullshoit Ballet's presentation of Black Swan Lake, featuring the Ben Bernank as the evil sorcerer Von Rothbart.

Tue, 06/26/2012 - 00:24 | 2560564 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

How could you get a minus one for that comment?!  I thought it was rather good!

Mon, 06/25/2012 - 23:49 | 2560521 El Oregonian
El Oregonian's picture

What a (ha) boob. I think someone slipped one of those lemons inside your head. When everyone sees the "man behind the curtain" the gig is up my friend. Benny can blow smoke and fire but everyone knows who is pulling the levers so the dramatic effect has lost its luster. Sadly for him, most people are wise to the game thereby nullifying shock waves that at one time, reverberated throughout the markets indefinitely now have half-lifes that are becoming shorter and shorter.

Tue, 06/26/2012 - 06:46 | 2560791 bdc63
bdc63's picture



FACT: Bernanke will 'stand ready' to release QE 'to infinity and beyond'

FACT: The only thing that will trigger the FED actually releasing QE will be a significant stock market dip (they give lip service to unemployment and other econ data, but they don't matter)

FACT: As long as traders/investors believe that 'liquidity" is the problem, then the Bernanke Put will work and the stock market will continue to defy gravity.

FACT: When 'the event' happens (call it a black swan if you must) that makes the investing communtiy realize this is not a liquidity problem but rather one of solvency, and that merely putting more money into circulation in a debt burdened bankrupt society won't do a darn thing to fix solvency, QE ceases to work and the Bernanke Put becomes meaningless.

Mon, 06/25/2012 - 20:41 | 2560054 mjk0259
mjk0259's picture

Stock market valuations are ridiculously high unless you believe ZIRP will last forever.


Mon, 06/25/2012 - 20:45 | 2560062 Bill D. Cat
Bill D. Cat's picture

When ZIRP ends , it all ends .

Mon, 06/25/2012 - 21:42 | 2560212 Kitler
Kitler's picture

ZIRP will end with a giant bang, not a whimper.

Mon, 06/25/2012 - 21:58 | 2560266 xtop23
xtop23's picture

ZIRP is the Keynesian end point. It's here to stay.

Mon, 06/25/2012 - 20:49 | 2560080 Thomas
Thomas's picture

Rising rates sink all boats. The dildos called pros say low rates are bullish for equities. In fact, dropping rates are bullish. Once you get to the lows, you are totally toast. All ya gots to do is look at rates at the start of the last secular bear (5%, 1966) and at the end of the secular bear (14%, 1981). 

Mon, 06/25/2012 - 22:52 | 2560413 ronin12
ronin12's picture

"The dildos called pros say low rates are bullish for equities. In fact, dropping rates are bullish." -


YES! Same is true for real estate.



Tue, 06/26/2012 - 06:55 | 2560802 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Just look at the NIKKEI for a correlation between ZIRP and equity prices.  Not pretty.

Tue, 06/26/2012 - 07:56 | 2560894 blindfaith
blindfaith's picture



This is one reason why the banks don't want to lend.  Why get stuck in a no intrest loan when 12% is on the horizon.  And, when the rates begin to rise, you will see money loans become really hard to get, and real estate drop back to 1980's levels.


Mon, 06/25/2012 - 20:57 | 2560103 malek
malek's picture


Excuse me, but it's now all about the flow as explained repeatedly at ZH.
ZIRP alone moves nothing anymore.

Mon, 06/25/2012 - 21:26 | 2560169 Questan1913
Questan1913's picture

Malek,  "ZIRP alone moves nothing anymore"

Really?  You calling 400 BILLION dollars a year nothing?  Zirp has moved 400 billion dollars a year every year of its existence from the pockets of bank depositors to the pockets of JP Morgan, Citti, B of A and the rest of the banking mafioso.  That is 400 Billion dollars a year of plunder extracted from bank customers that ended up in New York and the Hamptons.  Almost half a trillion dollars every year.  It stands as one of the biggest targeted tax increases of all time; a transfer from the least economically savvy to the masters of the universe, so called. 


Mon, 06/25/2012 - 21:52 | 2560250 WonderDawg
WonderDawg's picture

Agreed, but it doesn't seem to be moving markets at the moment.

Mon, 06/25/2012 - 22:11 | 2560313 malek
malek's picture

Only more and increasingly larger QE can kick the can a little further at this point.

