Why you now know more than bankers at the Bank for International Settlements

This article appeared online today. My comments can be found below each box.

Central bankers urge move from stimulus to reform Central bankers urge move from 'staggering' stimulus packages to reform as economy stabilizes By Bradley S. Klapper, Associated Press Writer On Monday June 29, 2009, 8:53 am EDT Buzz up! 0 Print BASEL, Switzerland (AP) -- The Bank for International Settlements urged governments Monday to move away from "staggering" stimulus packages as the global economy stabilizes and focus instead on reforming the international financial system.

"Staggering" stimulus? Oh really? Global capacity utilization is down to around 69% and tens of millions of people (human capital) are unemployed. If anything the stimulus has been staggeringly weak and ineffective so far. More should be done, not less.

BIS, a key standard-setter for the world economy as the central banks' central bank, said authorities now need to think about the medium-term health of their economies and that means adopting policies that spur critical adjustments, not hinder them.

Let them define or explain how sustaining aggregate demand and employment "hinders" adjustments. They are bankers and ought to understand banking and all things economic in the private sector function "pro-cyclically." In other words, growth cures, it doesn't hinder.

"The public resources devoted to economic stimulus and financial rescue have been staggering, approaching 5 percent of world GDP -- more than anyone would have imagined even a year ago," the Basel-based institution said in its 241-page annual report.

Historically, resources devoted to war have been far greater with little negative consequence. Yet in an economic crisis where people will die or barely live at a subsistence level, 5% is too much for these guys. And, surely, after their little Basel "get together" these guys will retreat to their cushy vacation homes in the south of France.

It conceded that government intervention has helped prevent a worse recession.

Conceded. The truth is hard to swallow for these guys. Cognitive dissonance.

But now that the "sense of free fall has dissipated" with growth possible this year, BIS said governments need to come up with plans to put their economies on a more sustainable footing -- the richer countries should form growth strategies that are based less on debt while the developing nations should not rely on exports as the sole driver of their growth.

Sustainable? Does that mean sustain industrial production at a level that is 30% below its potential? Sustain unemployment in industrialized nations in the area of 8% to 10%?

"Develop policies based less on debt." This is an hilarious statement. All "money" is debt in a world that is not on a gold standard. Is he suggesting we should go back on a gold standard?

"Policies must aid adjustment, not hinder it," the report said. "It means repairing the financial system quickly, persevering until the job of restructuring is complete."

Again, financial system is repaired if output and employment (growth) rises. Only gov't can do this now as the private sector lacks confidence.

BIS added that the balance sheets of many financial institutions have still not been repaired despite big injections of capital from governments, and that further steps may be needed to shore up their finances.

The balance sheet of gov't is the equal but opposite to the balance sheet of the public (banks included). Therefore, the larger the deficits that governments run, the greater the increase in income and savings of the public, BY DEFINITION!! This is an accounting identity and he ought to know it!!

But as soon as growth returns, governments should cut spending and raise taxes to put policy on a stable path, it said.

Yes, apply heavy fiscal drag as soon as growth returns so that we kill off growth! Can you believe this???

Central banks also need to figure out the best way to exit from positions they have taken in the financial crisis to prop up commercial banks as soon as financial markets resume normal operations, the report said.

The "exit" strategy, again, is growth, which shrinks central bank balance sheets and government debt relative to overall GDP.

BIS, which in recent days hosted the annual meeting of the heads of over 50 national banks including U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet, said stimulus and rescue packages have created "enormous" risks to long-term recovery.

What risks? Since stimulus has been enacted, global markets have been stabilizing. Growth in output and employment--achieved by any means--hardly poses any risk.

If all the money fails to sufficiently restore the health of the banking sector, "the result would be a massive build-up of public debt without a return to robust growth" -- or another risky bubble. Governments must resist the urge to stop their financial reforms prematurely as the first signs of recovery become clearer, the report said.

Banks are agents of the government. The idea that we need to pump more money into them is redundant. Sustain the healthy ones with uncollateralized lending in any quantity from the Fed. Close the insolvent ones. Problem solved! He doesn't see this. Public debt comprises part of the assets held by the public. It is part of the public's wealth, BY DEFINITION! He doesn't see this.

A weak financial sector would also mean that any improvement in the real economy would only be temporary, it added.

A weak financial sector is a CONSEQUENCE of weakness in the real economy, not vice-versa.

At a news conference, BIS General Manager Jaime Caruana stressed that "markets are not yet working normally."

But they could be if more were done. He and his colleagues argue less is more, which is ludicrous and doesn't stand up to the test of fact.

He said governments need to find a way to wind down failed banks. As these are so internationally involved, countries should work together to make the process as orderly as possible.

"Need to find a way?" We've had a way for 70 years! It's called the FDIC. Hello???? You believe these guys get these jobs? Every one of the readers of this blog are now overqualified to work at the Bank for International Settlements!