BIS Issues An Alert: Tightening "Paradoxically" Leading To Excessive Risk Taking; Reminds What Happened Last Time

Valuations in asset markets are “frothy” and investors are basking in the “light and warmth” of the “Goldilocks economy”, believing that nothing can upset a future of “sustained growth and low interest rates”. We observe a heavy dose sarcasm from the media briefing coinciding with the Bank for International Settlements’ (BIS) latest quarterly review. Specifically, we wonder why is it always the BIS which warns its central bank members and investors about the risk of an approaching financial crisis…and why do most of them never listen. We’re not sure, but here we go again, with the BIS warning that conditions are similar to those before the crisis.

As The Guardian reports:

Investors are ignoring warning signs that financial markets could be overheating and consumer debts are rising to unsustainable levels, the global body for central banks has warned in its quarterly financial health check. The Bank for International Settlements (BIS) said the situation in the global economy was similar to the pre-2008 crash era when investors, seeking high returns, borrowed heavily to invest in risky assets, despite moves by central banks to tighten access to credit.


The BIS was one of the few organisations to warn during 2006 and 2007 about the unstable levels of bank lending on risky assets such as the US subprime mortgages that eventually led to the Lehman Brothers crash and the financial crisis.

During the media briefing, Claudio Borio, Head of the Monetary and Economic Department at the BIS, remarked how the “feel good” conditions in the markets continued in the latest quarter, while risk on “intensified”.

It is as if time had stood still. Financial market participants had basked in the light and warmth of their "Goldilocks economy" in the previous quarter. They continued to do so in the most recent one. The macroeconomic backdrop brightened further. The expansion broadened and gained momentum. Above all, despite vanishing economic slack, inflation - central banks' lodestar - generally remained remarkably subdued. Nothing, it seemed, could upset a future of sustained growth and low interest rates. Accordingly, sovereign benchmark yields in core markets largely moved sideways. 


The risk-on phase intensified. Headline equity market indices approached or surpassed previous peaks. Before the jitters towards the end of the period, corporate spreads narrowed further, with the US high-yield index flirting with levels not seen since the run-up to the 1998 Long-Term Capital Management crisis and, later, to the Great Financial Crisis (GFC). Emerging market economy (EME) sovereign spreads followed a similar, if less extreme, pattern, while credit default swaps - a proxy for EME sovereigns' insurance cost - reached new post-GFC troughs. As capital inflows into EMEs persisted, albeit at a diminished pace, markets remained unusually receptive to issuance from marginal borrowers. In the background, implied volatility across asset classes - equities, fixed income and currencies - if anything, sank further. Indeed, equity and bond yield volatility touched the all-time troughs previously reached briefly in mid-2014 and before the GFC; currency volatility was approaching similar lows.

What’s really puzzling Claudio Borio, however, is that the market euphoria, or “ebullience” as he terms it, has continued as the Federal Reserve has proceeded with its tightening. While Borio acknowledges the BoJ has left its accommodative policy unchanged and the ECB may have “at least relative to expectations”, he notes that the Fed is the “issuer of the dominant international currency and its sway on markets remains unparalleled”. In Borio’s view this has led to a paradox, as he explained.

Hence a paradox. Even as the Fed has proceeded with its tightening, overall financial conditions have eased. For instance, a standard indicator of such conditions, which combines information from various asset classes, points to an overall easing regardless of the precise date at which the tightening is assumed to have started. Indeed, that indicator touched a 24-year low. If financial conditions are the main transmission channel for tighter policy, has policy, in effect, been tightened at all?

However, we have been here before in the 2000s and that didn’t end well. Here is Borio’s take on the similarities.

In fact, this paradoxical outcome is not entirely new…it is reminiscent of the Fed policy tightening in the 2000s - the phase that spawned the now famous "Greenspan conundrum". Then overall financial conditions hardly budged, and in some respects eased, as the Federal Reserve progressively raised rates. The experience contrasted sharply with previous tightenings, not least the one in 1994. At that time, long-term rates soared, the yield curve steepened, asset prices fell, corporate spreads widened and EMEs came under pressure.

