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Before the Music Stops Again

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In a fascinating parenthesis in our cover story, “Wall Street’s Next Political Storm,” Nicole Gelinas quotes President Obama from 2009 saying the government would continue to “provide the support [to major banks] to clean up their balance sheets.”

Insightfully, she notes the “jarringly wonky language that reminds us, half a decade later, of how the most obscure details of the financial crisis riveted ‘regular people’ at home.”

Gelinas observes that Wall Street issues played a significant role in the elections of both 2008 and 2012, and predicts it will again loom large in the next presidential election of 2016.

She is certainly correct about that, and it is worth amplifying some reasons why financial wonkiness will remain with us for some time to come.

Exhibit A comes from an obscure, “wonky” annual report, weighing in at 246 pages, from the Basel, Switzerland-based Bank for International Settlements (BIS).

For those not in the know about BIS, it is the central bank of central bankers. So the report’s primary audience is people like Fed chair Janet Yellen, ECB president Mario Draghi or Bank of Japan governor Haruhiko Kuroda.

As readers well know, advanced economy central banks have been expanding their balance sheets (there’s that term again) by the trillions of dollars. You might expect that BIS, as part of the fraternity of central bankers, sees such activity as necessary, even if a necessary evil.

But no—the report, which has attracted little attention outside of a few fund managers going to cash—focuses more on the evil than the necessity of easy money.

It states that investors are “dancing mainly to the tune of central bank decisions;” that volatility “has sagged to historical lows,” indicating that “market participants are pricing in hardly any risks;” and worries about a “disconnect between the markets’ buoyancy and underlying economic developments globally.”

That disconnect, it continues, is that “growth has disappointed even as financial markets have roared.”

The cheap credit that Gelinas sees as dangerously propping up the economy is similarly viewed by BIS as “bringing forward spending from the future rather than increasing its overall amount over the long run, while leading to a further rise in public and private debt.”

So we’ve all gotten to feel a little bit better about higher asset prices, if we are asset owners, but resources have not flowed to productive investment as we, again, dance to the tune of a Fed making money cheap and distorting investment over the past seven years.

Despite massive government stimulus, the economy has never achieved lift-off as debt accumulates and even while, as the BIS frighteningly notes, “monetary and fiscal policies run out of ammunition.”

Former Citigroup CEO Charles Prince infamously stated, in July 2007, just before the global financial crisis, that “as long as the music is playing, you’ve got to get up and dance.”

Indeed, we are dancing to a tune called by unelected bankers even while, or perhaps because, elected leaders have absented themselves from the difficulty of conducting an orchestra capable of harmonizing economic growth, orderly markets and sound financial institutions.

Let us hope leadership alternatives emerge before the music stops again.