The Swiss-based 'bank of central banks' said a hunt for yield was luring investors en masse into high-risk instruments, "a phenomenon reminiscent of exuberance prior to the global financial crisis".
This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong.
"This looks like to me like 2007 all over again, but even worse," said William White, the Bank for International Settlement's former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.
"All the previous imbalances are still there. Total public and private debt levels are 30 per cent higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle," said Mr White, now chairman of the OECD's Economic Development and Review Committee.
The BIS said in its quarterly review that the issuance of subordinated debt -- which leaves lenders exposed to bigger losses if things go wrong -- has jumped more than threefold over the last year to $US52 billion ($55.87 billion) in Europe, and jumped tenfold to $US22 billion in the US.
The share of "leveraged loans" used by the weakest borrowers in the syndicated loan market has jumped to an all-time high of 45 per cent, ten percentage points higher than the pre-crisis peak in 2007-2008.
The BIS said investors are snapping up "covenant-lite" loans that offer little protection to creditors, as well as a form of hybrid capital for banks known as CoCos (contingent convertible capital instruments) that switch debt into equity if bank capital ratios fall too low. While CoCos help shield taxpayers from losses in a banking crisis by leaving private creditors with more of the risk, the recent appetite for such an instrument is also a warning sign.
The BIS said interbank credit to emerging markets has reached the "highest level on record" while the value of bonds issued in off-shore centres by private companies from China, Brazil and other developing nations exceeds total issuance by firms from rich economies for the first time, underscoring the sheer size of the debt build-up in Asia, Latin Africa, and the Mid-East.
Perhaps it is time for a Debt Jubilee, whereby the debts of a debtor are forgiven after X years?
Alternatively, if one chooses to remain indebted to someone for an extended period of time their debts must then be forgiven at X squared years, the second period of Jubilee.
Perhaps it is time for a global debt Jubilee?
Give everything a fresh start.
Forgive others their debts and start again and this time try to do it right.
Perhaps it is time for a Debt Jubilee, whereby the debts of a debtor are forgiven after X years?
Alternatively, if one chooses to remain indebted to someone for an extended period of time their debts must then be forgiven at X squared years, the second period of Jubilee.
Perhaps it is time for a global debt Jubilee?
Give everything a fresh start.
Forgive others their debts and start again and this time try to do it right.
What a sweet idea. That would be the equivalent of the banks giving me a couple of million dollars!
Perhaps it is time for a Debt Jubilee, whereby the debts of a debtor are forgiven after X years?
Alternatively, if one chooses to remain indebted to someone for an extended period of time their debts must then be forgiven at X squared years, the second period of Jubilee.
Perhaps it is time for a global debt Jubilee?
Give everything a fresh start.
Forgive others their debts and start again and this time try to do it right.
you will get your debt jubilee, it just won't be presented the way you think
you will get your debt jubilee, it just won't be presented the way you think
Mel, a debt jubilee where only the debtors get a benefit would be outrageous.
If however, everyone was given say $100K (the figure depends on how much debt we want to extinguish vs the potential impact on inflation of lots of people having lots of extra cash) and those with debts were required to apply their $100K to their debts the result would be:
1. Everyone with no debt would have $100K
2. Everyone with debt will have had their debt reduced by $100K. Those with debt less than $100K will end up with a positive balance.
Reducing just 500,000 mortgages by $100K will wipe $500B off the banks loan books.
No moral risk arises because the debtors would probably regret that they did not end up with cash as a result of their past debts.
If those with cash balances (because they had less than $100K debt) rush out and start spending and inflation results then that could be managed with taxes or interest rates.
Probably sensible to start slowly with a small jubilee and see how it works.
In a sense the GFC cash splash was a small jubilee but it lacked the requirement that debtors pay down debts.
The major point of resistant will of course be the banks. Large outstanding loan books generating interest is their business model. The last thing they want is for a policy to come along that wipes out a major chunk of their loan book.
Of course doing this while the RBA is running manipulated interest rates and while an asset Ponzi economic model remains in place would be a waste of time. The debts would eventually be run up again.
Best thing to do is to start moving to full reserve banking and limits on the role of banks as part of the Jubilee.
Think of it as a massive dose of radiation applied to quickly shrink the size of a tumor.
Radical – yes and the banks will fight it kicking and screaming but a lot quicker and less painful than trying to shrink debt using inflation.
Mel, a debt jubilee where only the debtors get a benefit would be outrageous.
If however, everyone was given say $100K (the figure depends on how much debt we want to extinguish vs the potential impact on inflation of lots of people having lots of extra cash) and those with debts were required to apply their $100K to their debts the result would be:
1. Everyone with no debt would have $100K
i remember when Keen put the idea forward and admire him for thinking outside the square. There would be problems with this one though - speculative bubbles happening overnight when everyone received their slab of cash at the same time being one of them.
APF - a place where serious people don't take themselves too seriously. There's nothing else like it.
A debt jubilee represents a free pass to all the risk takers and a whack on the wrists for all the responsible and prudent savers.
The crazier, more dangerous and more reckless, the more reward we provide you.
In a world with debt jubilees the rational behaviour for an individual is undoubtedly to join camp reckless and borrow and borrow and leverage as much as you possibly can. When everything falls down and exuberance cannot push prices any higher, you get rewarded with the assets and walk away from the debt. It is institutionalised moral hazard.
Is it possible? Maybe in theory, with the right controls and measures. But in reality those who would design those controls and measures (those in the finance system) are the ones who would benefit the greatest from the jubilee. I cannot fathom human behaviour allowing this to run in a fair manner. It would be run in a way that covertly benefits the few at the expense of the many, and most of us wouldn’t even understand how.
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