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BIS Warns Central Banks Will Soon Be Forced to Bail Out Capital Markets

www.investing.com/analysis/bis-warns-central-banks-will-soon-be-forced-to-bail-out-capital-markets-200633179
BIS Warns Central Banks Will Soon Be Forced to Bail Out Capital Markets
By Darrell Delamaide/Investing.com   |  Dec 06, 2022 05:56AM ET
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  • BIS’s quarterly review cites the Bank of England’s intervention in the bond crisis as an example
  • U.S. economic data showing strength prompts fears of further Fed action
  • ECB will walk the tightrope on rates as European recession looms

The Bank for International Settlements (BIS)—often called the central bank for central banks—worries about many things so that your local central bank doesn’t have to.

Right now, the BIS is worried that central banks will have to bail out markets hit by higher interest rates, thwarting the effort to curb inflation by tightening money and shrinking bond portfolios.

The Basel, Switzerland-based bank cites the recent crisis in the U.K. when an ill-advised plan to stimulate the economy with £45 billion in unfunded debt forced pension funds following an ill-advised hedging strategy with derivatives to sell off billions in government debt to meet margin calls.

Lots of bad advice, but it was the Bank of England that had to an emergency program to buy up £65 billion of bonds just when it really wanted to start selling off its own holdings. The actual purchases, however, were just short of £20 billion. Not many countries will have this perfect storm of bad advice, but similar risks are lurking in the global economy.

As two BIS economists wrote in the quarterly review released on Monday:

“When these risks materialize, and the attendant economic costs are substantial, there will be pressure on central banks to provide a backstop. While justified, this can contrast with the monetary policy stance and encourage risk-taking in the longer run.”

There’s the catch; much like the so-called Fed put (the expectation the Federal Reserve will intervene to keep markets from tanking), the anticipation of a central bank bailout will encourage banks and other investors to take bigger risks. If their bet pays out, they cash in. If it flops, central banks come to the rescue.

The BIS economists are better at worrying than they are at providing solutions and consider forewarned as a fulfillment of their role. There is no good solution to bad advice, though some of that only turns bad in retrospect.

The U.S. jobs report, released on Friday, came in at a robust 263,000 added to non-farm payrolls, a much better showing than the 200,000 anticipated by economists. This has raised fresh concerns about how upward wage pressure can counterbalance Fed efforts to cool inflation, forcing the U.S. central bank to keep raising rates.

More good-news-means-bad-news came out on Monday, as data showed stronger-than-expected performance in the services sector, and factory orders also came in higher than expected. In short, the U.S. economy is more resilient than forecast, maintaining wage pressure on inflation and leading the Dow Jones Industrial Average to shed nearly 500 points in anticipation of further Fed action to cool it down.

The job market in Europe has also maintained resilience. Data for unemployment in the eurozone released on Friday showed the jobless rate dropping to a record low of 6.5% in October from 6.6% the previous month, even though big European economies are facing energy shortages this winter in the wake of the Ukraine war.

European Commissioner Paolo Gentiloni, who oversees the economy department in Brussels, said on Monday that Europe would fall into recession this winter, and it could well be spring before growth is restored.

The U.K.’s national statistics office reported last week that economic growth declined by 0.2% in the third quarter, marking the beginning of a widely expected recession. The contraction ended five quarters of positive growth and signaled that the rest of Europe could not be far behind.

However, the European Commission has forecast positive growth for all of 2023, following a contraction in the fourth quarter of this year and the first quarter of next year.

The European Central Bank will continue to walk a tightrope on interest rate hikes, seeking to simultaneously curb inflation and allow for growth with a 50-basis point hike at its governing council meeting next week. Central bank governors from France and Ireland added their voices to policymakers calling for a moderation in increases after two 75 bp hikes.

BIS Warns Central Banks Will Soon Be Forced to Bail Out Capital Markets
 

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BIS Warns Central Banks Will Soon Be Forced to Bail Out Capital Markets

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Comments (5)
Dave Stewart
Dave Stewart Dec 06, 2022 1:53PM ET
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To quote the great philosipher George Santayana, “Those who cannot remember the past are condemned to repeat it.”
Dan Star
DS5657348 Dec 06, 2022 12:33PM ET
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It's that past bailouts that got us in this mess.  The financialization of economies is against Nature.
Vikrant Hardikar
Vikrant Hardikar Dec 06, 2022 10:32AM ET
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all problem in USA
Santosh Oak
Santosh Oak Dec 06, 2022 9:47AM ET
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Central Banks will definitely have to bail out crashing the markets. People will food the bill for the blunders committed by Leaders. Te ordinary guy in the street foots the bill always. Sad.
John Hill
John Hill Dec 06, 2022 8:12AM ET
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in other words middle income families are damned if they do and damned if they don't. when will people realize that liberalism is the cause of all this?
alexandre abace
alexandre abace Dec 06, 2022 8:12AM ET
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Ideally, ( genuine) liberalism should contribute to avoid this, but it is a fairy tale ... What we can see is a concentration of power and money in a few hands. This is socialism or communism for the very rich. Taxes are paid to enrich those guys whenever they have not yet stolen any valuable things in the country. That includes fresh water and fresh air as well.
 
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