Central Bankers Receive Warning On Global Risks; Report Finds High Number Of Imbalances Threatening Economies Across the World
Although global growth is chugging along, the world's economies are exposed to an unusual number of risks, according to a report prepared for the world's central banks.</br></br>The troubling signs range from record housing prices and soaring indebtedness to an ever-widening U.S. current-account deficit and remarkably low bond yields. Any shift back to more ordinary levels could potentially be "rapid and disruptive," according to a report yesterday by the Bank for International Settlements, an international organization that fosters cooperation among the world's central banks.</br></br>On the whole, world-wide growth is fairly strong and inflation is tame, but many central banks are nevertheless worried. The last time the world economy faced such a confluence of imbalances was in the late 1960s. Then, the situation contributed to soaring inflation in the 1970s and the debt crises of the 1980s that affected many emerging-market economies. Most economists don't think this will happen again because the world economy is more deregulated and globalized -- which, along with inflation-focused central banks, should take the heat off excessive price increases.</br></br>One of the textbook prescriptions for many of the looming problems is higher interest rates. But that can cause unemployment and unhealthfully low inflation, the report said. The challenge is to address the sources of "potential unsustainability without, in the process, inducing a marked slowdown in world growth," Nout Wellink, president of the BIS, said yesterday.</br></br>It is a tricky moment for central banks, which have debated for years over how to deal with potential bubbles. There is no consensus: The U.S. Federal Reserve prefers a hands-off approach when it comes to bubbles and simply cleans up the mess afterward; the European Central Bank tries to keep bubbles from emerging to begin with.