To put it simply, why does tightening lead to easing? Borio doesn’t know but speculates that it lies with the macroeconomic backdrop and investor psychology. In particular, the global economy is expanding and inflation is low. It might be even worse this time because many financial market participants are expecting a “future of even lower interest rates” and inflation rates lower than the “central bank has communicated”.

Borio also has another explanation, which we find particularly thought-provoking. In simple terms, because central banks now go to such lengths to be predictable and gradual in policy implementation, financial market participants have responded by taking more leverage/risk.

Less appreciated perhaps, the very mix of gradualism and predictability may also have played a role. The pace of tightening has slowed across episodes, and it is now expected to be the slowest on record. And, scorched by the outsize reaction in 1994 - not to mention the "taper tantrum" in 2013 - the central bank has made every effort to prepare markets and to indicate that it will continue to move slowly. Indeed, today's experience is reminiscent of the repeated reassurance of the 2000s' "measured pace", except that the adjustment has been, if anything, even more telegraphed. If gradualism comforts market participants that tighter policy will not derail the economy or upset asset markets, predictability compresses risk premia. This can foster higher leverage and risk-taking. By the same token, any sense that central banks will not remain on the sidelines should market tensions arise simply reinforces those incentives. Against this backdrop, easier financial conditions look less surprising.

Borio finishes with a warning about the vulnerabilities in the system, including  “frothy” valuations, and how central banks might have to reconsider their gradual and predictable strategies, since they are having precisely the opposite effect to what is intended.

First, and most obvious, the jury is still out. There is a sense in which the tightening has not really begun. The vulnerabilities that have built around the globe during the unusually long period of unusually low interest rates have not gone away. As underlined in this Quarterly Review's special features, high debt levels, in both domestic and foreign currency, are still there. And so are frothy valuations, in turn underpinned by low government bond yields - the benchmark for the pricing of all assets. What's more, the longer the risk-taking continues, the higher the underlying balance sheet exposures may become. Short-run calm comes at the expense of possible long-run turbulence.


Second, a deeper question is what defines an effective tightening. Can a tightening be considered effective if financial conditions unambiguously ease? And, if the answer is "no", what should central banks do? In an era in which gradualism and predictability are becoming the norm, these questions are likely to grow more pressing.

In the run-up to the last crisis, it was the BIS’s then head of the Monetary and Economic Department, William White, who “rang the bell”, now his successor is doing the same.  White is currently chairman of the Economic and Development Review Committee at the OECD and, as we noted in September, is warning his new organisation sees “more dangers” today than in 2007.


Last of the Mi… Mon, 12/04/2017 - 06:18 Permalink

Banks are just shills for the stock market and the Fed overlord. No economy will be allowed to develope without each and every penny passing through their hands multiple times. Why do you think bitcoin is at $11k on it's way to $111k. People see a way to bypass the "tax everything that moves" US federal government. 

shitshitshit Last of the Mi… Mon, 12/04/2017 - 06:22 Permalink

That would be if people would not be using BTC as a speculative vehicle, which is sadly the case.Add to this the tether issue as well as obvious strange exchanges like bitfinex and coinbase that will probably be having problems with law and the rosy picture you just described might become a bit less such.BTW, how much legit money arrives on the markets currently (not talking about the tether printing machine, of course)? -Anyone has any idea?

In reply to by Last of the Mi…

pascal bets Mon, 12/04/2017 - 06:20 Permalink

Excellent article.  The markets are at such extremes that when they do fall it is going to be a catastrophe.  I just checked the futures this morning.  Shepwave on saturday night was calling for a massive gap up open this morning.  Something is not adding up here.  Analysts just don't do this on a normal basis  This is about the 100time in a roll that they have done this since I have been tracking.

OckhamsRazr pascal bets Mon, 12/04/2017 - 06:48 Permalink

Those analysts have been in the markets for several decades.  They are a few old timers there who have been around and have a unique ability to measure market excessess and movements. They usually keep to themselves so I would not be discussing this too much on this open forum. There are a few of us here who take their signals. 