Tue, 06/26/2012 - 01:51 | 2560648 Cheyenne
Cheyenne's picture

Ritholtz put up some scary graphs this morning on your point exactly.

Mon, 06/25/2012 - 21:43 | 2560216 Stuck on Zero
Stuck on Zero's picture

I suspect that Bernanke is going to hold off the big money printing binge until Obama makes some Wall Street concessions.  It's just arm twisting.  Obabm will cave and give the bankers anything they want just before the election and then the Fed will dump money from helicopters.  Obama will be reelected, the Bernake will make his bankster buddies wealthier than ever and the rest of us will be toast.


Mon, 06/25/2012 - 20:43 | 2560060 Stormy Weather
Stormy Weather's picture

What I'm most afraid of, is that this kind of Ben "Shalom" Bernanke and his likes will get away with it when everything collapses, by creating a war so big there will be too much confusion for people to look after them.

I hope I'm wrong and they will pay for what they did, but there is little hope. After all even if the great war is not yet there, Corzine and Bush are still running free.

Mon, 06/25/2012 - 21:22 | 2560163 Davalicious
Davalicious's picture

If/when currencies collapse our populations are unsustainable with simple barter. We rely on government to lube the economy with a means of exchange. People will be desperate. The government will be able to introduce a new, perhaps digital, currency they control. The Jew Filth (JF) will own most people.

Mon, 06/25/2012 - 23:51 | 2560519 James
James's picture

This fellow suggests they already do.

I'm surprised it's stayed up this long.

Craig himself is a jew.

Tue, 06/26/2012 - 07:56 | 2560893 KowPie
KowPie's picture


Mon, 06/25/2012 - 21:47 | 2560232 Offthebeach
Offthebeach's picture

We, the world, could go the way of the other central planning Utopia, the USSR. Decay and collapse with decades of lost growth. Market-Ticker posts a St. Lewis Fed chart that already seems to show no real GDP growth save added debt growth since 1980. Throw in
Bush/Obama/Romney debts, Japanese type demographics in Europe/China, Boomer retirement, youth debts with no kids, and were does the real wealth come from?
Unless we all become banks and self our underwater house notes to the Bernanke at full. That would be nice. But 'taint gonna happen.

Mon, 06/25/2012 - 20:49 | 2560083 Bill D. Cat
Bill D. Cat's picture

Anyone else have the vid locking up at " Truth " ?

Mon, 06/25/2012 - 22:04 | 2560285 Race Car Driver
Race Car Driver's picture

WTF flies out of his head to the left @ 00:46?

Mon, 06/25/2012 - 22:19 | 2560350 BandGap
BandGap's picture

That's the perceived truth baby swan. Aren't you listening?

Mon, 06/25/2012 - 21:00 | 2560098 potlatch
potlatch's picture

Lots of people have solutions, and theories, and then there are descriptions.  I prefer the descxriptions the best, because if all else fails, you can always just state some facts to yourself and go down with the ship, what what.


The issue is growth.  I always ask myself, "what fuckin growth?"  This is what makes me pull out my hair about Krugman: exactly what "growth" do you envision the US Government stimulating, or abetting, or clearing the way for?


We have everything.  Our only real cost brick wall is nothing but a money sink, though: long term health care for the Boomers...

...that we could locate on the Moon!  "Tranquility Base Homes: don't you deserve to die on the Moon?"


Mon, 06/25/2012 - 21:09 | 2560127 Atomizer
Atomizer's picture



Just watch on Thursday. Lol


Mon, 06/25/2012 - 21:19 | 2560141 slewie the pi-rat
slewie the pi-rat's picture

if printing money is the answer, what was that question again? 

Mon, 06/25/2012 - 22:26 | 2560368 Skateboarder
Skateboarder's picture

The dude's from Sausalito... he definitely shops at Whole Foods....

*middle fingers up*

Tue, 06/26/2012 - 00:10 | 2560547 moonstears
moonstears's picture

The question was: How do we make the filthy rich, and the political class, richer-er? I think.

Tue, 06/26/2012 - 08:05 | 2560928 blindfaith
blindfaith's picture



easy answer, sell them ( at fire sale, desperate to raise some cash for the deficet budget) public assests like tol roads, I95 and I395, stadiums, Yellowstone Park, the Mississippi River, Washington know, the things we just don't need now that we have apps.

