Perry Mehrling's blog

Financial Globalization and the Nation State

Today’s Financial Times articles: Swiss central bank discord provides a warning bell (Feb 24), Sovereigns turn to pre-crisis financial wizardry (Feb 24)

On facing pages in the print version of the FT, the reader is invited to consider the encounter of the modern state with the modern market. On the left hand page the story is about the central bank, on the right hand page the story is about the Treasury, and on both pages the story is about the continuing reverberations of the Global Financial Crisis and the changing role of both central banks and Treasuries as a consequence of financial globalization. Read more

Who’s afraid of finance?

Today’s Financial Times article: “Bernanke says foreign investors fuelled crisis” (Feb 19, 2011).

The latest evidence is that Bernanke is moving in a money view direction, but he is not there yet. He is not yet moving from his “global savings glut” interpretation of the origins of the crisis, but he is adding a global portfolio dollar demand dimension to it. In a money view, we reason from the opposite direction.

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The Future of Government Mortgage Finance Support

Today’s Financial Times articles: White House seeks wind down of Fannie and Freddie (Feb 11, 2011), Debate on Fannie and Freddie’s fate looms (Feb 11, 2011)

The stockholders of AIG were wiped out because that company sold insurance on mortgage-backed securities that fell in value. Not only did it price its insurance too cheaply, but it also neglected to allocate capital reserves to the contracts that it wrote.

More or less the same was true of Fannie and Freddie, but without the associated capital resources of a global insurance conglomerate. The ultimate stockholder of Fannie and Freddie, so it turned out, was the U.S. Treasury, and hence the U.S. taxpayer. Read more

A money view of the commodity bubble

Today’s Financial Times articles:  Currencies:  Strength in Reserve (Feb 8, 2011), Long-term investors shun Treasuries sale (Feb 8, 2011), Fuelling corn’s relentless rise back toward record levels (Feb 10, 2011)

Calls for a new Bretton Woods, a grand international monetary realignment away from the dollar, have come to little, so says the FT.   No alternative national currency is a plausible contender, given the “Triffin dilemma”, and potential supranational contenders such as the IMF’s SDR or gold have their own drawbacks. Read more

Speculation, stabilizing or destabilizing?

Today’s Financial Times articles: US muni smackdown (Feb 2, 2011), Wall St looks to boost market in US muni CDS (Feb 6, 2011)

“Muni veterans are from Mars, Meredith Whitney is from Venus,” so says Lex, commenting on the wide divergence in current views about the future of the US municipal bond market. Whitney sees a coming wave of defaults; veterans see municipal debt/income ratios far below those that sovereign states routinely bear.

Lex frames the divergence as a matter of political judgment. Municipalities have made promises to bond investors, but they have also made promises to public sector unions in the form of wage and pension contracts. When the numbers do not add up, which promises will wind up being honored and which breached?

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Saving the (International) Dollar

Financial Times articles being discussed: NY Fed to Expand Reverse Repo Requirements (Feb 1), Fed passes China in Treasury holdings (Feb 2)

The dissenters to the FCIC Report quite rightly emphasize the global character of the crisis, but they draw the wrong conclusions. What they miss is the global character of the shadow banking system, the collapse of which caused the crisis. (Chapter 7 is clear on this; “an ocean of money” was invested in commercial paper and repo, used to fund purchase of mortgage-backed securities.

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When the survival constraint bites

Financial Times article being discussed:  US Panel’s Report Reflects Partisan Rift (Jan 30, 2011)

If you can’t roll your funding as it comes due, you are dead. That is what Hyman Minsky called “the survival constraint."

From this point of view, the crisis looks like a series of ratchet steps down into the abyss, as the survival constraint shifted from one player to another—fail or bail? —until essentially the entire financial system was on life support provided by the only entity that does not face a survival constraint, the Fed. 

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And the nomination for best Perp Walk goes to...

Today’s Financial Times’ articles: “Goldman president warns on bank rules” (Jan 26), “Financial crisis report to blame Wall Street” (Jan 26), “US Crisis Inquiry Points to Widespread Failures” (Jan 27)

Now comes the Financial Crisis Inquiry Commission report, the sequel to Oscar nominee “Inside Job”, the movie. Once again, all the players are here. Once again, a morality tale: “lax risk management, distortive bonuses, predatory lending, and insufficient regulation.” Once again, essentially a sub-prime credit fuelled housing bubble story, with leverage and derivatives as a putative amplification mechanism.

But wait. Read more

And the nominees for Best Documentary are…

Today’s Financial Times articles: “Popcorn and Wine at ‘Inside Job’” (Jan 15, 2011) “Hollywood’s Credit Crunched” (Oct 9, 2010)

If you haven’t seen “Inside Job”, you must. As an analysis of the crisis, it just scratches the surface, but even those scratches do immense public service by arousing us to dig deeper and find out more.

It is a beautifully made film, and that is no small part of its appeal. The soaring opening sequence on Iceland tells you immediately that you are in the hands of an artist, and by the time the camera zooms in on Manhattan, you are hooked. Suspending disbelief, you give yourself over to the magic of the theater.

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It is all about promises to pay in the future.

Today’s Financial Times articles: Obama toughens China line (Jan 20, 2011), A Strategy to Straddle the Planet (Jan 17, 2011)

Everyone knows that China sells more to the rest of the world than it buys, and that the US buys more from the rest of the world than it sells. All the debate is about what these facts mean, where they come from and where they are going.

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