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Pricing Money: A beginner's guide to money, bonds, futures and swaps

jdawiseman.com

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Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#141

Post by quickthrower2 »

tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

While there are casinos, think: A farmer wants to get a fixed price for next years crop and insure against a bad harvest. Thats why you need these things.

Ok the farmer example is a trope apparently. Any business where you need to hedge financial risk. Lending too many mortgages to self employed people? Sell that risk / revenue stream on to someone else and buy something different to diversify.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#142

Post by xyzzyz »

asdff wrote: post #111
jdaw1 wrote: post #85

Earlier quoted context omitted.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

Why have them privately controlled at all? The fed prints the money. The fed could be the bank and insurer as well, and obviate the middle men skimming the pot.

Because private insurers have incentive to accurately price risks. If they price them too low, they will go bankrupt. If they price them too high, the competition will steal their customers with lower rates for the same coverage.

The governments, on the other hand, don’t go bankrupt, so when they price the risks too low, the public will be forced to bail it out anyway, either through taxes or through inflation.

This very much is real and serious problem: consider, for example, National Flood Insurance Program, which is exactly the kind of publicly controlled insurance you asked for. It was $25B in the red by August 2017, and would have gone bankrupt if it was private. However, you (and other taxpayers) bailed it out in October 2017 to the tune of $16B. It continues to accumulate debt, and is more than $20B in debt right now. You will bail it out again, and keep subsidizing people who build their houses on flood prone areas, knowing that you will pay for their losses.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#143

Post by alex_smart »

RyEgswuCsn wrote: post #122
jdaw1 wrote: post #85

Earlier quoted context omitted.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.

This is exactly the why and how of "travel broadens the mind". You only have to visit countries and socities that do not have well-developed financial markets to directly see and appreciate the value financial markets bring to your own society.

Visit a part of the world where most people do not have access to home loans, health insurance etc. and you will not have to ask how mere redistribution of risk and capital adds to productivity ever again. (I happen to have been born one such part of the world.)

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#144

Post by usefulcat »

RyEgswuCsn wrote: post #122
jdaw1 wrote: post #85

Earlier quoted context omitted.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

Except that is not exactly "productive", isn't it? After all, risk was not eliminated, only redistributed. Productive output, e.g., would be something that reduces the chance of your house catching fire.

Maybe ‘productive’ is mot the best word on which to focus. Insurance doesn’t eliminate risk but it can still be very useful.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#145

Post by tech_ken »

jdaw1 wrote: post #85
tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

>that was no small amount of work.

It definitely shows, thank you for publishing it freely

>The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them.

This makes a sense to me, thanks for explaining. I can definitely understand how insurance collectivizes and smooths individual risks, and from this and other examples I can see why a lending institution might seek something similar to enable them to keep cash moving. It does seem a little epicyclic to me that a farmer faces a glut as a result of organizing food production through a market economy, and then we resort to like a second-order market trick to resolve that problem. Presumably it would be simpler to just dump all the food in the middle of the table and then hand it out evenly, but I've heard this runs into its own set of difficulties.

>Let me also mention that I am the author of the definitive reference book on old Vintage Port: Port Vintages

Very welcomed, I may not buy the book but I will definitely go buy some port. TGIF!

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#146

Post by plandis »

tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

The thing that I’ve always found wild is that the money people make on markets seems to be so much higher than the money people who actually make goods/services.

Why has the global economy put such a high benefit from investment bankers compared to, for example, family doctors?

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#147

Post by skybrian »

dataflow wrote: post #102
skybrian wrote: post #99

Earlier quoted context omitted.

It's doubtful that farmers care about you in particular. However, in general, the societal benefit should be like a loan, like insurance, or both, depending on what it is. Loans are useful and necessary because businesses need to buy things before they get paid. It can't all be done using Kickstarter! Farming works this way. Insurance is useful because you get paid when something bad happens to you. On a day when you…

I don't follow. If the goal is insurance then why not just have... something more like insurance? Like when you buy insurance for your car or home? We don't let randos buy options on the average Joe's mortgage or car loan and claim it helps price discovery or liquidity, right? Or is it the case that even I can do that and I'm just out of the loop?

I don't know, but one reason might be history. Modern insurance companies are pretty recent. Before the 1920's, there were mutual-aid societies. Commodities trading is ancient.

But they also do different things:

You need insurance companies for one-off risks. Someone has to go see the house and say, "yep, it burned down." Also, we don't let people bet on other people's houses burning down for good reason.

Other risks are more impersonal, like "what if this company I bought a bond from goes bankrupt" or "what if the price of corn drops in half" or "what if the price of oil doubles." There are lots of people and companies who might want to hedge against those, not just the owner of the property.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#148

Post by tech_ken »

tel wrote: post #43
tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

Arbitrage and it's various squishier more stochastic cousins are the vehicle by which information flows through markets. Markets exist as a global network of interactions and persistent imbalances anywhere in the system can have massive consequences. Generally, these consequences rhyme with "two counterparties which don't interact with one another directly all that often suddenly discover grave disagreements in the d…

>Arbitrage and it's various squishier more stochastic cousins are the vehicle by which information flows through markets.

>This works a lot like a game of telephone where changes in one market venue propagate through related instruments to other venues crossing space, species, and even time.

Hell yeah I'm not sure where I fall on accepting this way of thinking about things, but the line of poetics/skeuomorphics/analogy is very cool to me.

>Economic wreckage is the result, at least, but also imagine what would happen if corn farmers produced only half the crop that their buyers would have liked to purchase.

This is kind of my sticking point because on direction of that risk is like an actual hazard to my biology and the other is the consequence of allocating food by market. Not saying it's 'wrong' per se, but it does stand out that we're resolving market problems with like market^2

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#149

Post by tech_ken »

nazka wrote: post #47
tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

Without them we wouldn’t have McNuggets. McDonald’s is known to have almost invented and streamlined cooking to industrial level. But McNuggets were made possible only through financial engineering: https://tackletrading.com/tackle-today-the-rise-of-chicken-m... I just finished some McNuggets so it’s even more funny to me right now.

> Without them we wouldn’t have McNuggets.

youtube.com/watch?v=uG3uea-Hvy4

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#150

Post by cvalka »

tech_ken wrote: post #17

This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?

Others have provided excellent answers. There's one thing I'd like to add. In order for the financial markets to provide more utility, a financial transaction tax needs to be introduced. It will indirectly kill unproductive or counterproductive financial activity such as high frequency trading.
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