dagblog - Comments for "Informationally-insensitive debt?"

The UST repo market is a

EmmaZahn — Sun, 17 Apr 2011 18:32:51 +0000

The UST repo market is a strange animal to me. But my understanding was that negative repo rates were a sign of massiveshorting - people willing to pay a high 'rent' to borrow the needed bonds. So I don't see any great demand for treasuries. And that is what you'd expect, no? - That treasury rates and bank bond rates gradually converge as investors see that the tbtf banks won't get regulated or cut down to size and so their liabilities are de facto liabilities of the US Treasury.

The repo market is a strange animal and much of the arbitraging that goes on there makes my eyes cross. I do however have some first-hand experience parking cash for institutional investors in repos. Granted it is limited and somewhat dated but still enough so that I could catch up on changes and expand my understanding of what was happening online in the wake of the 2008 crisis.

As for your not seeing any great demand for Treasuries, have you noticed their yields? I can assure you that UST repos were and still are in very high demand and while there may well be some short squeezes on specific collateral, the notion that there is massive shorting of UST repos would likely cause the entire system to seize up again, just as it did when such rumors spread in fall 2008. Repos are by definition short-term loans. What would you do if after lending someone money against gilt collateral you found out they were shorting it to you?

As for chickens and eggs, I didn't (intend to) say anything about the genesis of the situation we've got. We have a dysfunctional financial system - savings aren't getting transformed into productive investments. That is the diagnosis we share, right? But now what don't we agree on? Imho, you think its that there is an excess demand for safe storage of savings, whereas I think the problem is the usual pooling mechanism whereby banks - and government as well - take savings and spread them out on various individually risky yet collectively productive investment projects, that mechanism has broken down. The banking system has turned into a nombrilistic self-contained casino. And the upshot is that everyone wants guaranteed interest income and no one is capable of taking those big pools of risk-averse funds and transforming them into something useful. But one shouldn't take away from that situation that there is an excess of demand for the former to the detriment of the latter. There just is no simple additive relationship between risk-averse and risk-friendly funds...

Do we agree that capital did not venture out into riskier investments because the yields on money market instruments were too good? Sure, but not as sure that is still the case because money yields are now really very low. Increased financial uncertainty and recent paper losses are more likely keeping it from venturing out now.

As for separating the risk-averse from the risk-friendly....that is what my suggestion was intended to do. I get the impression that you think the overnight repo market is made up of only longer-term investment savings. Not so. Tangled up in it is practically every checking and savings account in the US. Our individual and commercial working capital. Our paychecks flow through it, we pay our bills through it but we do not see it because it is in shadow. That is what gives what you call tbff banks their bailout leverage. Free the hostage then let the big boys have their "nombrilistic self-contained casino". Working capital needs an alternative 'safe' place to go. Give it one.

But nothing I'm saying here is remotely original. You seem to be contesting that pretty standard account (or just not finding it relevant/sufficient) for some reason I can't quite grasp.

Not surprising. Information online about repos is ususally framed from the borrowers perspective. Mine is from the lenders', the reverse repo side. It is by definition opposite. See Cash Management.

I don't see how adding more Treasuries to the mix - 'special' or otherwise - fixes this problem.

Again, not adding -- just exchanging T-Note for T-Bill and eliminating a UST repo in the process. Net fewer info-insenstive instrument.

The UST repo market is a

Obey — Sun, 17 Apr 2011 13:57:29 +0000

In reply to We appear to be having

The UST repo market is a strange animal to me. But my understanding was that negative repo rates were a sign of massive shorting - people willing to pay a high 'rent' to borrow the needed bonds. So I don't see any great demand for treasuries. And that is what you'd expect, no? - That treasury rates and bank bond rates gradually converge as investors see that the tbtf banks won't get regulated or cut down to size and so their liabilities are de facto liabilities of the US Treasury.

But nothing I'm saying here is remotely original. You seem to be contesting that pretty standard account (or just not finding it relevant/sufficient) for some reason I can't quite grasp.

I don't see how adding more Treasuries to the mix - 'special' or otherwise - fixes this problem.

We appear to be having

EmmaZahn — Sun, 17 Apr 2011 03:52:45 +0000

In reply to Thanks for the

We appear to be having chicken-or-egg-first disagreement.

Did the creation of more and more info-insenstive investments draw capital away from other markets; or, did over invesment in other markets plus too little innovation drive capital to the safety of info-insenstive instruments like treasuries, agencies etc. until something more worthwhile came along? Both really and either way you get the tail of which Salmon speaks.

