Bank of International Settlements: Credit Boom May Spark Worldwide Depression

The Bank of International Settlements (BIS) is warning that the global economy could be on the brink of a major depression similar to the one that passed in the 1930s.

The BIS said that years of loose monetary policy have fueled a dangerous credit bubble leaving the global economy more vulnerable to an economic catastrophe than is generally understood.

In its 77th Annual Report for the financial year April 1, 2006-March 31, 2007 that was submitted to the BIS' annual general meeting held in Basel on June 24, the BIS - which one source described as "the ultimate bank of central bankers" - noted that the Great Depression that began in 1929 caught many off guard and unprepared.

"Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.

Several worrying signs, including mass issuance of new types of credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors and entrenched imbalances in the world currency system, have all made the Bank wary the global economy is at serious risk.

The BIS pointed to China as a possible spark that could cause a sudden global downturn.

The BIS said "China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity." "The Chinese economy seems to be demonstrating very similar, disquieting symptoms," the BIS claimed, noting China's credit and asset boom.

The Bank described China's booming economy as "unstable, unbalanced, uncoordinated and unsustainable" — a comment apparently made by Chinese premier Wen Jiabao.

The BIS also took a swipe at the U.S. Federal Reserve, noting that the central bank was rethinking the easy credit policies of former Fed chief Alan Greenspan.

The BIS was not sanguine about the dollar, citing America's huge trade and deficit imbalances with US external liabilities growing to over $4 trillion from 2001 to 2005.

"The dollar clearly remains vulnerable to a sudden loss of private sector confidence," the BIS report stated.

Worrisome too is the bubble created by private equity deals and hedge fund activity.

"Sooner or later the credit cycle will turn and default rates will begin to rise," the BIS said.

"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding,"

The BIS' report cited several worrying signs, including mass issuance of new types of credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors and entrenched imbalances in the world currency system.

The Bank for International Settlements (BIS) is an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks.

The BIS fulfils this mandate by acting as:

a forum to promote discussion and policy analysis among central banks and within the international financial community
a centre for economic and monetary research
a prime counterparty for central banks in their financial transactions
agent or trustee in connection with international financial operations
The head office is in Basel, Switzerland and there are two representative offices: in the Hong Kong Special Administrative Region of the People’s Republic of China and in Mexico City.

Established on 17 May 1930, the BIS is the world’s oldest international financial organisation.

As its customers are central banks and international organisations, the BIS does not accept deposits from, or provide financial services to, private individuals or corporate entities. The BIS strongly advises caution against fraudulent schemes.
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I think this is an unusual and disturbing thing for them to publish. Haven’t seen anything like it from a major financial institution before.

Interesting point about the B.I.S., the general public didn’t even know it existed until 1977.

ORIGINALLY, the central bankers sought complete anonymity for their activities. Their headquarters were in an abandoned six-storey hotel, the Grand et Savoy Hotel Universe, with an annex above the adjacent Frey’s Chocolate Shop. There purposely was no sign over the door identifying the BIS so visiting central bankers and gold dealers used Frey’s, which is across the street from the railroad station, as a convenient landmark.

It was in the wood-paneled rooms above the shop and the hotel that decisions were reached to devalue or defend currencies, to fix the price of gold, to regulate offshore banking, and to raise or lower short-term interest rates. And though they shaped “a new world economic order” through these deliberations (as Guido Carli, then the governor of the Italian central bank, put it), the public, even in Basel, remained almost totally unaware of the club and its activities.

In May 1977, however, the BIS gave up its anonymity, against the better judgement of some of its members, in exchange for more efficient headquarters. The new building, an eighteen-story-high circular skyscraper that rises over the medieval city like some misplaced nuclear reactor, quickly became known as the “Tower of Basel” and began attracting attention from tourists. “That was the last thing we wanted, “ Dr. Fritz Leutwiler, current president of both the BIS and the Swiss National Bank, explained to me while watching currency changes flash across the Reuters screen in his office. “If it had been up to me, it never would have been built.”

What you just read is from an article from Harpers Magazine 1983 that I have saved on my hard-drive. It’s Title is “Ruling The World Of Money”, by Edward Jay Epstein. Prints out to 8 pages. Ping me and I’ll email it to anyone that wants it. It makes for Fascinating reading to say the least.

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