Perry Mehrling's blog

Euro Summit Statement Explained

Okay, so here is the statement, but what does it mean?  Felix Salmon offers an unnamed advisor's flowchart.  Let's see if Money View thinking can do better.

Words are of limited help here (unless perhaps you are a Munchau!).  What is important is to understand the balance sheet relationships, and that takes a video.

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Margin Call--"Mama there's wolves in the house"

Jack Bauer comes to Wall Street, in the person of Sam Rogers, played by Kevin Spacey.  The thriller frame is achieved by compressing the slow motion train wreck of 2008 into only 24 hours.  (The time acceleration of the opening Manhattan shot foreshadows this compression, even as it pays homage to the opening shot of Inside Job.)  See reviews here and here. Read more

Making Markets

Plumbing Matters

The last few days have brought a remarkable, but as of yet unremarked, convergence of attention to the matter of making markets.   

We hear about the difficulty of implementing the so-called Volcker Rule, which requires drawing a bright line of some kind between proprietary trading (not allowed) and market making (allowed).  

We hear about banks getting out of the market making business, leading to unusually large spreads in corporate bond markets, large enough possibly to tempt others into the business. Read more

First Liquidity, then Solvency

First ECB, then EFSF

Tightening money market conditions in Europe have now claimed their first victim, Dexia, and in so doing shifted the focus of policymakers from sovereign debt to banking recapitalization.  But it is just a change in approach; the underlying problem remains the same.

The demise of Dexia should remind everyone that liquidity kills you quick.  In this regard, Trichet's reminder that no European bank should worry about liquidity is reassuring, or should be anyway.

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Lords of Finance Redux

Forget the G7, Watch the C5

Martin Wolf endorses Adam Posen's call for quantitative easing at the Bank of England, and then goes one better, calling for direct monetary finance of government spending, i.e. helicopter money. Read more

Europe Ground Zero

Financial Globalization versus the Nation State

At its core, this rolling crisis is really about financial globalization.  Both words are important.  When I say globalization I do not mean primarily trade in goods and services, but rather the integration of previously national money markets and capital markets.  Securities markets are increasingly global as pools of investable capital seek out the highest risk-adjusted return, on individual investments but also on diversified portfolios of investments from around the world.   And money markets are also global, as national borrowers who seek more funds than domestic lenders are offering inevitably find what they need in global funding markets, especially dollar funding markets. Read more

Twisting in the Wind

While waiting for TALF

Bernanke did everything he could last week, short of a QE3 expansion of the Fed’s balance sheet, but apparently the market was expecting more.   A creature of habit, the market was fixated on the balance sheet that has done the global heavy lifting since Lehman, rather than on the balance sheets that are poised to do the heavy lifting now, namely the other central banks that jointly announced unlimited dollar lending last week, especially the ECB. Read more


Understanding QE3

Liquidity is not a problem within the Eurozone, insisted European Central Bank president Trichet last Monday.  But the markets didn’t believe him.  The question now is whether the announcement last Thursday of a coordinated central bank intervention—by the ECB and also the Swiss National Bank, Bank of Japan, Bank of England, and the Fed--gives more reason to believe.  Read more

Fizzle at Jackson Hole

One silence, and one silo

So no QE3, at least not on the Fed’s own balance sheet, and not yet, but that was no surprise since expectations had been managed down by the time Bernanke gave his speech.  

What Bernanke did not say, maybe could not say, is that the major worry confronting central bankers today is Europe, and contagion from whatever happens there.  He didn’t say it, because he remembers all too well being dragged over the coals in Congress for the $600 billion credit line he opened for foreign central banks after Lehman, when the Fed stepped in as international lender of last resort at a time when global dollar funding markets were frozen. Read more

Sympathy for the Devil

Privatizing QE3

Pity the plight of the central banker.   The halcyon days of inflation targeting recede ever farther into the past, along with the glorious simplicity of agonizing whether 25 bp is enough.  Instead, the fate of the world seems to hang in the balance, even while the Fed Funds rate remains stuck at zero.

All over the world, central banks are stepping in to catch the falling knife dropped by their ostensible political masters, the issuers of sovereign debt.   Most notably, the ECB has extended its bond-buying to Spain and Italy, and the Fed has guaranteed another two years of ZIRP. Read more