Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Memetrics
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1518.0 | -0.5 | -0.03% |
| Eurostoxx Index | 2632.2 | -3.2 | -0.12% |
| Oil (WTI) | 96.64 | -0.7 | -0.69% |
| LIBOR | 0.29 | 0.000 | 0.00% |
| US Dollar Index (DXY) | 80.52 | 0.066 | 0.08% |
| 10 Year Govt Bond Yield | 2.01% | 0.01% | |
| RPX Composite Real Estate Index | 192.7 | -0.4 |
Markets are flattish on no real news. The Empire State Manufacturing Survey showed improvement in NY State for the first time in months. Bonds and MBS are flat.
Elizabeth Warren is fighting to keep the CFPB from being accountable to Congress. Senate Republicans are pushing to have the Bureau subject to annual appropriations and installing a 5 member board to increase transparency and accountability. Liberals are pushing for a straight up and down vote on Richard Cordray, who was installed through a recess appointment.
Dr. Cowbell was on Bloomberg TV this morning pushing for the Fed continue ZIRP as long as possible, in order to sustain the US housing recovery. He blames Japan’s lost decade on premature tightening by the Bank of Japan. He made is usual push for infrastructure spending and said we don’t have a debt problem. Of course the Fed is keeping the bond vigilantes at bay. Can they do so forever?
Freddie Mac has released their 2013 Economic and Housing Market Outlook. Like Krugman, they note the nascent strength in housing and estimate that it could add .5% to GDP this year. They see the 30 year fixed rate mortgage at 4% by Q413, with unemployment at 7.5% and housing starts at 1 million. They forecast that originations will fall by 15% this year as refis drop from a 75% share to a 40% share.
Senate Democrats unveiled a plan to delay the sequester by replacing the non-defense discretionary spending cuts with tax increases and maintaining defense cuts. Of course it has zero chance of going anywhere – it is more of a demagoguing opportunity for the President and an attempt to give the Heisman to an idea that was his to begin with. It is increasingly looking like there will not be a deal on the sequester, so it will either (a) happen, (b) get delayed for a year, or (c) happen and then get fixed in the continuing resolution.
Note: The MR will be spotty next week as I will be on the Left Coast.
Filed under: Morning Report |
All Things in Moderation 
My vote is for b) since Congress loves nothing better than kicking a can down the road. Although c) is a string possibility since their love for meaningless drama is just as strong.
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” it is more of a demagoguing opportunity for the President and an attempt to give the Heisman to an idea that was his to begin with.”
LOL. There is a competing narrative crediting Boehner & McConnell with choosing the sequester over a grand bargain, thinking Romney-Ryan would win. Whoops.
As the sequester was a bipartisan solution, it seems everyone should share the credit/blame for a basic failure to do their jobs.
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“LOL. There is a competing narrative crediting Boehner & McConnell with choosing the sequester over a grand bargain, thinking Romney-Ryan would win. Whoops.”
Actually, obama had a deal until Jack Lew came in with a demand for more taxes at the end. Bad faith by obama? I don’t know for sure. But I suspect obama has no interest whatsoever in cutting any spending, no matter how trivial.
Anyway, you know my view, that the sequestration is not a lot of money, and given that democrats gleefully raised taxes by $240 billion without worrying about the negative effect on the economy, they are being just a little hypocritical when they complain about a spending cut that amounts to a third of that number.
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I’m with Brent. All the hand-wringing – from both sides – over the sequestration is political theater. The real effects will be minimal to non-existent in the big picture.
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“Actually, obama had a deal until Jack Lew came in with a demand for more taxes at the end. Bad faith by obama? I don’t know for sure. ”
No, the gang of six came out with a proposal that made his deal look bad to the Democratic base. Of course, in the end the gang of six deal didn’t go anywhere either.
With regards to the original author of the sequester idea, it was Lew:
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Counter narrative!
http://www.newrepublic.com/article/112410/obama-blames-gerrymandering-gop-fever-hes-wrong#
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And I think Scott and Brent are way off base with the potential effects of the sequester. So does the Bipartisan Policy Center and Doug Elmendorf.
