José Viñals, the IMF’s financial counsellor, said: “Policymakers are facing a new global imbalance: not enough economic risk-taking in support of growth, but increasing excesses in financial risk-taking posing stability challenges.”
This is not what the central banks intended when they cut the cost of borrowing and cranked up the electronic-money printing presses in the process known as quantitative easing. They expected cheap and plentiful money to rouse the animal spirits of entrepreneurs, encouraging them to invest. Instead, they have provided the casino chips for speculators.
The IMF has identified three main problems:
First, while the traditional banks have been strengthened since the crisis by the injection of new capital, they are not really fit for purpose. The IMF conducted a survey of 300 banks in advanced economies and found that institutions accounting for almost 40% of total assets were not strong enough to supply adequate credit in support of the recovery.
Second, risk is shifting from traditional banks to what is known as the shadow banking system – institutions such as hedge funds, investment banks and money market funds that do not take deposits directly from the public, but have grown in size and importance over the past decade. The fund thinks the next crisis could well stem from the shadow banks.
Third, by guiding financial markets to expect only limited and slow increases in interest rates, the fund fears it has made investors complacent. Prices of a range of financial assets have risen; there has been little distinction between investments that are safe and those that are risky; and markets have been eerily free from volatility. Asked where the next sub-prime crisis was going to come from, Viñals said he did not have a crystal ball. Clearly, though, the IMF fears there is something nasty lurking out there.
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