IMF Admits QE Encourages Excessive Risk-Taking; Warns “Sharp Downside Risks Are Rising”

With the Fed unleashing its bubble-watchers last week, on the heels of warnings from the Central Bankers’ Central Bank (BIS), The IMF has decided it is time to chirp in. As Mises’ David Howden notes, after promoting QE for years (see here and here), the IMF is finally coming to realize what has been apparent for years now to almost everyone who doesn’t work for the Fed or the IMF: that low interest rates encourage risky decisions. The Guardian reports, excessive risk taking and geopolitical hazards pose new threats to a global economy already experiencing an uneven and weaker than expected recovery, the International Monetary Fund has warned. In a report prepared in advance of the G-20 meetings, The IMF warns, “financial market indicators suggested investor bets funded with borrowed money looked ‘excessive’ and that markets could quickly deflate if there were surprises in U. S. monetary policy or the conflicts in Ukraine and the Middle East.”
Some key excerpts from the full report below:
Sovereign bond yields have edged further down and equity prices have generally risen. Sentiment toward emerging markets has improved, as reflected in resilient portfolio inflows and stable or stronger currencies. Implied volatility measures fell to the very low levels prevailing before the May 2013 tapering remarks. This raises concerns that excessive risk taking may be building up, which could sharply reverse in the run-up to U. S. rate hikes or should geopolitical events trigger higher risk aversion.
Implied volatilities across asset classes have continued to decline, reaching levels prevailing before the Fed tapering talk. This raises concerns of a buildup of excessive leverage and under-pricing of credit risk which could be abruptly corrected in the run-up to U. S. rate hikes or because of higher global risk aversion.

This post was published at Zero Hedge on 09/18/2014.