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Whoever has the gold makes the rules.
http://reason.com/blog/2013/02/14/unions-look-to-stalk-their-way-into-our
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@ Mike. obama (not letting a crisis go to waste) used the stimulus plan to bump up the baselines of all the agencies. The sequester undoes that (by a tiny amount).
We are spending the highest % of GDP on government since the Truman administration. I find it amazing that the government cannot get by on what it got last year.
If the issue with the sequester is that the cuts aren’t done in a smart way, then obama should come up with other ways to lop 85 billion off the budget. But if the reason is that we are worried about the effect on the economy, I would ask where the fear was when he raised taxes by 3x as much.
obama believes government should be 24% of the economy. He probably believes it should be higher. But he has no interest in cutting any spending unless it happens after he leaves office.
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I think both parties have demagogued this. D’s on the starving kids argument and R’s on the compromising national security argument. I think that’s horse shit.
If the sequester goes through, you ‘ll see the “Firemen first” effect. Bureaucrats (and politicians) don’t like their spending touched so they’ll do whatever they think it’ll take to preserve their turf. It’s what school districts do when they want some bond passed, threaten to cut the band, sports or, horror of horrors to parents, bus routes.
I say fuck-it and let them shoot the hostage.
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Worth a read:
Stan Fischer saved Israel’s economy. Can he save America’s?
Posted by Dylan Matthews on February 15, 2013 at 2:09 pm
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/15/stan-fischer-saved-israels-economy-can-he-save-americas/
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“Brent Nyitray, on February 15, 2013 at 12:11 pm said:
@ Mike. obama (not letting a crisis go to waste) used the stimulus plan to bump up the baselines of all the agencies. The sequester undoes that (by a tiny amount). ”
Also in the final CR for 2009. They were proud of it at the time.
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This should be interesting if it happens just in time for the mid-terms:
““But we have to pass the [health care] bill so that you can find out what’s in it….” ”
– Nancy Pelosi
http://www.washingtonpost.com/blogs/post-partisan/post/pelosi-defends-her-infamous-health-care-remark/2012/06/20/gJQAqch6qV_blog.html
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Barney Frank on CNBC just now:
“I had a hard enough time trying to understand CDO’s and those things…”
Just the kind of guy you want writing financial legislation.
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It’s always interesting when the media themselves are called to account.
http://www.teslamotors.com/blog/most-peculiar-test-drive
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jnc:
John Broder, the NYT reporter, responds.
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Erik Wemple at WaPo has been cutting through the rhetoric fairly effectively on both sides of the Tesla contremps. It seems, like most things, the truth lies in the middle. Broder seems to have deliberately driven in a way to maximize the flaws in the platform to the point of stretching the truth in some places. That Tesla was able to catch him in some of his exaggerations has rightfully put him on the defensive. But the performance of the Tesla was hardly stellar either.
Here is the dilemma for a doctrinaire polemicist: Does one use this article as an indictment of the futility of government sponsored alternative fuel technology? Or does one use the incident as a cudgel to bash the inherent dishonesty of the nation’s most prominent left-leaning newspaper?
The correct answer is both.
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To J’s point about (Canadian pronunciation) ObamaCare, policy costs and penalties.
http://blogs.the-american-interest.com/wrm/2013/02/13/obamacare-supporters-feel-the-fear/
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@Brent:
obama (not letting a crisis go to waste) used the stimulus plan to bump up the baselines of all the agencies.
That’s a nice story. I suppose you think that agency baselines didn’t go up at all during GWB’s administration too. The facts — Table 5.4 is the relevant one on discretionary spending. ARRA spending was spread out over two FYs (2009, 2010).
I find it amazing that the government cannot get by on what it got last year.
Under the current budget authority (the continuing resolution), the government is getting by on basically what it got last year. The sequester takes out ~8% of that amount ($85B/$1,047B).
