Comments on: Quaint http://blogs.cfr.org/setser/2008/08/13/quaint/ Fri, 20 Nov 2009 12:55:21 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Brad Setser: Follow the Money » Blog Archive » The stealth bailout, illustrated, in close to real time http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-112345 Brad Setser: Follow the Money » Blog Archive » The stealth bailout, illustrated, in close to real time Mon, 08 Sep 2008 21:10:05 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-112345 [...] central banks now are in a position where they can influence, through their asset allocation, the allocation of credit inside the US economy. Remember that the Fed is trying to mitigate financial market distress by changing the composition [...] [...] central banks now are in a position where they can influence, through their asset allocation, the allocation of credit inside the US economy. Remember that the Fed is trying to mitigate financial market distress by changing the composition [...]

]]> By: Brad Setser: Quaint « Mini-Hvymtl http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111978 Brad Setser: Quaint « Mini-Hvymtl Fri, 29 Aug 2008 10:37:57 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111978 [...] Brad Setser: Quaint Published 2008.08.29 Economics Quaint [...] [...] Brad Setser: Quaint Published 2008.08.29 Economics Quaint [...]

]]> By: Rien Huizer http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111571 Rien Huizer Sun, 17 Aug 2008 13:38:17 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111571 Brad re yr # 35. I just meant that their tracking of trading patterns (market microstructure) is pretty sophisticated and should show up irregularities like people trying to manipulate markets supervised by them, like markets made by the primary dealers. That should show up "powertraders" in trasuries. As Twofish mentioned, manipulating that market is highly unlikely (connections with other markets, near-fungibility), but I would not rule out that a situation of "credibility" could arise, given a lot of ammunition and a plausible myth. Brad re yr # 35. I just meant that their tracking of trading patterns (market microstructure) is pretty sophisticated and should show up irregularities like people trying to manipulate markets supervised by them, like markets made by the primary dealers. That should show up “powertraders” in trasuries. As Twofish mentioned, manipulating that market is highly unlikely (connections with other markets, near-fungibility), but I would not rule out that a situation of “credibility” could arise, given a lot of ammunition and a plausible myth.

]]> By: bsetser http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111518 bsetser Fri, 15 Aug 2008 14:08:25 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111518 Rien -- interesting points. I have been thinking a lot about these kinds of scenarios. I am a bit less convinced that you are that the fed has a tight grip on the microstructure of all us markets (they completely missed the SIVs buying ABS -- they really thought there was a lot of global risk dispersion) as you are. but i also don't know all the things the markets group at FRBNY tracks. Rien — interesting points. I have been thinking a lot about these kinds of scenarios. I am a bit less convinced that you are that the fed has a tight grip on the microstructure of all us markets (they completely missed the SIVs buying ABS — they really thought there was a lot of global risk dispersion) as you are. but i also don’t know all the things the markets group at FRBNY tracks.

]]> By: RebelEconomist http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111508 RebelEconomist Fri, 15 Aug 2008 11:03:56 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111508 "should the US care if other governments are shaping the internal allocation of credit in the US? And if so, how should it respond?" Yes, the US should care and should do something about it. If the Fed believe that their investment has an influence on credit pricing, as I pointed out long ago if they also believed that mortgage rates were being held down by Chinese purchases of longer term debt, they should have shortened the duration of the SOMA account. They had enough treasuries in the SOMA to counteract much of the conundrum. For more detail, see: http://reservedplace.blogspot.com/2008/01/us-economic-policy-shot-in-foot-1-soma.html “should the US care if other governments are shaping the internal allocation of credit in the US? And if so, how should it respond?”

Yes, the US should care and should do something about it. If the Fed believe that their investment has an influence on credit pricing, as I pointed out long ago if they also believed that mortgage rates were being held down by Chinese purchases of longer term debt, they should have shortened the duration of the SOMA account. They had enough treasuries in the SOMA to counteract much of the conundrum. For more detail, see:
http://reservedplace.blogspot.com/2008/01/us-economic-policy-shot-in-foot-1-soma.html

]]> By: Simon http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111497 Simon Fri, 15 Aug 2008 04:21:58 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111497 I agree with DC. The capital miss-allocation problem originates on Wall Street no where else. The Chinese are paragons of responsibility compared with the facilitators of the spoilt ivy league Wall Street brats that have engaged in activities that threaten to seriously damage the financial stability of the entire planet. I agree with DC. The capital miss-allocation problem originates on Wall Street no where else. The Chinese are paragons of responsibility compared with the facilitators of the spoilt ivy league Wall Street brats that have engaged in activities that threaten to seriously damage the financial stability of the entire planet.

]]> By: Simon http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111496 Simon Fri, 15 Aug 2008 04:15:47 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111496 I can add!!!Cripes I was going to make a great post! I can add!!!Cripes I was going to make a great post!

]]> By: aim http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111492 aim Fri, 15 Aug 2008 03:08:16 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111492 bester Says: 'private investors will keep prices from deviating from their “fundamental value” by doing the opposite' This seems like a very reasonable assumption, but can't private investor's influence in a market be overwhelmed by many central banks? This issue goes beyond Chinese purchases. bester Says: ‘private investors will keep prices from deviating from their “fundamental value” by doing the opposite’

This seems like a very reasonable assumption, but can’t private investor’s influence in a market be overwhelmed by many central banks? This issue goes beyond Chinese purchases.

