BIS Warns: End Stimulus Measures Or Big Risks and Problems Ahead

In opposite camps to what Tim Geithner has been saying, the Bank for International Settlements has just released its annual report. The bank acts like the central bank of central banks. Its annula general meeting was attended by all the heavy weights of globla finances, including ECB President Jean-Claude Trichet, Ben Bernanke, and Bundesbank President Axel Weber.

If course, most other countries want other countries's stimulus to continue, as they will then articially stimulate their economy and they have places to export to.

However, the BIS warns that keeping interest rates too low for too long alters investment decisions. and that the direct central bank participation “entails significant risks.”

The report adds: “The time has come to ask when and how these powerful measures can be phased out,” “The cumulating side effects themselves pose a danger that, at the very least, implies exiting sooner than may be comfortable for many.”

"The financial crisis has left policymakers with a daunting legacy, especially in industrial countries. In setting policies, they must adopt a medium- to longterm perspective while they cope with the still fragile and uneven recovery. Households have only just begun to reduce their indebtedness and therefore continue to curb spending. Extraordinary support measures helped to contain contagion across markets, preventing the worst. But some measures have delayed the needed adjustments in the real economy and financial sector, where the reduction of leverage and balance sheet repair are far from complete. All this continues to weigh on confidence. The combination of remaining vulnerabilities in the financial system and the side effects of ongoing intensive care threaten to send the patient into relapse and to undermine reform efforts.

Macroeconomic support has its limits. Recent market reactions demonstrate that the limits to fiscal stimulus have been reached in a number of countries. Immediate, front-loaded fiscal consolidation is required in several industrial countries. Such policies need to be accompanied by structural reforms to facilitate growth and ensure long-term fiscal sustainability. In monetary policy, despite the fragility of the macroeconomy and low core inflation in the major advanced economies, it is important to bear in mind that keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial and monetary stability.

Fundamental reform of the financial system must be completed to put it on more stable foundations that would support high sustainable growth for the future. Above all, reform should produce more effective regulatory and supervisory policies as part of an integrated policy framework. A new global framework for financial stability should bring together contributions from regulatory, supervisory and macroeconomic policies. Supported by strong governance arrangements and international cooperation, such a framework would promote the combined goals of financial and macroeconomic stability".