I would ask where the fear was when he raised taxes by 3x as much.
Perhaps you are unaware, but taxing authority is given to Congress not the President (Article 1, section 7 of the Constitution). And Rs and Ds in both Houses voted for the fiscal cliff deal. Also, I would appreciate a citation for that “3x as much” statement as the numbers I have seen were ~$600B over 10 years or ~$60B a year (less than the sequester). Here’s my citation:
http://www.americanprogress.org/issues/economy/news/2013/01/03/48872/revenue-from-the-fiscal-cliff-deal-in-context/
obama believes government should be 24% of the economy.
You have a citation for that too, I suppose?
But he has no interest in cutting any spending unless it happens after he leaves office.
Bob Gates and Leon Panetta would disagree with you.
If you want to make a case that mandatory spending is out of control, I don’t disagree. If you want to make the case that BHO should propose better alternatives to the sequester, I don’t disagree either. When you minimize the effect that the sequester will have on the economy and people that aren’t in the Wall St. bubble, then I have a problem with that.
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Mike:
Perhaps you are unaware, but taxing authority is given to Congress not the President (Article 1, section 7 of the Constitution).
You aren’t seriously trying to suggest that the tax hikes were not the result of Obama policy, are you? How stupid do you think we are?
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Food for thought:
“Should an armed drone be dispatched to kill Christopher Dorner?
Why should the lives of law enforcement agents be risked to apprehend this suspected domestic terrorist?
Glenn Greenwald
guardian.co.uk, Monday 11 February 2013 13.25 EST”
http://www.guardian.co.uk/commentisfree/2013/feb/11/chris-dorner-drones-lapd
Do you bother to distinguish between Dorner and Anwar al-Aulaqi and if so how?
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Bush. Tax. Cuts.
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Scott:
How stupid do you think we are?
Pretty stupid, if you don’t remember that the legislation was hashed out as a compromise between Biden and McConnell, got 40 R votes in the Senate, then was allowed to the House floor by Speaker Boehner where it got 85 R votes. Even more stupid if you don’t remember BHO’s campaign promise to raise taxes on everyone making over $250K rather than the $450K in ATRA.
In either case, the statement of mine that you quoted was technically precise, something you should appreciate.
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Mike:
Even more stupid if you don’t remember BHO’s campaign promise to raise taxes on everyone making over $250K rather than the $450K in ATRA.
Not sure I understand. Obama campaigns on raising taxes, it happens, and then you try to sell us on the notion that it’s not Obama’s fault, but rather Republican’s, that taxes got raised? That type of “logic” may work on stupid Obama voters, but I can assure you I (presumably along with Brent) am not falling for such idiocy. Anyone paying a marginal amount of attention and with half a brain knows that Obama wanted taxes raised, while R’s did not, and Obama won the fight and got his way.
In either case, the statement of mine that you quoted was technically precise, something you should appreciate.
Yes, it was a technically precise claim made in an attempt to present a complete falsehood as the truth. Again, you can’t really think anyone here is stupid enough to think that the hike in taxes was the fault of R’s rather than Obama. Not even the Obama supporters here think such an idiotic thing. I am frankly surprised at you, Mike. You are usually much more sensible and honest.
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Mike:
In retrospect my response last night not was not great. More belligerant than it should have been. So a question for you. You said:
Even more stupid if you don’t remember BHO’s campaign promise to raise taxes on everyone making over $250K rather than the $450K in ATRA.
Given that, as you have pointed out, the constitution gives taxing authority to congress, what sense would it make for a presidential candidate to promise to raise taxes? Why would he promise something that, according to you, he doesn’t have the power to do?
Also, when McWing mentioned the Bush tax cuts, you seemed to understand what he meant and didn’t seem to object to the characterization. Why is that? Shouldn’t they be called the 107th and 108th congressional tax cuts?
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Under the current budget authority (the continuing resolution), the government is getting by on basically what it got last year. The sequester takes out ~8% of that amount ($85B/$1,047B).
