A week after the Bank for International Settlements fired its latest annual broadside against ultra-easy monetary policies, it's plain that the people actually responsible for navigating a course through treacherous economic straits are not on the same page. In fact, they aren't even reading the same book.
While the BIS curmudgeons insist that risk-loving speculators fuelled by cheap money are a bigger threat to the health of the global financial system than sputtering economies and the spreading fear of deflation, central bankers have been quick to defend their current policies in both talk and action.
Sweden's Riksbank actually doubled down on its loose-money bet, slashing its benchmark rate by half a percentage point to 0.25 per cent on Thursday, equalling its record low from 2010 and telling the markets not to expect any upward moves before the end of 2015. The directors' vote in favour of the cut was 4-2, with governor Stefan Ingves (and his BIS-like fears of financial instability) on the losing side.
In doing so, the bank was declaring that falling prices were its main concern, leaving "other policy areas" (i.e. the politicians and regulators) to cope with record consumer debt levels and a budding housing bubble, through what the economists call macroprudential policies. These could include more stringent mortgage standards and caps on loan-to-income ratios to rein in the risk-takers.
Earlier in the week, Federal Reserve chief Janet Yellen said much the same thing, taking dead aim at the BIS's insistence that central banks must heed the warning signals of financial distress. Without a swift return to more normal interest rates to rein in financial excesses, the Swiss-based central bank monitor fears another global crisis that policy makers would have no ammunition to combat.
"Monetary policy faces significant limitations as a tool to promote financial stability," Ms. Yellen told a meeting of the International Fund on Wednesday. "Its effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach." What's more, "efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment."
The Bank of England's particularly quotable chief economist, Andrew Haldane, also weighed in. He has no quarrel with the BIS's description of "extraordinarily buoyant" financial markets that are out of touch with reality. Indeed, "lots of nutty things are still happening," he told a Financial Times conference.
Mr. Haldane acknowledged that easy monetary policy has "aided and abetted" the risk-taking that has led to bubble-like conditions in real estate and some other assets. But that was the idea: drive up asset prices and get more capital working in the broader economy to stimulate a recovery. That, he insisted, is what monetary policy is supposed to do.
Then it was the turn of European Central Bank president Mario Draghi, who has just spearheaded the most aggressive easing in the short history of the ECB, which was once the BIS's poster child for ultraconservative, inflation-fearing monetary management.
"The first line of defence against financial stability risk should be the macroprudential exercise," he told reporters. "I don't think that people would agree with the raising of interest rates now."
Central bankers have made their fair share of mistakes since the Great Financial Meltdown and undoubtedly will continue to do so. Getting the timing of policy shifts right is as difficult as predicting currency swings or market tops. But at least the Fed and other guardians of monetary policy have shown the flexibility and boldness needed to respond to unconventional times with unconventional actions. That's not something we would ever expect from the gloomy BIS watchdogs hunkered down in Basel.