Salmon's solution is basically to force that capital into riskier markets. Where are these markets? Do they meet the prudent man rule of fiduciary responsibility in the present investment environment? Included in that surplus money are what remains of many baby-boomers retirement savings. Now is not the best time for it to take on a lot more risk.

I really do not see my proposal as creating more info-insensitive debt as exchanging one kind for another and eliminating a faux info-insensitive in the process. For example, a recent yield on a 3-yr UST repo was negative 1.7% while the nominal yield on it was positive 1.25% Why are we paying interest on something someone is willing to pay us for?

For one thing, you can cut

Rootman — Sat, 16 Apr 2011 23:25:06 +0000

In reply to Thanks for the

For one thing, you can cut out the middlemen. The faux-sensitive stuff that we faux-insure with no return to ourselves.

Thanks for the

Obey — Sat, 16 Apr 2011 22:23:58 +0000

In reply to I guess that it was that

Thanks for the clarification.

Still, maybe I'm just confused, but I don't see a clear distinction between information-insensitive securities, and faux-info-insensitive securities. To me it is more that the info-insensitivity comes in degrees, due to uncertainties eg regarding government backstops and such.

Taking things step by step,

(i) an ideal financial system has a mix of info-insensitive and info-sensitive investments, right? For a system dominated by info-insensitive debt ends up allocating capital inefficiently (by definition, right?), stunting growth and productivity and such. And a system dominated by info-sensitive debt ends up harming the small-time low-info saver who is at a disadvantage in the information game.

(ii) what we have now is a market dominated by info-insensitive investment vehicles, right? Faux or not, there is 9 tn in treasuries, 8 tn in de facto guaranteed tbtf bank debt and 4-5 tn in agencies. Maybe add on a couple of tn in triple-A ABS of various sorts, but lets say that maybe starts being a bit more info-sensitive. One might also add dollar denominated liabilities of the big foreign bank, given how much it turns out the Fed backstops them too. Dunno. So somewhere between 20 and 30 tn in safe storage of savings, money management for morons, as it were. That seems to me to be too much, leadng to a hopelessly inefficient financial system.

now your solution is ...

(iii) LET'S ADD MORE INFO-INSENSITIVE INSTRUMENTS TO THIS SYSTEM.

Which, if I'm roughly correct on (i) and (ii), leads to a situation where EVERYONE GETS SCREWED.

Really only worth it if you have some kind of schadenfreude fetish...

I don't see how that fixes anything. Sorry this got to be so long, but just want to be clear about how I ended up being confused about your position on this.

Why, thank you, kind sir. :)

EmmaZahn — Sat, 16 Apr 2011 20:22:35 +0000

In reply to I think she's brilliant.

Why, thank you, kind sir. :)

I guess that it was that

EmmaZahn — Sat, 16 Apr 2011 20:18:22 +0000

In reply to Spam.- to all intents and

I guess that it was that global glut of savings driving the developement of all the fancy new informationally-insensitive debt because all the other markets, equity, bonds, real estate, were topped out. There was more money than traditional places to invest without driving prices to even more ridiculous levels than they already were so Wall Street started making up new, faux informationally-insensitive instruments to soak up the excess.

In other word, the problem was not risk aversion, although there was some of that, it was simply too much money with too few places to go --- a giant money bubble.

Would hate to see good informationally-insensitive debt like USTs get thrown out with the bad, faux ones.

I think she's brilliant.

Rootman — Sat, 16 Apr 2011 20:06:08 +0000

In reply to Spam.- to all intents and

I think she's brilliant. Voluntary corporate taxation. Borrow at a negative real interest rate. The more we borrow, the more we earn. Only surpluses could ever loom as financial dark clouds. Usually we outsource this, but let Treasury do it.

Spam.- to all intents and

Obey — Sat, 16 Apr 2011 19:49:10 +0000

In reply to they want the fat profits

Spam.

- to all intents and purposes imperishable, great supply-demand outlook.

(But don't take my word for it. Consult an investment professional before acting on the advice of a guy disguised as an overweight pug)

;0)

p.s. seriously, not sure what you're driving at...

they want the fat profits

EmmaZahn — Sat, 16 Apr 2011 19:07:47 +0000

In reply to I don't think you're

they want the fat profits without doing the work of evaluating risk.

Question. Where would you have invested surplus funds in the mid-2000s if your were already your risk managers's peak levels for equities and real estate?