The only major global financial body to correctly warn that the global financial crisis was coming in 2008, the Swiss-based Bank of International Settlements is again sounding alarm bells as the Federal Reserve prepares to wind down its QE3 money printing program this week.
The BIS says many imbalances are now actually worse than in 2008 as low interest rates have taken investors increasingly into high risk instruments in pursuit of yield, reports The Daily Telegraph today.
It quotes BIS former chief economist William White who made his reputation for warning of wild behavior in financial markets in 2007 as saying: ‘This looks like 2007 all over again, but even worse…Total public and private debt levels are 30 per cent higher in the advanced economies than they were then and we have a new problem with bubbles in emerging markets.’
The BIS analysis is written in arcane banker-speak but its latest quarterly review flags up high levels of ‘leveraged loans’ that are used by the weakest borrowers in the syndicated loan market. Investors are also buying up all manner of high-risk loans risking a repeat of the subprime mortgage debacle.
Credit to emerging markets is off the scale and bond issuance from these nations actually exceeds the advanced economies for the first time. It is an accident just waiting to happen in the view of the very sober and correct BIS which got this right in 2007-8 at a time when most banks just went with the flow and ended up close to drowning.
Her Majesty The Queen pointedly asked Bank of England economists why they did not foresee the global financial crisis. Well, the BIS bless its socks was spot on but nobody listened. Will it be any different this time?
Subprime deja vu?
Probably not, there is too much money to be made charming investors out of large fees for as long as possible. It is the same systemic weakness that allowed subprime lending to bring the US banking and housing sectors close to a complete collapse in late 2008.
What we don’t know is whether this party will be crashed sooner or later. Mr. White told The Daily Telegraph that if this happens the only thing left for central banks would be ‘Abenomics for the world I suppose’, in other words money printing and hyperinflation.
Why not heed the BIS warning now rather than follow the lemmings to destruction? Those who think China and other emerging stock markets look attractive ought to wake up. But this is also a sell order for stocks, bonds and real estate worldwide.
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