D Ravi Kanth: Does the BIS matter?

TRADING THOUGHTS

Indeed, many of the grave problems confronting the global financial system were captured in a comprehensive report that the BIS issued well ahead of the sombre 78th annual event. It is not that the central bankers' central bank woke up all of a sudden to the worsening crisis. "The current market turmoil in the world's main financial centres is without precedent in the post-war period," it said. "With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point. These fears are not groundless."

Obviously, the tectonic changes now unfolding in the world economy are fraught with pain and dislocation for a huge majority of the global population. A period of severe slowdown following the current phase of hyper inflation is likely to manifest ultimately in falling prices or deflation. This is bound to cause untold misery to those who lack any social protection and their numbers run into hundreds of millions.

The moot issue is why it all did happen in the way it did and who ought to be held responsible. The BIS points the needle of blame for the sudden changes in the financial conditions in two directions: the extension of the long-standing "originate-to-distribute" model to new mortgage products in recent years and the sudden deterioration in both financial and macro-economic conditions that fuelled unstoppable credit excesses that finally went bust.

The originate-to-distribute model is responsible for the furious growth and the rise of debt securitisation that began in the United States and spread rapidly like a wildfire to other industrialised and some developing countries. There is nothing wrong with this model, which is meant to spread the risk. However, the model failed to work well because the actors