In reply to by pascal bets

Bring the Gold Erek Mon, 12/04/2017 - 12:52 Permalink

Exactly, how people support the madness that was the "tax reform" bill the senate passed at 2am on a Friday boggles the mind. Unless you're a shill for the 0.01% or one of them yourself, you WILL get fucked by this bill either immediately or within a rather short turn around. I believe that vote may have baked in a civil war. The ruling oligarchs seem obsessed with recreating 1789 France / 1776 US conditions. Taxation without representation and an out of control aristocracy with starving masses who are vastly better armed than their 18th century peers.

In reply to by Erek

Batman11 Mon, 12/04/2017 - 06:42 Permalink

The Central Bankers are clueless.It's easy to understand 2008, but they don't.Neoliberalism was an ideology and its expert technocrats believed they were using economics that was beyond question.2008 – “How did that happen?”It was a “black swan”.Their perfect economics couldn’t explain it; therefore it must be a “black swan”.2008 was just like 1929, and both were exactly the same as Japan’s bursting bubble in the 1980s. People outside the mainstream have spent decades working on the problem that was seen in Japan and have worked it all out. and 2008 stick out like sore thumbs, 2008 wasn’t a black swan.Bank credit (lending) creates money.There are three types of lending:1) Into business and industry - gives a good return in GDP and doesn’t lead to inflation2) To consumers – leads to consumer price inflation3) Into real estate and financial speculation – leads to asset price inflation and gives a poor return in GDP and shows up in the graph of debt-to-GDPRichard Werner explains in 15 mins:’s actually very straight forward if you are not a neoliberal ideologue.

Batman11 Batman11 Mon, 12/04/2017 - 06:45 Permalink

The “new normal” in the West is the “old normal” in Japan; almost no inflation or growth in GDP.Richard Koo has worked that out as well, he’s had decades to work on it. money supply = public debt + private debtThis is unknown to the mainstream and today’s policymakers always think austerity is the answer.The IMF predicted Greek GDP would have recovered by 2015 with austerity.By 2015 it was down 27% and still falling.Richard Koo had to explain the problem to the IMF (see video above).They had pushed Greece into debt deflation by cutting Government spending with austerity.The money supply = public debt + private debtThe private sector were paying down their debts reducing the "private debt" component and then the Troika cut Government borrowing, the "public debt" component. Debt deflation was guaranteed, but they didn't know.Richard Koo had watched as Western “experts” told Japan to cut Government spending and seen the fall in GDP as the economy went downhill. The only way to get things going again was to increase Government spending and he has had decades to work out what was going on.Ricahrd Koo explains Janet Yellen’s inflation mystery and the West’s problems with growth, productivity and inflation. The West turned Japanese in 2008, apart from Germany that didn’t load up with private debt.

In reply to by Batman11

DutchZeroPrinter Batman11 Mon, 12/04/2017 - 07:10 Permalink

GDP doesn't equal standard of living. Imagine a small island, that produces everything itself. It exports some goods, but it needs to import fresh drinking water.C+I+G+X-M = GDP. Because of some event, imports stop and GDP rises. Well, not for long as everybody will die. This is just one example, why GDP is not a good yardstick for measuring an economy.

