The central bankers' central bank: a new banking crisis?

But should the BIS be listened to at all?

The Bank for International Settlements – the Swiss-based multinational institution which is known as "the central bankers' central bank" – has issued its 83rd annual report, which warns of the potentially massive implications of a spike in bond yields.

BIS argues that an increase in average yields of 300 basis points – 3 percentage points – would lead to losses on US Treasury bills of over $1trn, and it warns that such a big move can happen "relatively fast":

Someone must ultimately hold the interest rate risk. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.

The warning fits into a narrative which began last week: that the US Federal Reserve's decision to "taper" its quantitative easing program will end the period of artificially low bond yields. There has certainly been a spike in yields: a 10-year UK gilt yields 2.48 per cent, compared to 1.90 a month ago, while 10-year US is up to 2.58 per cent from 2.01.

But the BIS has its scope set wider. The rises we've seen this month are merely the difference between "low" and "very low" cost of debt for solvent sovereigns; it doesn't yet change the overall story of the last thirty years, which is continued decline in yields.

Instead, as the Economist's Ryan Avent writes, to understand BIS's advice, we have to remember its background as an institution where the central bankers go to tell each other the myths on which their self-esteem rests. And key amongst those myths is the argument that interest rates – the key driver of monetary policy in most open economies – have been too low in recent years.

If interest rates have been too low, then bond yields are doubly depressed, first by QE and second by the low rates. It's easy to see how that belief spirals into warning of an inevitable spike in yields.

But, Avent points out, rates aren't low (or rather, too low) when they are low in absolute terms. Instead, we have to look at where they are compared to where they should be to encourage full employment. Given the deeply depressed economies in the developed world, it is almost certainly the case that interest rates at the level the Bank of England's 0.5 per cent are too high: that, rather than running the risk of causing the economy to overheat, they are dampening investment and growth.

There's a similar infestation of central-bank-ese in the BIS's treatment of sovereign debt, which Avent summarises as "Something something fiscal policy":

Central bankers have strong views on what governments ought to be doing with their budgets, many of which make most sense when given the least scrutiny. The BIS knows what it wants to say: that fiscal consolidation is almost universally necessary and the only real question is how to pursue it. Picking a path toward this argument that doesn't immediately cave in under the weight of self-contradiction proves to be a difficult task.

Paul Krugman is even harsher, writing that:

Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length.

The BIS pulls the classic two-step of looking at problems from within the Eurozone – where sovereigns without central banks have seen massive explosions in debt and borrowing costs – and extrapolating that to non-Eurozone nations. In short, it's not moved on from the economic "debate" which occurred in the spring of 2010, over whether Britain was the next Greece. (In case you've missed this one: it's not.) But even within the Eurozone, the BIS analysis is problematic, demanding massive deleveraging in countries which are already struggling to cut what spending they can. It fails to acknowledge the first rule of Eurozone budgets: if you are trying to cut debt/GDP ratios, it's more important in the current economic climate to keep growth up than it is to cut government spending.

BIS goes one step still, though. It calls for mass private sector deleveraging at the same time, inveighing against general balance sheet overhang. Quite apart from the fact that it's tricky for all sectors of the economy to deleverage at the same time – someone has to buy the debt – there's that whole paradox of thrift thing which we've known about for a little over three hundred years.

"If the world is lucky," writes Avent, "central bankers will discount the recommendations of the BIS." If the world was lucky, there'd have been better recommendations in the first place.

A woman cycles past the Bank for International Settlements in Basel, Switzerland.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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The deafening killer - why noise will be the next great pollution scandal

A growing body of evidence shows that noise can have serious health impacts too. 

Our cities are being poisoned by a toxin that surrounds us day and night. It eats away at our brains, hurts our hearts, clutches at our sleep, and gnaws at the quality of our daily lives.

Hardly a silent killer, it gets short shrift compared to the well-publicised terrors of air pollution and sugars food. It is the dull, thumping, stultifying drum-beat of perpetual noise.

The score that accompanies city life is brutal and constant. It disrupts the everyday: The coffee break ruined by the screech of a line of double decker buses braking at the lights. The lawyer’s conference call broken by drilling as she makes her way to the office. The writer’s struggle to find a quiet corner to pen his latest article.

For city-dwellers, it’s all-consuming and impossible to avoid. Construction, traffic, the whirring of machinery, the neighbour’s stereo. Even at home, the beeps and buzzes made by washing machines, fridges, and phones all serve to distract and unsettle.

But the never-ending noisiness of city life is far more than a problem of aesthetics. A growing body of evidence shows that noise can have serious health impacts too. Recent studies have linked noise pollution to hearing loss, sleep deprivation, hypertension, heart disease, brain development, and even increased risk of dementia.

One research team compared families living on different stories of the same building in Manhattan to isolate the impact of noise on health and education. They found children in lower, noisier floors were worse at reading than their higher-up peers, an effect that was most pronounced for children who had lived in the building for longest.

Those studies have been replicated for the impact of aircraft noise with similar results. Not only does noise cause higher blood pressure and worsens quality of sleep, it also stymies pupils trying to concentrate in class.

As with many forms of pollution, the poorest are typically the hardest hit. The worst-off in any city often live by busy roads in poorly-insulated houses or flats, cheek by jowl with packed-in neighbours.

The US Department of Transport recently mapped road and aircraft noise across the United States. Predictably, the loudest areas overlapped with some of the country’s most deprived. Those included the south side of Atlanta and the lowest-income areas of LA and Seattle.

Yet as noise pollution grows in line with road and air traffic and rising urban density, public policy has turned a blind eye.

Council noise response services, formally a 24-hour defence against neighbourly disputes, have fallen victim to local government cuts. Decisions on airport expansion and road development pay scant regard to their audible impact. Political platforms remain silent on the loudest poison.

This is odd at a time when we have never had more tools at our disposal to deal with the issue. Electric Vehicles are practically noise-less, yet noise rarely features in the arguments for their adoption. Just replacing today’s bus fleet would transform city centres; doing the same for taxis and trucks would amount to a revolution.

Vehicles are just the start. Millions were spent on a programme of “Warm Homes”; what about “Quiet Homes”? How did we value the noise impact in the decision to build a third runway at Heathrow, and how do we compensate people now that it’s going ahead?

Construction is a major driver of decibels. Should builders compensate “noise victims” for over-drilling? Or could regulation push equipment manufacturers to find new ways to dampen the sound of their kit?

Of course, none of this addresses the noise pollution we impose on ourselves. The bars and clubs we choose to visit or the music we stick in our ears. Whether pumping dance tracks in spin classes or indie rock in trendy coffee shops, people’s desire to compensate for bad noise out there by playing louder noise in here is hard to control for.

The Clean Air Act of 1956 heralded a new era of city life, one where smog and grime gave way to clear skies and clearer lungs. That fight still goes on today.

But some day, we will turn our attention to our clogged-up airwaves. The decibels will fall. #Twitter will give way to twitter. And every now and again, as we step from our homes into city life, we may just hear the sweetest sound of all. Silence.

Adam Swersky is a councillor in Harrow and is cabinet member for finance. He writes in a personal capacity.