The attack on main-stream alchemy

The staunch defenses of Simon Wren-Lewis and Paul Krugman worry me a little. I respect both of them, and think that Wren-Lewis in particular is both reasonable and careful in his arguments. But really, doesn’t the idea of rational expectations remind you of transmutation – kinda cool if it was true, but more interesting as […]

Derivative not toxic shock

They’rrrre baaack. It’s leveraged supersenior kids, but not as you know it. Specifically not as you know it because the new ones are not non-recourse on the leverage, so they have no gap risk for the seller. Now, there are some not-entirely-accurate statements going around about what is actually happening here, so let’s look. How […]

What did he just say?

Quoth Tarullo: To date, over-the-counter derivatives reform is the primary example of a post-crisis effort at market-wide regulation. Given that the 2007–2008 financial crisis was driven more by disruptions in the SFT markets than by disruptions in the over-the-counter derivative markets, comparable attention to SFT markets is surely needed. So, um, you admit that “the […]

Quotes of the week: ZLB and safe assets

A few memorable lines to muse on: 1. From Paul Krugman, talking about the need for negative real rates: in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that […]

A bad habit

The claims that senior bankers have been using dangerous drugs are shocking, but the evidence appears irrefutable. Yes, cov-lite loans are growing: This is going to have a nasty come down…

He ain’t ergodic, he’s my brother

I have been meaning to blog for a while about ergodicity. I know, exciting stuff. Here’s the skinny: Roughly speaking, a system is ergodic if the time average is the state space average. Suppose we have a financial asset with genuinely IID returns: then if we look at the average return over time, that will […]

Answering the call for private capital

Matt Levine, unexpectedly, is too generous. He suggests that the Fairholme Capital Management proposal to privatize Fannie Mae and Freddie Mac is pretty good. Not so much, Matt, unless you like the idea of the state handing billions of dollars to a bunch of hedge funds for no readily obvious reason. What Frannie needs is […]

Failures of confidence building – a question

One of the roles of a financial stability authority – the central bank perhaps – is to reassure the market in crisis that an institution under stress is indeed solvent albeit not liquid. They do this in part by words and in part by deeds: by lending. The communication of solvency to the market is […]

The problem with bond market power

Peter Lee in Euromoney points out that while dealers’ bond inventory has been going down, the big funds have got bigger. Liquidity is drying up across the bond markets. Regulations designed to curtail banks’ leverage have had the unintended consequence of also sharply reducing their ability and willingness to make markets in corporate and even […]

The price of resolution

Simon Johnson has a very good point. First he points out that most experts agree that bankruptcy cannot work for large, complex financial institutions in the United States, at least not using the current bankruptcy code. It can and does work for non-financials, and the FDIC work out process for small banks works well without […]

Shameless book plug

On the Amazon money and markets blog, though, rather than here.

The slow reaction of bond indices

From Goldman’s Jesse Edgerton, via FT alphaville: In the current iBoxx US investment grade index, for example, about 15% of bonds in the index trade less than once a month, and only about 65% trade on any given day. Even fewer bonds trade multiple times per day in substantial sizes. Thus prices and yields for […]

A great title: Jamie as Lance

I don’t agree with much in this post, but the title is so good that I have to quote it anyway: Jamie Dimon, the Lance Armstrong of Finance A good title doesn’t just provide a bite-sized synopsis, it raises questions by itself: and this one does just that. It’s compelling not because it is true […]

So dark it might not even be there

The latest result on the search for dark matter is so important it has even made it to the pages of the economist. Basically, the Lux experiment didn’t find any. None, nada, nothing at all. Why does this matter? Well, dark matter is a compelling idea that fixes a lot of problems: without it everything […]