In reply to by Batman11

geekz_rule Batman11 Mon, 12/04/2017 - 07:10 Permalink

d00d.. I generally appreciate your posts.. but to characterize fraud and deep crimes as "clueless" is rather naive.. dont ya thinkthis is orchestrated, with agenda and purpose. they know exactly what they are doing.#AusterityIsCode4Looting Friedrich Von Hayek, Austrian economist, proposed a 4 plank plan to establish economic "freedom". Of course, that "freedom" was only for the inbred elitists, the "rentier" class, the "new" feudal lords. These ideas support and justify the creation of absolute monopoly of the entire world's resources. Monopoly always was the real intention, the people's only real enemy. No wonder Hayek was found, then promoted by Rockefeller!"Competition is a sin" J. Rockefeller.Hayek's plan: peddled as Libertarian, supporting "Liberty", but based on the inaccurate notion that "government" is evil and root of all corruption. A self serving lie. Government is the people, but the Monopolist's use "government" as a simple false target, a straw man, a distraction, a curtain to hide behind. In practice, government today, and for generations, is merely a puppet used as the force projector controlled by the money masters, pay to play, bought and sold to the highest bidders of the deep state.Hayek's 4 Planks:1) Deregulate global financial markets - DONE2) Deregulate global trade - DONE3) Bankrupt all sovereigns and nations with fiat (empty, unbacked, meaningless) paper "debt" (thereby neuter a nation's capability to enforce laws - eliminate the people's ability to defend against being consumed by these 1%) - DONEthen lastly, the kill shot:4) Privatize Everything. create permanent rent payers of even the most basic necessities of life (Air, water, food, shelter). - Almost COMPLETE#PrivatizationIsTHEFT - Private "free markets" in a corrupt world is a LIE. Privatization's sole purpose is to redirect public money to the inbred 1% parasitesImplemented globally by force, using their "super sovereign" (above the laws of nations) global banking control entities, WTO, WB, IMF, BIS, etc. and of course, actual militaries.We are 99.99% there. we are already debt slaves to a global 1%, they have monopolized everything. condition will not, nor can not, be changed with BS "elections" run by the very 1% we seek

In reply to by Batman11

MortimerDuke Batman11 Mon, 12/04/2017 - 07:52 Permalink

On the one hand you see the CBs as clueless.  On the other you call neoliberals "idealogues."  Central bank cheeleaders are neither liberal not neoliberal.  They're statists.  A belief in decentralized power is a classical liberal stance.  Those who are called neoliberal today are Keynesians and proponents of a "mixed" economy.  They may be neo-something, but they are not neo-liberal.

In reply to by Batman11

Pearson365 Mon, 12/04/2017 - 06:46 Permalink

Borio's an idiot.  If the ECB and BOJ and SNB are printing 100s of billions per month, all it takes is currency swaps to make any "market" a huge complacent bubble.

Herdee Mon, 12/04/2017 - 06:56 Permalink

Interest rates will never normalize during my lifetime - Ben Bernanke. If they try it, they;ll be a major depression. They've got only one choice after they checked into The Roach Motel. It's hyperinflation until she busts. What's the big reason? Government's no longer have the tax base to service their obligations. They have to monetize just like the United States. Bitcoin is one of the signs of lack of confidence developing in the world's reserve currency. The Americans have got only 4% of the purchasing power left in the Dollar. They're bust and they're toast from war. Worn down, their Cities are crime ridden and the infrastructure crumbling. Infrastructure not even in the shit-ass budget.

DutchZeroPrinter Mon, 12/04/2017 - 06:59 Permalink

Real interest rates are falling, that's why. Inflation is picking up at the end of the cycle, but interest rates aren't moving up as fast, hence there is no tightening. Asset prices are rising, so margin debt is fuelling it, because interest on it is still low. At one point, this will reverse and the bubble will burst.

geekz_rule Mon, 12/04/2017 - 07:04 Permalink

Who is the FSB? (Financial Stability Board)Who does the FSB serve?Does the US FED and POTUS & Cabinet serve at the FSB's (as Proxy for the BIS) leisure?What is the BIS? (Bank of International Settlements)What is, and who has, "Documentary Immunity"? and what does this mean to regulatory enforcement?What is "Immunity of Assets" and how do global cartel member banks benefit?Does the invocation of "collateral consequences" as prime consideration in prosecution suggest the re establishment of "separate but equal" jurisprudence?Why was the US DOJ's "prosecution" of HSBC so important to earning a much greater understanding of who really controls what globally?Is the BIS (their executives, and cartel member banks) IMMUNE to National and International Law? Watch!!  "All The Plenary's men" #BankstersAreTheRealTerrorists

