Juggling Dynamite

The 2008 financial crisis was an implosion of fraud, bad debts and over-valued assets. The response from central banks was to deny and pretend that more liquidity was all the global economy needed to get back on a robust growth path. That was their first big policy mistake. Continuing to drown capital markets in wave after wave of more and more liquidity has been their next policy mistakes. Bernanke and Draghi may still be in denial but international bankers are increasingly sounding the alarm and admitting that too much liquidity is setting the financial system up for its next big fire storm. See: Global banks warn over too much liquidity.

“An influential group of leading world banks warned Thursday that central banks are pumping out too much easy money and markets risk becoming dangerously addicted to ultra-low interest rates.

The Institute of International Finance, which groups 450 banks, said that if central banks continue to flood money into the global economy, then any future bid to get it under control could itself destabilize the financial system.

“Much of the recovery so far has… been heavily reliant on ‘easy money’ conditions fostered by central banks,” the IIF said in a statement,

“These conditions — quantitative easing, very low interest rates — cannot last forever, but the risk is that financial markets have become addicted to them,” it warned.

“The longer central bank liquidity is relied on to hold things together, the more excesses and distortions are being accumulated in the financial system. An eventual unwinding of these excesses will become a destabilizing risk event.”

The IIF said the US Dow Jones Industrial Average’s had hit an all-time high this week more because of relaxed international monetary conditions than thanks to any recovery in the real economy.”

“Doom, Boom and Gloom Report” editor Marc Faber tells “Closing Bell” he thinks the stock market will suffer a major drop sometime this year. Host Maria is of course just as skeptical of downside risks as she was at the peaks in 2000 and 2007…ah memories… I am not sure if the perma-bulls are truly simple and ignorant about the nature of market cycles, or whether they chose to be willfully blind in order to do their job as stock pumpers. Either way the next bear market is likely to drive even more viewers away from business television. Here is a direct link.

Nouriel Roubini, co-founder of Roubini Global Economics LLC, talks about the European sovereign-debt crisis, the outlook for central bank monetary policy and risks of an asset “bubble.” He speaks from the sidelines of the Ambrosetti workshop in Cernobbio, Italy. Since staying too bearish on financial markets off the bottom in 2009, Roubini has learned to be more vaguely bullish when asked about near term market prospects. His true strength though is not his market timing which the hosts always ask him for (“how should we play this asset bubble until it blows up?” is the typical query). As an economist, Roubini’s expertise and value comes from his in depth knowledge of the European economy and political landscape. Here is a direct link.