1 July 2008

Central bankers' central bank warns world economy at 'tipping point'

One of the world's leading economic agencies is warning that many of the big banks around the globe have underestimated the problems that they face. The Swiss-based Bank for International Settlements is the central bank for central banks. Its latest annual report argues that the consensus view underestimates the problems, and the world economy may be at a tipping point, facing an economic catastrophe.

Presenter:Stephen Long
Speakesr: economist Dick Bryan, University of Sydney; Satyajit Das, risk analyst

STEPHEN LONG: Last year when inflation was low and the world economy was still strong and stable, the Bank for International Settlements gave a prescient warning about the growing risks that could bring it all undone.

It's latest annual report was released last night in Switzerland and its assessment is candid and grim. The report warns:

"The facts suggest that the magnitude of problems to be faced could be much greater than many now perceive. While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect."

STEPHEN LONG: Despite this, it cautions against using rates cuts to bail out the world economy arguing that loose monetary policy helped to create the mess in the first place.

SATYAJIT DAS: It is an extraordinary statement of how close the world is to a total financial meltdown.

STEPHEN LONG: Satyajit Das a risk analyst who tipped the global credit crisis.

Dick Bryan, an Associate Professor of Economics at the University of Sydney uses the same adjective.

DICK BRYAN: It is quite an extraordinary message, I think Stephen. It's a big statement saying that the world economy could potentially be facing one of the biggest crisis for the last 150 years.

STEPHEN LONG: Most central banks and the International Monetary Fund are tipping only a mild hit to world economic growth. The Bank for International Settlements says they are wrong.

Associate Professor Dick Bryan.

DICK BRYAN: The Bank for International Settlements goes to great lengths to juxtapose their own view to what they call a consensus and that consensus is saying inflation will be a blip and that it will only be around for a year and we will get recovery and they're saying 'no'.

SATYAJIT DAS: The central banks have used loose monetary policy and low interest rates to bail themselves out of every crisis since 1987 and what they are saying is that at some point in time, the piper must be paid.

The fears about higher inflation and what central banks can and can't do is really quite frank. I think it would be best to sum up this report by saying, the superhero central banker is dead.

STEPHEN LONG: The Bank for International Settlements notes parallels between the current financial turmoil and the great economic woes of modern history.

DICK BRYAN: The 1930s, the 1870s, they are referring to parallels with the Asian financial crisis and they are giving a big serve to the way in which the world financial system has been run and operated.

SATYAJIT DAS: The statements in here are talking about comparisons to the 1920s depression and it is actually pointing fingers at central banks and their policies and their misunderstanding of how the financial system works and their love of the new-fangled things that have brought the world to the precipice of what could be one of the most major financial catastrophes in the history of economics.

STEPHEN LONG: Have you ever seen a report by a global economic agency that is even remotely like this?

SATYAJIT DAS: Oh, not really and I think the fact that Harry White is the Chief Economist of the BIS is about to retire, he may well need to retire after this. He is part of the essence.

DICK BRYAN: It's telling central banks that they got it wrong. That they shouldn't have let us get into this precarious position. That they should have been constraining credit earlier and that they have put us in a position now where there just aren't clear policy options.

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