"Surely difficult challenges lie ahead for the Fed, some undoubtedly of our own making, and others that will be thrust on us by market or other forces."
Wow... That is as close to a mea culpa as I have ever heard from some one in a position of authority... even more than 'mistakes were made'... he must REALLY be ready to retire.
"Looking forward, our loss over recent years of the fragile political coalescence around fiscal discipline, our currently projected 10-year fiscal deficits...our extremely low personal savings rate and high levels of personal debt, all suggest that the next Fed Chairman could face at some point in the future, there's no way of knowing whether it is years out or sooner an even greater need for the understanding and experience to deal with serious market difficulties," he said.
It would be extremely disappointing if, in his closing speech to the most respected monetary leaders in our country, AG chose to EMPHASIZE the debubbling of our housing risk. I guess it will be up to the next Fed Head to address our $40 TRILLION Derivative dilemma?
I would think that the $40 or $55 trillion dollar derivatives dilemma
(who really knows the exact number) would work itself out one way or another during the unwinding of the housing/ credit bubble.
With derivatives speeding up the transportation of money, it will be very interesting to see how long it takes for cross defaults to unstabilize the international monetary system.
Mass defaulting loans means that borrowers cannot service their debt. Inducing lending institutions and other dependent upon these payments first into insolvency, and then if forced to service their own financial obligation and unable to do so, bankruptcy.
Due to the web of payments are necessary in order for other business to service their own obligations, with enough defaults this would induce an exponential amount of insolvencies and bankruptcies due to missed payments.
How would derivatives interact in this situation?
Arbitrage depends upon the volatility of the underlying asset to remain within its predicted volatility. When financial institutions decline into financial difficulties, they must sell assets in order to service financial obligations and contractual obligations.
Therefore as the banking crisis spreads, financial institutions must dump assets, driving the price of assets down. Liquidity is also affected as the banking contagion spreads, forcing asset prices lower, forcing sell-offs, and inducing an exponential imbalance between buyers and sellers of assets.
Derivatives pay out money at an accelerated rate due to leverage of up to 50 to 1. Therefore when liquidity evaporates, money is transported at a rate that may lead to a counter-party fault. This means that the other side of the derivatives contract doesnt have or is unwilling to service their derivatives contract obligation.
Since Hedge Funds borrow as much money as they can with no regard to asset verses loan amount, unlike Regulation T for broker accounts, if these funds go bankrupt or insolvent and cannot service or repay their debt, then the lenders effetely loose this money as well, causing financial difficulties or even bankrupting the bank itself.
This bankrupt bank may induce other banks into financial difficulty.
Good example, Russian Banking Crisis of 1998 and LTCM.
CD, Jl,
One thing: can't speculate about derivates' effects without considering netting (which attempts to avoid destabilizing gross imbalances and widespread asset selloffs) and closeout (which bypasses court-supervised restructuring). The Fed's conscientious, but maybe biased conclusion is that the two features could have the effect of hastening or precipitating failures of individual institutions, but reducing the chance of contagion (That's assuming that the parties' systems work, of course.)
I cant agree more about netting and collateral. That is why during a counter party failure the failing party may just decide they dont want to pay. If you netting period is long then you are definitely in danger of this protective tactic.
Refusing to honor contracts would certainly initially contain initial contagion of insolvency from spreading by shifting the burden to the damaged party.
If the banking crisis large, then blocking insolvency through refusing to honor contracts may not work as the damage will just come back at the blocking bank through another route. A route formed through a chain reaction caused by the damaged party insolvency.
"Surely difficult challenges lie ahead for the Fed, some undoubtedly of our own making, and others that will be thrust on us by market or other forces."
Wow... That is as close to a mea culpa as I have ever heard from some one in a position of authority... even more than 'mistakes were made'... he must REALLY be ready to retire.
Rubin: Greenspan Heir May Face Big Problems
"Looking forward, our loss over recent years of the fragile political coalescence around fiscal discipline, our currently projected 10-year fiscal deficits...our extremely low personal savings rate and high levels of personal debt, all suggest that the next Fed Chairman could face at some point in the future, there's no way of knowing whether it is years out or sooner an even greater need for the understanding and experience to deal with serious market difficulties," he said.
FOXNews.com - Ex-Treasury's Rubin: Greenspan Heir May Face Big Problems - Business And Money | Business News | Financial News
It would be extremely disappointing if, in his closing speech to the most respected monetary leaders in our country, AG chose to EMPHASIZE the debubbling of our housing risk. I guess it will be up to the next Fed Head to address our $40 TRILLION Derivative dilemma?
I would think that the $40 or $55 trillion dollar derivatives dilemma
(who really knows the exact number) would work itself out one way or another during the unwinding of the housing/ credit bubble.
With derivatives speeding up the transportation of money, it will be very interesting to see how long it takes for cross defaults to unstabilize the international monetary system.
Chrom, bailey,
Can you give me a specific example of a typical derivative at risk and outline how the cross default would happen (what institution may be affected)?
Jl,
Mass defaulting loans means that borrowers cannot service their debt. Inducing lending institutions and other dependent upon these payments first into insolvency, and then if forced to service their own financial obligation and unable to do so, bankruptcy.
Due to the web of payments are necessary in order for other business to service their own obligations, with enough defaults this would induce an exponential amount of insolvencies and bankruptcies due to missed payments.
How would derivatives interact in this situation?
Arbitrage depends upon the volatility of the underlying asset to remain within its predicted volatility. When financial institutions decline into financial difficulties, they must sell assets in order to service financial obligations and contractual obligations.
Therefore as the banking crisis spreads, financial institutions must dump assets, driving the price of assets down. Liquidity is also affected as the banking contagion spreads, forcing asset prices lower, forcing sell-offs, and inducing an exponential imbalance between buyers and sellers of assets.
Derivatives pay out money at an accelerated rate due to leverage of up to 50 to 1. Therefore when liquidity evaporates, money is transported at a rate that may lead to a counter-party fault. This means that the other side of the derivatives contract doesnt have or is unwilling to service their derivatives contract obligation.
Since Hedge Funds borrow as much money as they can with no regard to asset verses loan amount, unlike Regulation T for broker accounts, if these funds go bankrupt or insolvent and cannot service or repay their debt, then the lenders effetely loose this money as well, causing financial difficulties or even bankrupting the bank itself.
This bankrupt bank may induce other banks into financial difficulty.
Good example, Russian Banking Crisis of 1998 and LTCM.
Hope this helps
Chromatic Dispersion
Banking, Derivatives, and Systemic Risk
Banking, Derivatives, and Systemic Risk
CD, Jl,
One thing: can't speculate about derivates' effects without considering netting (which attempts to avoid destabilizing gross imbalances and widespread asset selloffs) and closeout (which bypasses court-supervised restructuring). The Fed's conscientious, but maybe biased conclusion is that the two features could have the effect of hastening or precipitating failures of individual institutions, but reducing the chance of contagion (That's assuming that the parties' systems work, of course.)
Great points made and agree. Nothing to add.
Psh,
I cant agree more about netting and collateral. That is why during a counter party failure the failing party may just decide they dont want to pay. If you netting period is long then you are definitely in danger of this protective tactic.
Refusing to honor contracts would certainly initially contain initial contagion of insolvency from spreading by shifting the burden to the damaged party.
If the banking crisis large, then blocking insolvency through refusing to honor contracts may not work as the damage will just come back at the blocking bank through another route. A route formed through a chain reaction caused by the damaged party insolvency.
Chromatic Dispersion
Banking, Derivatives, and Systemic Risk
Banking, Derivatives, and Systemic Risk
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