Despite Successful Second Quarter, BIS Warns Against Lowered Interest Rates

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With the United States and global economy beginning to slowly recover from the 2008 financial crisis, there has been an increase in the call for new debt ratings and bond issuances. This has caused Moody’s profit revenue to surge even higher than analysts expected.

Moody’s CEO Raymond McDaniel stated that the second quarter results reflected “healthy market conditions and good demand for a wide range of our products and services.” Moody’s announced that its earnings were $319.2 million this quarter, or $1.48 a share. This is up from $225.5 million in 2013’s second quarter. Analysts predicted that estimated earnings would be $1.01 a share and revenue at $803 million.

In Moody’s second quarter report, the company touched on global interest rates, which are very low compared to expectations. The Bank for International Settlements (BIS) warns that this is a negative trend that could destabilize the global economy. “Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” the bank wrote.

BIS explains that this disconnect is mainly due to continued monetary stimulus in the form of money printing and increasingly low interest rates by several large banks. “Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition,” explains BIS of these fiscal trends. “Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent.”

Claudio Borio, head of the monetary and economic department at BIS, warned that the beginning of another financial crisis could cause a retreat towards protectionism that would “spell the end to the current open global economic order” as we know it. “Focusing our attention on the shorter-term output fluctuations is akin to staring at the ripples on the ocean and losing sight of the more threatening underlying waves,” he said.

BIS was the only major international financial organization to warn of the great financial crisis in 2008, so international financial group is definitely an authority that is worth listening to. What do you think? Are lower interest rates going to cause another financial crisis?