As far as the budgets are concerned, I am getting my info from Wikipedia. The budget is 3.8T. The budget has gone up every year. They are claiming that the requested increase this year was 75B.. The sequestration cuts erase that. The actual spending the government does is invariably larger than the requested spending level. So my point is valid – basically the government is being asked to get by with what it got last year. I would add that at 24% of GDP, we are spending the most since the Truman administration.
Also, I would appreciate a citation for that “3x as much” statement as the numbers I have seen were ~$600B over 10 years or ~$60B a year (less than the sequester).
I am including the payroll tax increase and the obmacare tax increases. That accounts for the difference.
You have a citation for that too, I suppose?
As far as the 24% number, all I can say is watch what he does instead of what he says. We are spending 24% of GDP on government and the thought of reducing it to 23.5% is somehow unthinkable. His SOTU involves big additional spending projects. He wants more government spending in order to redistribute wealth. It is in his DNA. Ezra Klein did a good column on this either yesterday or this morning.
When you minimize the effect that the sequester will have on the economy and people that aren’t in the Wall St. bubble, then I have a problem with that.
Point taken about being in the Wall Street bubble, though I would argue the Beltway’s bubble is just as bad. And I do think that most people who don’t make their living from the government won’t even notice if HUD gets a little less, or DOE, or EPA. Since entitlements aren’t getting hit, most people shouldn’t see a thing.
If obama doesn’t like how the cuts are laid out, he can propose some other way to do it then. Has he? Not that I can tell. Has anyone on the left proposed doing that? As far as I can tell, no. They just want to get rid of the sequester by replacing real spending cuts with a combination or real tax hikes and fake spending cuts. Of course there aren’t a lot of fake spending cuts left after he used them in the supposed $1.2 trillion cut. You can only end the Iraq war once.
Look, obama was hell-bent on raising taxes, whether it hurt the economy or not. So he shouldn’t get to use the “I don’t want to hurt the economy” excuse on spending either. It is more than a little hypocritical.
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Bush. Tax. Cuts.
Expired.
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Interesting thoughts from Megan McArdle on who’s responsible for fraudulent loans.
http://www.thedailybeast.com/articles/2013/02/15/how-much-fraud-was-there-among-mortgage-originators.html
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When Billionaires Go Bad
I don’t know if anyone is following the Icahn–Ackman–Herbalife drama, but it’s briefly in the news again:
http://www.cnbc.com/id/100464074
Sounds like a really, really expensive game of Chicken to me!
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I’d argue that the Bush Tax Cuts are now permanently installed.
For 98% of Americans.
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Re herbalife:
Icahn is short puts, which is a different bet than buying the stock. Also, if his objective was to “smoke out Ackman,” selling puts isn’t the way to do it.
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I’m still quite sick about this Star Trek betrayal.
You’re all just fucking with me, right?
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Brent: I still don’t completely sling the lingo, but on the halftime report they were talking about he has leveraged himself with a combination of calls and puts and the two guys discussing it sounded quite impressed. I’m willing to take their word for it. 🙂
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McWing: I’m agnostic when it comes to Star Trek and Star Wars, so you can come cry on my shoulder if you need to.
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“obama was hell-bent on raising taxes, whether it hurt the economy or not. ”
By what measure has raising taxes hurt the economy? The bettors on wall street have been buying, not selling:
https://www.google.com/finance?chdnp=1&chfdeh=0&chdet=1360961880000&chddm=12253&cmpto=INDEXDJX:.DJI;INDEXSP:.INX;INDEXNASDAQ:.IXIC&cmptdms=0;0;0&q=INDEXDJX:.DJI,INDEXSP:.INX,INDEXNASDAQ:.IXIC&ntsp=0&ei=kgYfUaCJMcuvqwH_Kg
For a more reliable analysis, of course, we’ll have to revisit this in a year or two.
