Everyone knows that “too big to fail” banks are bad for the economy. Indeed, even top bankers themselves [22] say the big banks need to be broken up.
Now, the heads of many of the world’s biggest banks are saying that the amount of liquidity which the central banks are flooding into the economy is becoming dangerous.
Agence France-Presse reports [23]:
An influential group of leading world banks warned Thursday that central banks are pumping out too much easy money and markets risk becoming dangerously addicted to ultra-low interest rates.
The Institute of International Finance, which groups 450 banks, said that if central banks continue to flood money into the global economy, then any future bid to get it under control could itself destabilize the financial system.
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“These conditions — quantitative easing, very low interest rates — cannot last forever, but the risk is that financial markets have become addicted to them,” it warned.
“The longer central bank liquidity is relied on to hold things together, the more excesses and distortions are being accumulated in the financial system. An eventual unwinding of these excesses will become a destabilizing risk event.”
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IIF deputy managing director Hung Tran said that central bankers should be aware of “the unintended consequences of their actions” and make clear how they expect to adjust monetary policy over the long term.
“This would help lessen the risk of large swings in financial markets,” he said.
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US Federal Reserve chief Ben Bernanke last week downplayed worries that liquidity was fueling fresh bubbles in financial markets. But he added that the Fed — which has held its key rate near zero since the end of 2008 — was monitoring the situation.
The IIF is not some renegade group. Its board members [24] include the top brass from many of the world’s biggest banks, including Goldman Sachs, Citigroup, Barclays, HSBC, Deutsche Bank, Société Générale, BNP Paribas, UBS, Credit Suisse, Morgan Stanley, Agricultural Bank of China, Industrial and Commercial Bank of China, Sumitomo Mitsui Financial Group, BNY Mellon, Bank of Tokyo-Mitsubishi UFJ, Commerzbank and Scotiabank,
As we noted in 2008, the problem was never liquidity [25]. The problem is that the big banks became insolvent [26] because of stupid gambling.
In other words, the government’s whole approach to the 2008 financial crisis was entirely wrong [27]. And the easy money policy (quantitative easing) of central banks doesn’t help, but instead hurts the economy and the little guy [28].
Interestingly:
“Much of the recovery so far has… been heavily reliant on ‘easy money’ conditions fostered by central banks,” the IIF said in a statement,
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The IIF said the US Dow Jones Industrial Average’s had hit an all-time high this week more because of relaxed international monetary conditions than thanks to any recovery in the real economy.