Hey, if the are doing it in Europe ( hi goldensquid) then it will happen here now that the elite have their bought and sold men in high places.

Mon, 06/25/2012 - 21:16 | 2560147 veyron
veyron's picture

How's your FB call Biderman?

Mon, 06/25/2012 - 21:19 | 2560153 Snakeeyes
Snakeeyes's picture

Don't worry. Cities are trying to screw investors be using eminent domain on mortgages for the purpose of writing down principal. US is officially lawless.

Mon, 06/25/2012 - 22:07 | 2560301 xela2200
xela2200's picture

Nothing new. The government has been screwing people for over a hundred years under the guise of Eminent Domain.

Mon, 06/25/2012 - 21:21 | 2560160 Urban Roman
Urban Roman's picture

Not even buy and hold!?

I'm gonna hang onto those Braniff Airlines shares, they'll really be great some day!

Mon, 06/25/2012 - 21:24 | 2560167 Bay of Pigs
Bay of Pigs's picture

Reading a prepared script just doesnt cut it. Can't he just talk on his own?

He's not very convincing.

Mon, 06/25/2012 - 22:11 | 2560312 GlomarHabu
GlomarHabu's picture


Mon, 06/25/2012 - 22:19 | 2560343 Cognitive Dissonance
Cognitive Dissonance's picture

Let's stick a camera in your face and let you babble on. I'm sure you'll be more convincing than Biderman.

Good luck with that.

Mon, 06/25/2012 - 21:31 | 2560180 disabledvet
disabledvet's picture

I don't even know where to begin with this crap actually. I mean GET OFF THE WHOLE "THE FED BUY'S STOCKS" THING will ya? At best "the Fed creates confidence"...but so many other factors have to be at play it's almost like penis envy in these here parts this whole "the Fed Chairman is God" thing. If the Fed truly IS more powerful than Wall Street (and it is btw) it's only because Wall Street is so inhabited with such a mass of morons that it can make the Fed Chairman seem all powerful. Clearly however "he and his committee just use common sense." The whole "we're doing so many illegal things you better give me the CEO more money than is believable" ethos of Wall Street has led that Insane Clown Posse right where they (mostly) should be: flat broke and downsizing. (they should be in prison for life of course.) Having said that these folks at the FOMC are just reasonable people trying to keep an even keel in a financial world gone totally insane. with the End of the Euro methinks this will be the coup de grace for not only The Street but the City as well...and for some time to come. Were it to pass "a fitting end to a pathetic episode of all that is wrong with the human race."

Mon, 06/25/2012 - 23:22 | 2560472 Snidley Whipsnae
Snidley Whipsnae's picture

The equities did not regain their highs of 1929 until ~ 1952...

The passage of a few generations will be necessary before equities will be saleable again... like the collapse of a fiat currency will cause a return to some form of hard money... then a few generations pass and all those that remember how they got screwed with fiat are gone, history is rewritten, and a new crop of fools are ready to be fleeced.

What we are witnessing now has happened in the past... just not on a global scale.


Tue, 06/26/2012 - 06:57 | 2560804 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Not just once, it has repeated continuously for 3000+ years!  Humanity never learns.

Mon, 06/25/2012 - 21:39 | 2560202 Turin Turambar
Turin Turambar's picture

IIRC, I heard an economist answering a question regarding the possiblity of hyperinflation, and he said that one of the reasons why we don't see so much inflation is due to the fact that only about 30% of the dollars that have been created are actually in circulation.  The remaining 70% are out of the country and held by foreign governments and such.  Things will probably be okay until some trigger event (unknown at this point) results in all of those dollars flooding back in to the US.  THEN, the crap will hit the fan.

Tue, 06/26/2012 - 02:11 | 2560659 Missiondweller
Missiondweller's picture

Sounds about right. Its filling up the big hole left by the evaporating shadow banking system.

See Tyler's post earlier today on Shado Banking.

Mon, 06/25/2012 - 21:46 | 2560226 blueridgeviews
blueridgeviews's picture

I believe Biderman is right. The headwinds are building ex. 5 trillioin in deficit spending and we only got 1.9% GDP growth last quarter. I imagine the "real " economy has contracted about 8 %/year the past 4 years or so.

Now China/ Europe, India and JApan are all contracting. My guess is that US will be officially contracting shortly.

