Vicious cycle

21 September 2011 By Martin Hutchinson

Just as Ben Bernanke and his crew contemplate further easing, a new IMF report lays out the multiple threats created by such loose monetary policy. In rich nations, small firms suffer while in emerging markets, capital inflows produce bubble conditions. The FOMC should pay heed.

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The International Monetary Fund’s “Global Financial Stability Report” released on Sept. 21 cautioned that “low policy rates, although necessary under current conditions, can carry longer-term threats to financial stability.”

Threats the IMF identified included “diversion of credit into opaque channels such as the shadow banking system;” “a search for yield is pushing some segments to become more leveraged and hence vulnerable again;” and “the potential for a sharper and more powerful turn in the credit cycle, risking greater deterioration in asset quality in the event of new shocks.”

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