----- Original Message -----
From: Gold Anti-Trust Action Committee
To: [EMAIL PROTECTED]
Sent: Tuesday, June 19, 2007 11:29 PM
Subject: [GATA] Central bankers turn to BIS as markets ignore risk
Central bankers turn to BIS as markets ignore risk
Submitted by cpowell on 04:05PM ET Tuesday, June 19, 2007. Section: Daily
Dispatches
"There's a wonderful camaraderie among central bankers."
* * *
By John Fraher
Bloomberg News Service
Tuesday, June 19, 2007
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1cW8RYVARJM
Six decades ago the U.S. Treasury wanted to shut down the Bank for
International Settlements, saying it helped finance the Nazis. Today
Jean-Claude Trichet and Ben S. Bernanke are transforming the organization into
one of the world's most powerful networking clubs.
With hedge funds and private equity firms pumping record sums of money around
the world economy, central bankers fret that investors are taking on too much
risk. As a result, the bankers are increasingly turning to the Basel,
Switzerland-based BIS, the oldest international financial institution, for
research and advice, and to coordinate damage-control plans.
The bank's most important role may be in providing a venue for swapping
information and ideas among those charged with maintaining the stability of the
global economy. "If the BIS didn't exist we'd have to invent it," said Laurence
Meyer, 63, vice chairman of Macroeconomic Advisers LLC in St. Louis and a
former U.S. Federal Reserve governor.
The "central banks' central bank" now performs many of the functions of a
monetary authority, churning out research on everything from derivatives to
inflation-targeting. It also holds about 6 percent of central banks' currency
reserves on their behalf.
... 'Unbelievable Speed'
"Funds are flowing across the world with unbelievable speed, and central
bankers feel they are in uncharted territory," Meyer said. "Central bankers
want to talk to each other about this, and the BIS is the best vehicle."
European Central Bank President Trichet, 64, and Fed Chairman Bernanke, 53,
will meet about 250 of their colleagues from around the world on June 23 and 24
at the BIS's copper-colored, cylindrical headquarters after a year in which
investors ignored their calls for prudence.
While market blowouts such as the Asian crisis of 1997 are always hard to spot
in advance, policy makers say, the increasing popularity and complexity of the
derivatives used by investors to hedge their bets are making the task even
tougher.
Fed Bank of New York President Timothy Geithner argues that the danger that new
crises will be harder to manage should be the "principal preoccupation" of
central bankers.
"The rapid development of global financial markets points toward the importance
of strengthening the cooperation within the worldwide community of central
banks," Malcolm Knight, 63, general manager of the BIS, said in an e-mailed
response to questions.
...Providing a Forum
Providing a forum for central bankers to discuss financial globalization is
only the latest incarnation of an organization founded in 1930 to manage
Germany's World War I reparation payments. In the interim it handled gold
looted by the Nazis, helped oversee the global currency system set up after
World War II, bailed out a Communist government during the Cold War, and
midwifed the ECB.
During World War II the bank transferred Czechoslovakian gold to Germany after
the Nazi invasion in 1939. It later emerged that Czech officials were held at
gunpoint as they placed the order.
U.S. Treasury Secretary Henry Morgenthau tried to shut down the bank at the
1944 Bretton Woods conference; only intervention by John Maynard Keynes saved
it. The U.S. soon saw the usefulness of the BIS as an arena to fine-tune the
Bretton Woods global currency regime, with Fed officials attending regularly
from 1960.
...Cold War Divides
The BIS also straddled the divides of the Cold War, giving central bankers from
both sides of the Iron Curtain a rare forum. In the early 1980s it helped bail
out Yugoslavia's government after a debt crisis hobbled the country's ability
to meet its international obligations.
The first foundations for European currency union were laid at the BIS and in
1994 the European Monetary Institute moved from Basel to Frankfurt, where it
became the ECB.
As barriers to capital flows fell in the 1990s and countries such as China and
India become more integrated into the global economy, BIS membership has
swelled to 55 from 36 over the past decade.
"Markets are increasingly global, and central banks are not," said Willem
Buiter, 57, a former member of the Bank of England's Monetary Policy Committee.
"So there's a huge vacuum to be filled."
The agenda for this year's annual meeting may already have been set by a report
published last month. The Financial Stability Forum, which is based at the BIS
and brings together regulators and central bankers, argued that hedge funds
should "enhance sound practice" methods for improving risk management and
preventing potential shocks to the international financial system.
...Perceptions of Risk
Investors' perception of risk is near historic lows. The gap between the yield
demanded by investors to hold high-yield, high- risk U.S. corporate debt and
government bonds fell to the lowest ever on June 5. European companies have
borrowed a record $284.7 billion in loans and bonds rated below investment
grade since the start of the year.
Growing concern about the extent of investors' risk-taking comes as a global
cash glut swamps the ability of central bankers to set policy. New Zealand
central bank Governor Alan Bollard said in March that "cheap international
money" has stymied his efforts to curb a housing boom, a sentiment echoed by
Bank of England Governor Mervyn King.
Buiter, now a professor of political economy at the London School of Economics,
says liquidity and new financial instruments are pouring across borders so
quickly that the BIS's ability to analyze financial markets is struggling to
keep up.
...'Fighting the Last War'
"The problem is that you will inevitably end up fighting the last war," said
Buiter. "The global reality is they have to agree on everything, so things
become very, very slow."
The BIS's advocates nevertheless point to its power as a magnet that brings
together the world's most powerful central bankers and their officials.
"The BIS has more influence than you might think," said Ernst Welteke, 64, who
headed the Bundesbank between 1999 and 2004. "It's a very informal exchange of
opinions, which I found very important."
The BIS's meetings, which usually take place every two months, give central
bankers an opportunity to meet face to face. Policy makers typically arrive on
Sunday evenings and governors from the Group of 10 nations dine together.
The next morning, the likes of Trichet, Bernanke, King, and China's Zhou
Xiaochuan can be seen taking breakfast together in the restaurant of the Basel
Hilton before they stroll across the street to the BIS's 20-story building,
which was designed by Martin Burckhardt.
...'Uniquely Valuable'
There, policy makers share ideas and experience on everything from the state of
the global economy to derivatives to currency management until late into the
evening. "Governors find these discussions uniquely valuable," said Knight.
"They have the chance to really hear others' news."
Central bankers also get time to relax. At last year's annual gathering, policy
makers crammed into the bar of the Basel Hilton to watch the World Cup soccer
match between the Netherlands and Portugal, smoke cigars and exchange banter.
"There's a wonderful camaraderie among central bankers that means they really
get to know each other very well," said Meyer, who sometimes represented Alan
Greenspan during his time at the Fed between 1996 and 2002. Traveling to Basel
"was unbelievable fun."
* * *
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