These are the headwinds.

Mon, 06/25/2012 - 22:15 | 2560334 Mike Cowan
Mike Cowan's picture

More useless information. Not even interesting.

Mon, 06/25/2012 - 22:17 | 2560340 Downtoolong
Downtoolong's picture

The fallacy of the Bernanke put is that it’s only a defense in nominal terms. If and when it gets applied the Fed must print so much money to prop up the market that it still devalues your investments in real terms. It only appears to work, but, in reality doesn’t. It’s a mirage and you still lose, and of course, Wall Street wins.

Mon, 06/25/2012 - 22:18 | 2560348 GlomarHabu
GlomarHabu's picture

"It doesn't take a weatherman to know which way the wind blows" ..... Bob Dylan 1965


Mon, 06/25/2012 - 22:20 | 2560351 BandGap
BandGap's picture

The perceived truth flies out of his head at 00:46.

Tue, 06/26/2012 - 01:51 | 2560647 DeadFred
DeadFred's picture

Small bird on the powerline just above his window? You can see the shadow of the line on the window upper right. The bird hops off the wire and drops to the bushes below his window. It helps that the video is taken at the same time of day as the Google street view photos were.

Mon, 06/25/2012 - 22:26 | 2560367 wisefool
wisefool's picture

These are the old ways. You will not see them again.

Moving forward. We need a system that promotes the Doctors or shiny metals.

Mon, 06/25/2012 - 22:47 | 2560372 essence
essence's picture

When Biderman uses the term "Fed" I take it to mean the Powers That Be, the Shadow government that controls the U.S and most all western governments.  Now, of course, believing this comes down to ones world view.

If you are inclined to think that a academician with no real world work experience, one who makes a relatively measly $400K a year is in charge of setting policy for what is ostensibly the most powerful corporation in the World (the Fed) .... then you and I  have limited common ground and attempting to dissuade you is pointless. I bid you well and hope you enjoy tonight's facebook updates & favorite TV shows.

On the other hand, if one takes the "Fed" to encompass the Exchange Stabilization Fund, JPM, and perhaps the IMF,BIS and others, well then the powers to manipulate grow by an order of magnitude.

One point I wish to make is that we simply don't know the true makeUp and extent of the "Fed".
Exactly who owns it?  Why is getting information about its activities as difficult as pulling teeth? Why do they redact documents when they lose court challenges for information? The TRILLIONS it gave out in interest free loans wouldn't happen by chance to be going to companies owned by the same powers that are owners of the Fed? 

Nah ... to think that would be conspiracy theory.

All I am doing here is extending Charles rant to its logical conclusion. If markets are rigged then the question is by whom and what is the full extent of these entities.

Don't worry, no doubt your congress critter and the regulators will get right on this issue.



Mon, 06/25/2012 - 22:40 | 2560390 yogibear
yogibear's picture

It's a fantasy to think the US will pay back it's debts in current dollars. Bernanke and the Fed plan to significantly devalue the US dollar.

Only a complete loss of faith in the US dollar will stop Bernanke and the Fed's printing. It's coming.

Bernanke could be the first fed chairman in history to cause a run on the US dollar.


Mon, 06/25/2012 - 23:08 | 2560447 Snidley Whipsnae
Snidley Whipsnae's picture

"Bernanke and the Fed plan to significantly devalue the US dollar."

This statement has been confirmed many times on many sites...

Kyle Bass, in an interview posted on this site, definitely confirmed that the Fed is and will continue to devalue the dollar. So did Jim Rickards, et al...

Many folks think that because the dollar has been devalued by ~96 cents since 1913 that it cannot be devalued by another 96%, and another 96%, etc... But, that is the plan going forward. The Gov will not declare a default when they can get rid of their debts by continueing to devalue the dollar.

Why would the rest of the world be searching for an alternative to the dollar if the dollar was really sound? The rest of the world would like to use a currency that is a means of exchange and a store of value... but the dollar is no longer a store of value over any extended period of time... and now the dollar is losing purchasing power at a much faster rate and the rate will speed up as the Fed/Treasury continues to print in ever greater amounts...

