Friday, May 17, 2013


Paul Krugman takes note of a Wall Street Journal blog post praising a warning from Jaime Caruana, the general manager of the Bank for International Settlements ("the central banks' central bank) about the dangers of keeping interest rates for too long. As Krugman notes, the WSJ sees one credential for this warning being that --

the BIS is one of the few international financial institutions (some say the only one) to see the financial crisis coming and to issue clear warnings ahead of time.

Now at the institutional level, that's true. But Jaime Caruana wasn't at the BIS prior the financial crisis. He was head of the capital markets department at the IMF. And did he then see the financial crisis coming and issue clear warnings ahead of time? Here he is summarizing the IMF's Global Financial Stability Report in April 2007 --

Overall, then, we note that the structural transformations occurring in global financial markets are likely to have a positive impact on financial stability. However, the increased complexity of instruments and linkages and the very benign circumstances associated with the rapid rise in the types of institutions investing abroad and increasing global reach of financial institution suggests there may be pockets of vulnerability, and that we must continue to analyze all these trends in greater depth ... We think that over the last years the improvements in risk management techniques and processes in many financial institutions has been really very important, very relevant, and very positive, and this has contributed to strengthen the resilience of the financial system. We see these developments positively. There is liquidity in the financial system, and I would like to say that part of this liquidity comes from the innovation of the financial systems, so it is the very financial system that also is helping to create additional liquidity in the system.

If you read the whole thing and indeed his other pronouncements from that era, there are indeed enough CYA paragraphs about risks where he can say he did mention some possibility in advance. But clear warnings about an impending crisis? No way.

One side note to this is that the international financial policy elite has been a very nice landing spot for Spanish bankers whose record at home and their institutional prognostications prior to the crisis leave a lot to be desired. Now they're heralded as the people who saw it coming.