Comments on: Central banks were not the big buyers of synthetic triple AAA … http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/ Thu, 14 Oct 2010 13:09:54 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Phillip Huggan http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-124359 Phillip Huggan Tue, 03 Feb 2009 21:07:24 +0000 http://blogs.cfr.org/setser/?p=4573#comment-124359 IDK the motives of Central Bank secrecy. Maybe preserves sovereign power, maybe allows some strategic investing activities. *If* transparency decreases odds of financial crisis, can't the WB/IMF/BIS/illuminati just give discounts to open CBs and penalties to secretive ones? Your analysis of low Chinese currency stimulating savings instead of spending on imports is good. But China might not be looking at it from that point of view. Developing economies (SK) have functioned best by initially protecting their new industries while those (South America) that free traded and followed IMF reforms lost their social nets, new industries and a generation. China was/is probably keeping Yuan low to develop a manufacturing base. 2/3 of the country is still 3rd world. IDK the motives of Central Bank secrecy. Maybe preserves sovereign power, maybe allows some strategic investing activities. *If* transparency decreases odds of financial crisis, can’t the WB/IMF/BIS/illuminati just give discounts to open CBs and penalties to secretive ones?

Your analysis of low Chinese currency stimulating savings instead of spending on imports is good. But China might not be looking at it from that point of view. Developing economies (SK) have functioned best by initially protecting their new industries while those (South America) that free traded and followed IMF reforms lost their social nets, new industries and a generation. China was/is probably keeping Yuan low to develop a manufacturing base. 2/3 of the country is still 3rd world.

]]> By: Twofish http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123805 Twofish Thu, 29 Jan 2009 19:47:22 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123805 I assume that the comment was reversed: Huizer: Banks should have been explicitly forbidden to refuse assistance to shadow banks (in which case it would have been very hard to finance these things using commercial paper. The trouble is that the whole reason for investment banks existing is to support the securities market. I don't think that the solution is forbidden them from doing this sorts of investments. The basic problem was that risk was not well valued here. Also people talk about the "shadow banking" industry as if it was some small side light. In fact most capital allocation in the United States takes place through the securities market, and the "non-shadow" bank sector is smaller than the "shadow banking" sector. So the tail is larger than the dog. I assume that the comment was reversed:

Huizer: Banks should have been explicitly forbidden to refuse assistance to shadow banks (in which case it would have been very hard to finance these things using commercial paper.

The trouble is that the whole reason for investment banks existing is to support the securities market. I don’t think that the solution is forbidden them from doing this sorts of investments. The basic problem was that risk was not well valued here.

Also people talk about the “shadow banking” industry as if it was some small side light. In fact most capital allocation in the United States takes place through the securities market, and the “non-shadow” bank sector is smaller than the “shadow banking” sector. So the tail is larger than the dog.

]]> By: Twofish http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123803 Twofish Thu, 29 Jan 2009 19:37:51 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123803 ReformerRay: There are banks in my town that have not participated in the party going on in New York. They did. Indirectly or directly they did. This is why you have to be careful with how you structure the bailout. If you do it wrong, then the people that didn't know they they were benefiting from bad behavior get hit, and the lesson becomes "if I'm going to get punished for something that I didn't do, I might as well be hypergreedy the next time." Look at your typical community bank and see what they have their balance sheet in. ReformerRay: My proposal is to announce that AIG and Citi group have received all the money they are going to get from the Federal government. And that all the other firms that are going broke because they are tied to these two firms also will get no help Which is pretty much everyone in the entire world. ReformerRay: There are banks in my town that have not participated in the party going on in New York.

They did. Indirectly or directly they did. This is why you have to be careful with how you structure the bailout. If you do it wrong, then the people that didn’t know they they were benefiting from bad behavior get hit, and the lesson becomes “if I’m going to get punished for something that I didn’t do, I might as well be hypergreedy the next time.”

Look at your typical community bank and see what they have their balance sheet in.

ReformerRay: My proposal is to announce that AIG and Citi group have received all the money they are going to get from the Federal government. And that all the other firms that are going broke because they are tied to these two firms also will get no help

Which is pretty much everyone in the entire world.