]]> By: Rien Huizer http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111489 Rien Huizer Fri, 15 Aug 2008 02:26:02 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111489 Brad, yr # 15 /powertrader: looks like the opinions here vary from stifling intervention (shrek's stationary curve) to irrelevance (twofish). That also looks like correlation without a theory (shrek) and theory without evidence (twofish)! Anyway, I guess we ll agree that China shows no signs of deliberaltely manipulating the market opportunistically for short term gains. I do believe though that Shrek's comments indicate that China has developed a degree of credibility in the long end of the curve (easiest explanation of Shrek's Voorwerp). It is a subject that deserves much attention, especially if preferences between the US gvt and the Chinese would start to conflict (which they seem not to be doing at the moment). As to markets being so large and liquid that intervention cannot be makes no effective (Twofish), I totally disagree with that.. But it is possible that the intervener in last resort, i.e. the US gvt via its agencies, is constrained in such a way that it cannot intervene effectively without having to sacrifice other goals. Governments just printing money and central banks combatting inflation singlemindedly do not belong in grown up society. Well, if the US cannot always get what it wants in its own capital markets, why would China be able to intervene with any effect. I think it could but only in theoretically and bstracting from political consequences: if China crated a nuisance there would be some extra-market response. The Fed has excellent micro-structure knowledge within its system. It cannot prevent Chin from buying paper but it can do a lot to counter whatever it might consider abuse. The point is, of course, what would China and the US do if they had a very deep disagreement (say China would have added three trillion to its stash, some bright spark at SAFE would talk his bosses into yield enhancement through active management (trying to be a little Soros) and start dumping treasuries whilst being indiscreet about it in the pub where the economic scribblers are). That might cause long term interest rates to go up, the rest of the market to panic (the initial effect of a credible actor moving the market abruptly) and produce a rsult that the US gvt might not like (probably). What would hppen is anyone's guess, but probably there would be consultation. Washington does not care about the external value of the USD that much, but it does care about someone moving interest rates outside the Fed-Treasury consensus. And then the US would ground the PoBC for a month or so. Some people in Washington and Beijing must have been brainstorming about this from time to time, so the bright spark would be more likely a Leeson than a Soros (after the fact of course) and things would go back to normal. Meanwhile Bright Spark's friends from the pub could have made a little fortune. As to end-user demand from spot FX transactions: not privy to any pertinent information but I would also expect that to be not "overwhelmingly" large. It may be more concentrated and in a time zone where markets are a little thinner. But institutional demand, interbank trading and very large japanese firms may also be quite important in Asian time. I guess it depends where you are and what kind of FX work you do, whether SAFE is important. Brad, yr # 15 /powertrader: looks like the opinions here vary from stifling intervention (shrek’s stationary curve) to irrelevance (twofish). That also looks like correlation without a theory (shrek) and theory without evidence (twofish)! Anyway, I guess we ll agree that China shows no signs of deliberaltely manipulating the market opportunistically for short term gains. I do believe though that Shrek’s comments indicate that China has developed a degree of credibility in the long end of the curve (easiest explanation of Shrek’s Voorwerp). It is a subject that deserves much attention, especially if preferences between the US gvt and the Chinese would start to conflict (which they seem not to be doing at the moment). As to markets being so large and liquid that intervention cannot be makes no effective (Twofish), I totally disagree with that.. But it is possible that the intervener in last resort, i.e. the US gvt via its agencies, is constrained in such a way that it cannot intervene effectively without having to sacrifice other goals. Governments just printing money and central banks combatting inflation singlemindedly do not belong in grown up society. Well, if the US cannot always get what it wants in its own capital markets, why would China be able to intervene with any effect. I think it could but only in theoretically and bstracting from political consequences: if China crated a nuisance there would be some extra-market response. The Fed has excellent micro-structure knowledge within its system. It cannot prevent Chin from buying paper but it can do a lot to counter whatever it might consider abuse. The point is, of course, what would China and the US do if they had a very deep disagreement (say China would have added three trillion to its stash, some bright spark at SAFE would talk his bosses into yield enhancement through active management (trying to be a little Soros) and start dumping treasuries whilst being indiscreet about it in the pub where the economic scribblers are). That might cause long term interest rates to go up, the rest of the market to panic (the initial effect of a credible actor moving the market abruptly) and produce a rsult that the US gvt might not like (probably). What would hppen is anyone’s guess, but probably there would be consultation. Washington does not care about the external value of the USD that much, but it does care about someone moving interest rates outside the Fed-Treasury consensus. And then the US would ground the PoBC for a month or so. Some people in Washington and Beijing must have been brainstorming about this from time to time, so the bright spark would be more likely a Leeson than a Soros (after the fact of course) and things would go back to normal. Meanwhile Bright Spark’s friends from the pub could have made a little fortune.

As to end-user demand from spot FX transactions: not privy to any pertinent information but I would also expect that to be not “overwhelmingly” large. It may be more concentrated and in a time zone where markets are a little thinner. But institutional demand, interbank trading and very large japanese firms may also be quite important in Asian time. I guess it depends where you are and what kind of FX work you do, whether SAFE is important.

]]> By: anon http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111480 anon Fri, 15 Aug 2008 00:18:13 +0000 http://blogs.cfr.org/setser/2008/08/13/quaint/#comment-111480 bsetser - very interesting; thx. bsetser – very interesting; thx.

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