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““obama was hell-bent on raising taxes, whether it hurt the economy or not. ”
By what measure has raising taxes hurt the economy? The bettors on wall street have been buying, not selling:”
It hasn’t.. Which is why I am skeptical of the whole “if the economy rolls over it is the Republicans’ fault because they implemented obama’s plan to cut government spending by a tiny amount…
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“Troll McWingnut or George, whichever, on February 15, 2013 at 7:30 pm said:
I’m still quite sick about this Star Trek betrayal.
You’re all just fucking with me, right?”
No, I legitimately hated the new Star Trek movie. It was the equivalent of Jar Jar Binks in Star Wars.
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jnc/NoVA/Paul/yello: Looking more and more like I’ll be trekking to your part of the world for at least a couple of interviews relatively soon. I’ll keep you posted.
How was the dodgeball last night, jnc?
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We won, but I drank too much afterwards.
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🙂
That’s what you get for playing dodgeball on Valentine’s Day!
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“. It was the equivalent of Jar Jar Binks in Star Wars.”
I have never read anything more hateful.
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Brent:
As far as the budgets are concerned, I am getting my info from Wikipedia. The budget is 3.8T. The budget has gone up every year. They are claiming that the requested increase this year was 75B.
The total budget may be $3.8T, but the sequester cuts are specifically for discretionary spending which, under the continuing resolution, is $1.047T. That is ~$8B more than last year. Here are the numbers from a source you will probably trust. The numbers in Wiki are only requested numbers, not actual numbers. Those will be determined (maybe) at the end of next month.
I am including the payroll tax increase and the obmacare tax increases. That accounts for the difference.
It is a bit disingenuous to include these in the calculation of tax increases. The Obamacare tax increases were passed in 2010, they just came into effect in 2013. So, it isn’t like Congress just passed them as a part of the fiscal cliff deal. The payroll tax holiday was always meant as a holiday and not a permanent tax cut, sort of like that gas tax cut we had in 2009.
Point taken about being in the Wall Street bubble, though I would argue the Beltway’s bubble is just as bad.
Agreed.
And I do think that most people who don’t make their living from the government won’t even notice if HUD gets a little less
If the sequester hits indiscriminately like the reports say (I haven’t read the legislation), then I can guarantee you that people on food stamps are going to notice getting 5 – 10% less buying power. That’s the difference of at least a loaf of bread every week (and that is if you only spend $20 – 40/week in food stamps). Certainly, some cuts in government service will only result in minor inconveniences (longer TSA lines at the airport, fewer services at the VA, etc.). And those of us who depend on government funding — federal grantees at universities or private research foundations — will likely have to reduce our staffs so people will lose jobs.
My point all along is that I think you have been minimizing the potential effects of the sequester. I’m not going to argue about the fact that the Ds don’t have a viable alternative to the sequester and that it is somewhat hypocritical to worry about the economy only when you talk about spending cuts and not tax increases. But, to me, it is also somewhat hypocritical to make a huge deal about a small increase in income taxes on the 2% but then discount the effect of a similarly small increase in spending cuts.
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Troll:
I’d argue that the Bush Tax Cuts are now permanently installed. For 98% of Americans.
I’d agree with that, even though the Bush Tax Cuts expired at 12:01 on Jan 1. So, technically, ATRA made them the Obama Tax Cuts. But that, to me, is just hair-splitting. As I’ve said before, I think that ATRA was vindication for GWB in that it permanently installed almost all of his tax cuts.
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Scott:
If you don’t mind, I will just reply to your comments from this morning.
what sense would it make for a presidential candidate to promise to raise taxes?
It doesn’t make any sense to me. But talking about taxes, either cuts or raises, plays well with the electorate. I suppose that it has more force if POTUS’ party controls both houses of Congress.
when McWing mentioned the Bush tax cuts, you seemed to understand what he meant and didn’t seem to object to the characterization. Why is that?
Well, it is the colloquialism with which all of us are familiar. If you prefer, we can use EGTRRA/JGTRRA from now on. We use “Obamacare” colloquially, but technically it is PPACA. Actually, I generally use PPACA or ACA instead of Obamacare. And you can see that I have used ATRA to describe the “fiscal cliff deal.”