]]> By: locococo http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123749 locococo Thu, 29 Jan 2009 11:18:18 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123749 so it s official now. we ve had gold vs the derivatives in the "safe asset" contest. all you had to do is keep the gold bugs terrified and naked short the treasuries. Another two sets of derivatives for this op. then you get to attract all the pensions and the other cb s to subscribe to the idea that gold is out and derivatives are in and that they should start hedge funding for yields. and now, the financials are currently in the lead. so it s official now. we ve had gold vs the derivatives in the “safe asset” contest. all you had to do is keep the gold bugs terrified and naked short the treasuries. Another two sets of derivatives for this op. then you get to attract all the pensions and the other cb s to subscribe to the idea that gold is out and derivatives are in and that they should start hedge funding for yields. and now, the financials are currently in the lead.

]]> By: Glutton for Gluts http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123748 Glutton for Gluts Thu, 29 Jan 2009 11:10:07 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123748 Counter arguments: PtII http://www.econbrowser.com/archives/2008/12/john_taylor_on.html Counter arguments: PtII

http://www.econbrowser.com/archives/2008/12/john_taylor_on.html

]]> By: Glutton for Gluts http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123745 Glutton for Gluts Thu, 29 Jan 2009 10:57:58 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123745 Brad, Savings glut? Global? Correlation? A good contrarian contribution. http://mises.org/story/3203 Brad,

Savings glut? Global? Correlation? A good contrarian contribution.

http://mises.org/story/3203

]]> By: Observer http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123727 Observer Thu, 29 Jan 2009 05:21:59 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123727 Brad, what role if any did restrictions on direct investments of foreign capital have in this crisis? Would great freedom of foreign ownership have resulted in less of a logjam for the Treasuries? Brad, what role if any did restrictions on direct investments of foreign capital have in this crisis? Would great freedom of foreign ownership have resulted in less of a logjam for the Treasuries?

]]> By: Indian Investor http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123726 Indian Investor Thu, 29 Jan 2009 04:51:51 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123726 Rien: Everyone with a minimum of financial services knowledge could have seen this coming. In the absence of too much knowledge I'm evaluating the possibility that stock markets have already bottomed out. As far as the Nifty is concerned, we can tell by the end of this week's earnings releases. The two considerations are the earnings releases of firms, and the macroeconomic policy announcements. Barring widespread trade protectionism, markets can be expected to recover. Rien:
Everyone with a minimum of financial services knowledge could have seen this coming.

In the absence of too much knowledge I’m evaluating the possibility that stock markets have already bottomed out. As far as the Nifty is concerned, we can tell by the end of this week’s earnings releases. The two considerations are the earnings releases of firms, and the macroeconomic policy announcements. Barring widespread trade protectionism, markets can be expected to recover.

]]> By: Cedric Regula http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123724 Cedric Regula Thu, 29 Jan 2009 04:43:24 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123724 We should also keep in mind that inflation will kill pension funds. It won't take much to make real return on fixed income go negative. Then you still get to pay taxes on it, which is very annoying. If the '70s were any indication, inflation was not good for stocks since the DOW was at 600. And if somehow the market ever takes back the ability to set interest rates, stocks get pressured to go down when fixed income yields go up(unless there is a very strong bull market). On average pension funds need 10% gains to meet obligations.LOL. So if all this stimulus gets out of hand and roils markets, or ends up causing inflation either sooner, or later, we can look forward to 80 million impoverished retired baby boomers, because it looks like SS is a goner too, and Medicare will gobble up what's left. Have a nice day. We should also keep in mind that inflation will kill pension funds. It won’t take much to make real return on fixed income go negative. Then you still get to pay taxes on it, which is very annoying.

If the ’70s were any indication, inflation was not good for stocks since the DOW was at 600.

And if somehow the market ever takes back the ability to set interest rates, stocks get pressured to go down when fixed income yields go up(unless there is a very strong bull market).

On average pension funds need 10% gains to meet obligations.LOL.

So if all this stimulus gets out of hand and roils markets, or ends up causing inflation either sooner, or later, we can look forward to 80 million impoverished retired baby boomers, because it looks like SS is a goner too, and Medicare will gobble up what’s left.

Have a nice day.

]]> By: bsetser http://blogs.cfr.org/setser/2009/01/28/central-banks-were-not-the-big-buyers-of-synthetic-triple-aaa-%e2%80%a6/#comment-123721 bsetser Thu, 29 Jan 2009 04:13:35 +0000 http://blogs.cfr.org/setser/?p=4573#comment-123721 Sargon -- i agree with your point. Rien -- i also agree with most of your points. Sargon — i agree with your point. Rien — i also agree with most of your points.

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