Global Economy: I.M.F. Warns of Global Financial Risk From Fiscal Policies - by Landon Thomas jr

As global leaders sounded the alarm about a slowing world economy, a more immediate concern drew the attention of policy makers at the International Monetary Fund’s semiannual meetings last week: inflated asset prices and increasing levels of debt overseas.

Bond markets in the eurozone are booming, debt in China is at historic highs and the United States stock market, even with its sharp fall last week, has been on a tear.

As economists and politicians heap pressure on global central banks to continue, and even escalate, their unusually loose monetary policies in order to spur global demand, the fear that these measures could provoke another market convulsion is spreading.

“A major lesson of the last crisis is that accommodative monetary policy contributed to financial excesses,” said Lucas Papademos, a former vice president of the European Central Bank. “We are pursuing a similar policy for good reason. But there are limits — if you do this for too long, risks in the financial markets will materialize.”

Over the last week this debate has been playing out here: on panels at think tanks, in huddles inside and outside the hulking I.M.F. building and in formal talks between government officials and central bankers.

Mario Draghi, the president of the E.C.B., echoed these concerns on Saturday when he said that beyond concerns about the global economy, one of the main topics of discussion was “increasing financial risk-taking” by investors, especially nonbank institutions.

To a degree, the fund’s warning that the eurozone’s economy, and Germany’s in particular, might face a recession turned what had been an academic discussion into a major political issue.

The outcry for Germany, which has surpassed China as the country with the largest trade surplus in the world, to spend more on infrastructure to revitalize its flagging economy was loud enough. But behind closed doors there was an even harder push for more immediate action: a purchase by the European Central Bank of Italian, Spanish and Greek government bonds, in large quantities.

While the bank has presented a plan to buy securitized corporate bonds, many now think that too few of these securities exist for the plan to make a difference.

Germany, led by its hawkish central bank head, Jens Weidmann, has resisted all moves by the E.C.B. to buy government bonds in bulk.

Read more: I.M.F. Warns of Global Financial Risk From Fiscal Policies - NYTimes.com