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Mike:
It doesn’t make any sense to me.
Does it make any sense to you that in 2008 Obama ran on “fixing” the health care system? After all, the president did not have the constitutional power to implement ACA. That power lies with congress. It seems Obama makes it a habit of talking about doing things he doesn’t have the constitutional authority to do. But in that, of course, Obama isn’t alone, and for obvious reasons. Because the president very often has the political power to get congress to do things that the president alone does not have the constitutional power to do.
I think it is quite disingenuous to suggest that, because the constitutional power to write and pass legislation lies with Congress, it cannot be sensibly said that the president is responsible for implementing certain laws that he explicitly championed and pushed congress to pass. More than disingenuous, it is ridiculous.
Well, it is the colloquialism with which all of us are familiar. If you prefer, we can use …
No, I am perfectly fine with “Bush tax cuts” just as I am fine with “Obama tax hikes”. You obviously accept the former, while you seem to object to the latter. I think your objection is transparently partisan. Obama wanted taxes hiked, he campaigned on hiking them, and he got them hiked. If he didn’t want them hiked, they wouldn’t have been. He owns the tax hikes, and I think anyone who suggests differently is either a fool or must think his audience is.
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Mike,
I am not making a big deal about the tax hike. What I was trying to do was put the sequestration amount in perspective. We increased taxes way more than the amount of spending that was cut. And macroeconomically, the economy doesn’t care whether the tax increase was the expiration of a temporary tax cut or something that was implemented years ago. Taxes went up. The framing of the tax increases is more of a Greg Sargent partisan bean-counting issue.
I find it partisan and disingenuous to blame small spending cuts if the economy rolls over and ignore the fact that taxes went up way more. And that is obama’s MO on this – he will demagogue the sequestration cuts and blame Republicans for implementing his own idea. And yes, as a conservative / libertarian I find it highly annoying that the media refuses to call obama out on this, especially when he has defended it recently.
And I thought entitlements (SS / Medicare / Medicaid / Food stamps) were exempt. I cannot imagine in my wildest dreams obama agreeing to cut food stamps.
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” And yes, as a conservative / libertarian I find it highly annoying that the media refuses to call obama out on this, especially when he has defended it recently.”
I really want to see a reporter ask President Obama if his veto threat on any attempt to defer the sequester still stands.
http://www.forbes.com/sites/afontevecchia/2011/11/21/obama-i-will-veto-attempts-to-get-rid-of-automatic-spending-cuts/
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I really want to see a reporter ask President Obama if his veto threat on any attempt to defer the sequester still stands.
That would require them to (1) have a memory and (2) be willing to ask a hard question.
I’d be interested in the answer, though.
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The answer would be “circumstances have changed and I have been assured by the leadership of both parties in Congress that they are working on cutting deficits in good faith.”
This is what any POTUS would say. It is generic POTUS speak.
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Mich:
That would require them to (1) have a memory and (2) be willing to ask a hard question.
They have a memory, and are often willing to ask hard questions. Just not of The One.
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And why, again, haven’t you run for President, Mark???
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Scott:
Just not of The One.
If you’re going to refer to President Obama this way you might as well use it for GWB as well in that context.
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Mich:
If you’re going to refer to President Obama this way you might as well use it for GWB as well in that context.
Heh. That’s a good one.
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I signed this petition and hope others here feel moved to action as well
https://petitions.whitehouse.gov/petition/stop-using-wives-mothers-daughters-rhetorical-frame-defines-women-their-relationships-other-people/3yvcscVK
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George, you might want to come to Austin for this:
http://www.thelongcenter.org/1213/one_man_starwars.aspx
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Back door bailout?
http://tinyurl.com/ccg973w
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I had a long answer for you, McWing, about why there are other things higher on my priority list than this rhetorical framework, but all it would do is open a can of worms.
I’m glad you feel strongly enough about it to have signed the petition.