Mon, 06/25/2012 - 23:32 | 2560494 Mugatu
Mugatu's picture

Problem is Bernanke may suck just as bad at inflating the US Dollar as he is at getting the economy going.  He has competition: the Europeans, British, and Japanese may be doing a better job of screwing their currencies.  America's currency should hit the toilet first!  No way we should let these other currencies beat us at our own game!  That would be like the US basketball team losing to the Russians.  Nobody prints money better than us.......period!

Mon, 06/25/2012 - 23:57 | 2560532 moonstears
moonstears's picture

Mugatu, I see your point...but, here's 2 questions to ponder: 1. If it happened tomorrow(we'll say hyper inflation), are you ready for the ordeal and disruption in goods and services?(I'll assume you say "more than most"). 2. Are your loved ones ready?(you got their back?). What's the old addage "careful what you wish for...". 

Mon, 06/25/2012 - 22:44 | 2560398 km4
km4's picture


America’s long slope down


A broad swath of official economic data shows that America and its people are in much worse shape than when we paid higher taxes, higher interest rates and made more of the manufactured goods we use.

The numbers since the turn of the millennium point to even worse times ahead if we stay the course. Let’s look at the official numbers in today’s dollars and then what can be done to change course.....

The bottom line: less income, hardly any more jobs, sharply increased mortgage debt and Washington ledgers awash in red ink as voters are asked to endorse even more tax cuts.

How many years of evidence does it take to establish that a policy worked or failed?

My reading of this and tons more data is that the Bush tax cuts utterly failed, the Fed’s artificially low-interest rate policies under presidents Bush and Obama do far more damage than good (especially to savers), and that the United States is harmed both by the imbalance in the trade relationship with China and scores of trade agreements with South Korea and other low-wage countries that are deeply flawed at best.

We need to recognize that the tax cutters were snake oil salesmen, the Federal Reserve an enabler of damaging debts and that bilateral trade deals are written of, by and for global financiers, not workers.



Mon, 06/25/2012 - 22:50 | 2560409 km4
km4's picture

What The Mother Of All Central Banks Says About The Financial System


The Bank for International Settlements, the mother of all the world’s Central Banks, released their 82nd Annual Report on Sunday with this to say about the economy: be prepared to lower your expectations.

The world is now five years on from the outbreak of the 2008 financial crisis that started with the  implosion of two major U.S. investment banks — Bear Stearns and Lehman Brothers. Yet, the global economy is still unbalanced and seemingly becoming more so as interacting weaknesses continue to amplify each other.

Here are some takeaways from that 214 page report on the global banking system going forward.

Private banks need to recognize losses.

Monetary easing more controversial than before.

This crisis is not over.

Shadow banking system ungovernable and growing.

so Biderman's black swan looking more and more right vs Bernank put

Mon, 06/25/2012 - 23:18 | 2560467 stant
stant's picture

the black swan has a full weapons load. its gona debt charge the titanic just it starts to look like a submarine. wont be the hot chick from heavy metal riding it ,be the bernank

Mon, 06/25/2012 - 23:28 | 2560485 baby_BLYTHE
baby_BLYTHE's picture

srs, is he Jewish?

Tue, 06/26/2012 - 00:04 | 2560506 moonstears
moonstears's picture

Massive inflation is the only way the debt at Govt level goes away, the only way, thus inflation is the goal, eventually.It'll take the hyper-inflation due to the mistrust of fed notes as value/savings to reset the sheeple. ASAP Fill your cupboards, drop $200 on dry beans, dry milk, cooking oil, rice, TP etc. You'll be glad you did. I've told many what you all know, only a few get it, I've said "When the Govt spends like money's going out of style, it may be going out of style!"  p.s. Bernanke, "student of the great depression", clamors about deflation busting at all costs, yet fails to explain that HIS ancestors at the Fed, caused that deflation, by witholding notes and loans, in response to the gold coin runs of the "roaring 20's", as I've heard postulated on the interwebs. FDR got their gold back(45% of it anyway) yet they still made fed notes scarce. Fuckers!

Tue, 06/26/2012 - 00:50 | 2560585 reader2010
reader2010's picture

That's purely bullshit. Bernanke and his fuckers will not be able to kill the depressionary forces eventually because that's the law of the universe. Mark my words, deflation and democracy will finally come to the USSA!

Tue, 06/26/2012 - 01:03 | 2560607 q99x2
q99x2's picture

Now the end of 2013 before Swany makes a landing. I liked Soro's idea of 2 more days a lot better.