Let it Go Mon, 12/04/2017 - 07:10 Permalink

I feel we are in uncharted waters and should take nothing for nothing for granted. To assume we will move forward without a glitch is  extremely optimistic.With the passage of time, things change and evolve. This transformation can be seen in both society and the economy. A question we must ask is just how relevant today's comparisons are with prior economic cycles? The situation today is in many ways "historically unique" due to the rampant expansion of credit in recent decades.Recently  I found myself pondering the line, "outwit and outlast" that is often used during the popular hit television show Survivor. It occurred to me the winners in both life and investing often reflect these qualities and that this game is far from over. More on this train of thought in the article below. http://Economic Evolution Renders Many Comparisons Obsolete.html

geekz_rule Mon, 12/04/2017 - 07:12 Permalink

#HostLife - The people have been turned into "hosts" (a food source - rent payers) for the 1% inbred parasites (leeches - rent collectors) through the re-establishment of the "West Virginia Coal Mine  Experience"™ (circa 1900). By quietly monopolizing necessities (food, water, shelter, energy), by debt expansion, and by wage suppression: we now work in the company "mines" (cube farms, whatever), live in the company housing (mortgage), shop in the company store (credit card debt), pay MONOPOLY prices for  necessities. Cradle to grave slavery to the "Nanny" Corporations (all owned at the top by Banksters) 

voting machine Mon, 12/04/2017 - 07:31 Permalink

BIS happily creating bubbles enabling the .01% to gain more assetsand lead the debt slaves  to the slaughter house and unending servatude On your knees bitchezBTW - that building does not look like a happy place...

Calculus99 Mon, 12/04/2017 - 07:31 Permalink

More on the upside I think. I've got charts going back 100+ years and right now the current Dow action looks EXACTLY the same as the lead up to 1929.At present it looks like we're about 1928 so maybe another 6-18 months left.... 

buzzsaw99 Mon, 12/04/2017 - 07:47 Permalink

the bis sounds like every other bozo that comes on here with the "i'm not saying it's going to crash soon but if it does don't say i didn't warn you..."  type of stuff.what we always get:  twenty reasons why the market will crash soon.what we never get:  five reasons why new all time highs are imminent.

everything1 Mon, 12/04/2017 - 10:42 Permalink

I agree in that I see no tightening, but plenty of spending, we've never had negative real interest rates before so this could go on for a long, long time.  My best guess is end of trumps presidency possibly.Interest rates can't go back up, the debt is never being paid back, and the next crunch (bubble), will push them down even further.  Deficit growth is heading in a parabolic fashion, and so even the interest payments will not be serviceable, thus negative interest rates. By sacrificing quality we've been able to make inflation appear more tame it seems.  Technology has kept energy cheap as well.

gdpetti everything1 Mon, 12/04/2017 - 12:29 Permalink

Well, the tightening is scheduled to really start next year, someone posted a chart here yesterday on this.... whether or not the CBs actually do it is questionable, but they are OWO, and their only job at this point is to prepare the way for the NWO in which they won't be needed anymore.... thus global chaos, not just in the ME, but everywhere, including here at 'home'.That said, this BIS statement aligns with the basic priniciple of 'free will'... the goal of leading the herd over the cliff... willingly... the goal is to get them to willingly do so... thus the laws coming out in the West and elsewhere making all previous intel ops legal... all the spying, torture etc... this is the universal prinicipal of free will... a MAJOR dynamic of operations at higher levels of this cosmic 'game'. You lose 'points' or energy when you simply steal it... if you can encourage the herd to give it up freely, you take energy from them instead... and in the end, the 'game' is based in the energy of consciousness.... Free Will... most of the herd doesn't know they even have it... nor want it means etc. THis is why the higher command centers utilize lower ones to do their dirty work... so that the 'cost' or energy lost is on the lower minions, not them... there is a method to the madness here in Purgatory..... about to end soon.All of this is why the system won't change and won't be 'Fixed'.... the PTB are taking out the old, and putting in the new.

In reply to by everything1