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Source: www.asiaecon.org |


The Bank for International Settlements (BIS) is an international organization that encourages cooperation among central banks to pursue both monetary and financial stability. It is also known as The Central Bank to the world's central banks. On this past Monday's forum, most of the world's central bankers worried that the numerous government efforts to kick off the economy might only have a "temporary impact". The reason for such worry comes from the fact that governments all over the world have injected trillions of dollars to save the financial system, while underlying problems, such as toxic assets, and growing debt have not been fully addressed.

There are many signs of a global economic recovery. For instance, there has been an increase in Japanese industrial output, which rose 5.9 percent in May and is expected to increase steadily through August 2009. At the same time, economic confidence has increased considerably in the euro zone, as reported by the economic sentiment index, which turned out better than most forecasts.

Although those might seem like positive signs for the world, the Bank for International Settlement is still wary from the way complex securitized products pushed the world’s financial system into a crisis. In response, most central bankers agreed that financial products should be treated like medicines:

According to Reuters, the “safest” instruments would be widely available. Second tiers would be available only to those with authorization (similar to prescription drugs) and third tier would only be available to a limited number of “pre-screened” individuals and/or institutions (like experimental drugs). A final tier would be considered illegal.

The BIS claim that “Such a registration and certification system creates transparency and enhances safety” and that “issuers bear increased responsibility for the risk assessment of their products.”

Yet another worry the BIS brought up were the toxic assets that remain on bank’s balance sheets. “Governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks,” the BIS said. “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses.”

Furthermore, most countries planned a fiscal stimulus to ease the recession and attempt to boost the economy. However, the BIS is uneasy about “the danger that fiscal policy-makers will exhaust their debt capacity before finishing the costly job of repairing the financial system,” it said. “There is the definite possibility that stimulus programs will drive up real interest rates and inflation expectations.” The BIS also encouraged “one-off cash handouts to low-income groups over…tax cuts” because fiscal expansion raises long-term deficits and it points out how much tougher it is to increase taxes and reduce spending simultaneously.

“The public resources devoted to economic stimulus and financial rescue have been staggering, approaching 5 percent of world GDP — more than anyone would have imagined even a year ago,” the Basel-based institution said in its 241-page annual report.

Along with the warnings of the improving but still uncertain world economy, the BIS asks governments to “resist the urge to stop their financial reforms prematurely” since signs of recovery are beginning to finally spring up.

Source: www.asiaecon.org |

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