Tue, 06/26/2012 - 06:35 | 2560793 Colonial Intent
Colonial Intent's picture

Black swan?

Isn't that the name of the latest attack sub USA has sent to subic bay on a goodwill tour, 2nd publicly announced sub in 10 month's.......neither deployment is a regular posting.

Add that to the filipino navy boat that was chased off the horsehoe island in the South china sea by a chinese grisha.

Tue, 06/26/2012 - 07:04 | 2560811 dizzyfingers
dizzyfingers's picture


BIS: Central Banks Reaching Limit of Power to Fix Economies Central banks in developed nations are confronting the limits of their ability to aid economic recovery as government efforts to strengthen their finances fall short, the Bank for International Settlements said.

“Central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed,” the Basel, Switzerland-based BIS said in its annual report, published Sunday. “Both conventionally and unconventionally accommodative monetary policies are palliatives and have their limits.”

While central banks’ actions were key to limiting damage from the collapse of Lehman Brothers Holdings Inc., interest rates are now “as low as they can go” and debt purchases have swollen central bank balance sheets, the BIS said. European Central Bank President Mario Draghi has indicated that the ECB is close to exhausting its tools after cutting its benchmark rate to a record low and flooding the banking system with cash.

“In the middle of all this we find the overburdened central banks, pushed to use what power they have to contain the damage,” Stephen Cecchetti, BIS economic adviser, said on a conference call. “There are very clear limits to what central banks can do. It’s critical for the health of the global economy to break the vicious cycles and reduce the pressure on central banks.”


‘Buys Time’

The BIS was formed in 1930 and acts as a central bank for the world’s monetary authorities. It said extraordinary measures have reduced incentives for politicians and other borrowers to repair balance sheets, and created the illusion that central banks can do much more to stoke growth and redress imbalances.

Central bank policy “buys time” in the short term for banks and governments to tackle debt overhangs, the BIS said. European finance ministers meeting in Luxembourg last week battled over strategies to contain the debt crisis. Leaders are due to hold a summit on June 28-29, which will be their 19th since the turmoil erupted.

The Federal Reserve expanded its Operation Twist program last week and will swap $267 billion in short-term securities with longer-term debt. Chairman Ben S. Bernanke said officials are focusing “primarily” on the outlook for jobs in deciding on further easing. The ECB has lent more than 1 trillion euros ($1.26 trillion) at its benchmark rate, and said this month it will continue to provide liquidity to solvent banks.


‘Benefits Shrink’

The benchmark rates of both banks, along with the Bank of England’s, are at a record low. Overall, central bank assets are at $18 trillion, about 30 percent of global gross domestic product, double the ratio a decade ago, according to the BIS.

“As the benefits of extraordinary monetary easing shrink and become less certain, the risks of expanding central bank balance sheets are likely to grow,” Jaime Caruana, general manager of the BIS, said in prepared remarks for a speech in Basel today. “Such hazards may materialize in ways that are not completely clear today.”

Loose policy also poses risks for developing nations by fueling credit- and asset-price booms, complicating efforts to stabilize price gains, the report said. In emerging economies, interest rates have been raised “only hesitantly” out of concerns about stoking further capital inflows.

Imbalance Risk

“As a result, monetary policy in emerging-market economies may be systematically too loose,” the BIS said. “This creates risks of rising financial imbalances” similar to those in advanced economies before the crisis.

The BIS called on central banks in advanced economies to take account of these spillover effects, and use all opportunities to encourage balance-sheet repair and deleveraging. Still, they “may have no choice but to keep monetary policy relatively accommodative for now.”

As central banks enter “uncharted territory” with their stimulus measures, policy makers may find it difficult to implement the required tightening of fiscal policy, Caruana said. Central banks might also lose credibility if governments fail to improve their balance sheets, he said.

“If markets come to see monetary policy decisions as constrained by the growing financing needs of government, the ability of central banks to control inflation would, at some point, be seriously compromised,” Caruana said. “Fiscal consolidation is therefore essential not only to restore fiscal sustainability, but also to preserve the credibility of monetary policy.”

On the debt crisis in Europe, the BIS said it’s “hard to escape” the conclusion that the solution to the crisis will have to include a pan-European banking system.

“A currency union that centralizes the lender of last resort for banks must unify its banking system,” it said. “Banks in Europe must become European banks.”

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