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Observations On Black Swans In Money Markets
The attached presentation, from John Taylor of Stanford and John Williams of the SF FRB, prepared in the weekend before the Lehman bankruptcy, and thus in the eye of last year's hurricane, provides some additional insights into money markets, the Fed's TAF program, OIS spreads, and how everything can go spectacularly wrong at mere whiff of that greatest black swan of all, and the one concept all in the financial business take for granted: counterparty risk. With the Fed now actively pursuing the extraction of capital out of money markets instead of primary dealers, the potential liquidity imbalance will be a major threat to the system and will be actively monitored by Zero Hedge. If the Fed's soothing admonition that it has things in control serves any purpose, it is that sooner rather than later risk flaring and six sigma events will once again be a daily occurrence.
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This is good news . I plan to follow your findings closely. Thank you
"With the Fed now actively pursuing the extraction of capital out of money markets instead of primary dealers, the potential liquidity imbalance will be a major threat to the system and will be actively monitored by Zero Hedge."
Taleb could not have said it better---same story 8.6 years later if not sooner--
Taleb could not have explained it better--will happen again but we will not have to wait 8.6 years given the corrupt and shady response to the meltdown.
TAF was never meant to be statistically significant.
This is all based in instilling confidence. Even risk is just a measure of confidence. If risk is a dependable measure, and TAF is not, then the relative lower level than it otherwise would have been of the former makes the latter a success (though maybe not cost effective).
That banks are not able or are not willing to fully capitalize on the artificial level of risk in the spread between LIBOR and the OLR is more a function of the signal that the overnight lending rate (OLR) of 0 to .25 creates.
This is especially true if you believe that any changes made by the FED take a full 6 months to gain traction.
Everything is fine, everything is good, but the FED itself is unwilling to offer more than .25%!?!?!
Take our money where your mouth is and raise the rate!
Instead of studying TAF, a close look at the OLR should be made to determine to what difference raising the rate would make! If there is not enough demand at .25, then it is doubtful that at .5 there would be any appreciable decline.
In classic counter-intuitive thinking, rising the rate may actually instill confidence (even if false) that things really are improving, and since it takes 6 months for it to take full effect, maybe the TAF could be used to tamper the enthusiasm, if it turns out by some miracle to be true, a full 2 quarters from inception!
If wrong and the rate is raised in a deflationary setting, there is not enough demand at 0% anyway.
Life is a gamble, it will never make perfect sense or perfectly conform to a model or other academic reasoning, what does the Fed have to lose?
Shock the world! Raise the rate!
I applaud Zero Hedge for shining light on this problem and for monitoring the Fed's sleight-of-hand.
In addition, let us look behind the curtain of "counterparty risk" and seek punishment, restitution, and prevention of the reckless and criminal behaviour that led to intolerable increases in "counterparty risk": reckless financial engineering, gambler's leverage, corruption, scams, fraud, and fiduciary irresponsibility for hundreds of billions of dollars of other people's hard-earned money and pension savings.
The rule is simple: Always give preference to FDIC insured money market deposits in a bank, rather than a money market fund, now that the Treasury program to insure the latter has expired.
time123
admin: http://invetrics.com
Great News - the savings rate declined from 4.9% to 3.3 from the second to the third quarter !! Who says the banks are not lending ?? Borrow Borrow Borrow Cause there is no Tomorrow (for any of us or our kids)!! The Fed is getting what it wants from the American public.
Breaking news...
Epidemic of pneumonic plague in Ukraine?
http://mignews.com.ua/en/categ386/articles/376396.html
http://piglipstick.blogspot.com/2009/10/in-light-of-ukraine-situation.html
Does anyone remember this?
http://www.youtube.com/watch?v=rdajhqp85Zg
Professor Moshe had called into a live radio show by Dr. A. True Ott, broadcast on Republic Broadcasting claiming to be a microbiologist who wanted to supply evidence to a States Attorney regarding tainted H1N1 Swine flu vaccines being produced by Baxter BioPharma Solutions. He said that Baxter’s Ukrainian lab was in fact producing a bioweapon disguised as a vaccine.
Dood, I think you're going into that conspiracy theory territory again.
I mean, just because JPMorgan Chase & the Rockefeller family own over half the pharmaceuticals, and just because vaccines are big biz, and just because Baxter keeps "accidentally" sending out those pandemic-level contaminated samples (like three times over the past nine years) -- again I repeat, "by accident" -- is simply no reason to suggest this could be on purpose. Remember, the majority of those vaccines are produced overseas - outside of the USA -- oopsy, that was a Ukrainian lab, huh?
Anyway, it's simply what they call "transferring mortality risk, or longevity risk, to the financial markets".....
I would like to be able, but I cannot draw conclusions from this article. I have some understanding of my own liquidity preference and my own estimates of counterparty risk. Nevertheless, I cannot understand what this presentation has to say about liquidity preference and counterparty risk.
Am I alone? Help from any commenters is welcome.
I know hind sight is 20/20, but I would think the FED/Treasury would be playing "what if" with systemic risk and moral hazard as a full time occupation.
One strategy the FED could have tried, rather than finding a buyer for Bear Stearns directly, was to extend the powers of the "discount" window to include money market facilities and repos for Investment Banks. This could have been supported quickly through special powers and then legislated.
For the GSEs, I guess, an ounce of prevention is worth a pound of cure. The real solution for the GSEs is no Government involvement, that is, by definition a GSE is an abomination to the free market.