"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Tuesday, April 13, 2010

Really great links - Stability of short term interest rates and bubbles - Greece - Gary Gorton

FT Alphaville - Boringness of central banks to blame for bubbles - From Deutsche Bank’s Francis Yared and Abhishek Singhania - "We argue that in fact, that central banks’ predictability during the 2004-2007 tightening cycle contributed to the compression of the risk premium in fixed income markets and, therefore, indirectly to the excessive leverage that built up over that period."

Ambrose Evans-Pritchard - Greece - "EU officials react with outrage to comparisons with Argentina, but as Mr Johnson says "Greece is far more indebted, is much less competitive in global markets, and needs a greater fiscal and wage adjustment".
Argentina's public debt was 62pc of GDP in 2001: Greece will top 120pc this year. Its budget deficit was 6.4pc: Greece's was 16pc last year on a cash basis. Its current account deficit was 1.7pc: Greece's was 11.2pc in 2009.
The cleanest option for Greece is an Argentine default with a 65pc haircut for creditors, and exit from the euro. Argentina recovered fast after liberation. Greece could expect "decent growth" by mid 2011.
True, but Greece is just "the tip of the iceberg", in the words of China's central bank. The design faults of EMU have left all Club Med trapped in debt deflation or perma-slump. Europe's banks are in turn stuck with fatal exposure. You cannot safely uncork Greece without risking a chain reaction."

Aleph blog - Book Review: Gary Gorton - Slapped by the Invisible Hand - "But what makes this book a winner is that he lays bare the root cause of the crisis: we need safe short-term liabilities in order to transact. Banks provide the short term medium of commerce, so that no one has to consider whether their dollars are changing in value month after month.
But when there are alternatives to banks that seem cheaper in the short run in creating stable securities, the banking system gets hollowed out. That can be as simple as money market funds, or as complex as AAA structured securities that finance complex obligations.
At such a point, being a bank is not so valuable, and banks mimic the innovations in order to compete.
Though not an innovation, repo funding was a star of this crisis. Repo funding is a short-term means of gaining liquidity through borrowing while offering high quality liquid assets as collateral. It is very stable most of the time, but when liquidity gets scarce, the system as a whole can unwind.
The book focuses on “safe” liabilities: bank deposits, both before and after deposit insurance, repo funding, and AAA short securities from securitizations. People want to keep their purchasing power safe. But when the safety of any safe security comes under question, the system falls apart.
That is the nature of a systemic crisis. What is previously regarded as safe is not safe."

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