Seeds For Next Crash Sprout

From the NY Times:

FRANKFURT — An organization representing the world’s main central banks warned Sunday that dangerous new asset bubbles were forming even before the global economy had finished recovering from the last round of financial excess.

Investors, desperate to earn returns even as official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements in Basel, Switzerland, said in its annual report published Sunday.

Recovery from the financial crisis that began in 2007 could take several more years, Jaime Caruana, the general manager of the B.I.S., said at the organization’s annual meeting in Basel on Sunday. The recovery could be especially slow in Europe, he said, because debt levels remain high. “During the boom, resources were misallocated on a huge scale,” Mr. Caruana said, according to a text of his speech, “and it will take time to move them to new and more productive uses.”

The B.I.S. acts as a clearinghouse for transactions among national central banks and also as a setting where central bankers can discuss monetary policy and other issues like financial stability or bank regulation.

Its board includes Janet L. Yellen, chairwoman of the United States Federal Reserve; Mario Draghi, president of the European Central Bank; and the heads of central banks from Japan, China, India and many other countries.

The organization often uses its annual reports to send a message to political leaders, commercial bankers and investors, and reflects a widespread view among central bankers that they are bearing more than their share of the burden of fixing the global economy.

The language in the 2014 edition was unusually direct, as was its warning that the world could be hurtling toward a new crisis."There is a disappointing element of déjà vu in all this,” Claudio Borio, head of the monetary and economic department at the B.I.S., said in an interview ahead of Sunday’s release of the report, which he described “as a call to action.”

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The B.I.S. also had harsh words for corporations, which it said were not taking advantage of booming stock markets to step up investment. That is one reason that gains in productivity — the foundation of sustained economic growth — have slowed in most advanced economies, according to the report. “Despite the euphoria in financial markets, investment remains weak,” it said. “Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions.”

The overall message from the central bankers was that the world has forgotten the lessons of recent years."The temptation to postpone adjustment can prove irresistible, especially when times are good and financial booms sprinkle the fairy dust of illusory riches,” the B.I.S. said. “The consequence is a growth model that relies too much on debt, both private and public, and which over time sows the seeds of its own demise."

How exciting - the geniuses who brought us the last crash are working on bringing us the next one.