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Mark,
The “singing the songs” part of the show bothers me. Singing the songs? From Star Wars? As far as I can remember there was only one song, and the Ewoks sang it at the end of Return of the Jedi.
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Singing the music. John Williams’ score. A cappella.
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(“singing the music”)
Duh duh duh DUUUH DUH, duh duh duh DAAH DUH, duh duh duh DAAH DAH duhduhduh duuuuuuuuuh.
wow.
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Duuuh duh –
I can hear it now – gorgeous, flowing, powerful!
Last night I attended my FPA group [“Great Decisions” – see http://fpa.org/great_decisions/ if you don’t know about these]. We discussed the future of the Euro. We had a mass of material we had individually researched. We laid out all the structural problems of the multi-tiered European confederacy. Then we turned to what the USA ought to do.
The large group, hardly monolithic in political viewpoints, could not pose a useful US position that did not involve breaking up TBTF banks and re-imposing the equivalent of Glass-Steagall [thanks to Brent, I argued for stricter capital requirements short of G-S]. The long conversation had ended with the realization that the USA could still more readily crater the western economies than could the Eurozone.
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This song would be acceptable.
http://m.youtube.com/#/watch?list=FLljGVU0XUicVz_CJ6YOMuLQ&v=GUQc1Sdcjo8&desktop_uri=%2Fwatch%3Fv%3DGUQc1Sdcjo8%26list%3DFLljGVU0XUicVz_CJ6YOMuLQ
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“This video contains content from FOX and NBC Universal, one or more of whom have blocked it on copyright grounds.:
Oh, sure, McWing. Try to turn me into an internet pirate with your link!!
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The link works for me. Weird.
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To me, the single best thing to reduce systemic risk is to move as many over-the-counter derivatives to an exchange with a central clearing party. There would be position limits, open interest disclosure, etc. Just proper disclosure of open interest would have reduced the size of these bets – most professional investors avoid crowded trades and probably would have not piled on some of these trades.
The clearing house would be paid for by a per-ticket charge similar to how we trade equity options. It would eliminate counterparty risk as much as possible. It would also require more margin than many of the banks required. IMO, people that were selling CDS protection were doing so as a clever way around Reg T.
FWIW, I believe Scott (who trades fixed income derivatives for a living disagrees with me on this)
Counterparty risk has been behind every crisis in recent memory. If Long Term Capital Management almost took down the system, then there probably isn’t any way to shrink the banks enough to make the system safe. I think breaking up the banks is barking up the wrong tree.
I have always thought that re-implementing Glass Steagall was a security blanket more than anything.
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Brent:
FWIW, I believe Scott (who trades fixed income derivatives for a living) disagrees with me on this)
Only partially. I think the most important aspect is clearing with both variation and initial margin, which is being implemented right now. But forcing them to be traded through an exchange would defeat the purpose of them in many respects. One of the primary values of derivatives is that they are flexible and can be easily structured for clients to manage the risks they want to manage. If they are forced onto an exchange, then they will have to be standardized rather than customized, and customers will be forced to manage their risks using only those products that are widely enough used to become traded on an exchange.
Interestingly, exchange traded swap futures contracts are being introduced, but note that their primary selling points are that margining requirements are less onerous than OTC swaps. Also note that, as futures, settlement for both price and deliverability is dependent upon the existence an underlying OTC market.
Counterparty risk has been behind every crisis in recent memory.
I think this cannot be emphasized enough. As I wrote in an ATiM post many months ago, the only reason that AIG’s failure alone could have posed a systemic risk was if the “risky bets” made by the banks were actually hedged with trades done with AIG. It was credit risk, not market risk, that threatened the banks.
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Brent:
To give you a small example of the flexibility of OTC swaps, we have a client who wants to do a rate hedge on a structured aircraft borrowing. Because of the structure of the underlying loan, he needs a swap with quarterly Libor settings (ie 3m Libor) but which pays out monthly. This is a very simple requirement to accommodate with an OTC swap, but almost certainly would not exist as an exchange traded product.
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