Pricing Money: A beginner's guide to money, bonds, futures and swaps • Hacker News Board

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

#211

Post by chii » Sat, Jun 17, 2023, 9:12 AM UTC

hbarka wrote: post #205

chii wrote: post #197

Earlier quoted context omitted.

> who should have been the optimal holder of their risks? they _produced_ more risk (by holding long maturity bonds that lose value as interest rate grows). This risk was not something that is inherent - they could've chosen not to do that with the large deposits from the pandemic money growth. There's noone who can be the optimal holder of the risk that is produced this way, because there's no value on the other end…

What about First Republic Bank?

I know less about FRB's failure. It was likely due to a domino effect from SVB's - specifically, FRB has a high uninsured ratio of deposits (they service rich people).

The FDIC has announced that they will not do a repeat of what they did for SVB - insure the full deposit amount rather than just the $250k. Therefore, anyone with a large deposit in a small bank is going to want to move their money out into a "too big to fail" bank.

Unfortunately for FRB, this is what happened to them. No bank can survive a real run, no matter how carefully balanced they are with risk (after all, they _do_ take on some risks in order to make a profit).

In my opinion, the FDIC's announcement of what they will not do (insure the full deposit, even if above the $250k limit) after doing it for SVB, while have good intentions, is what backfired.

They should've just lied, and said that they'd do it for another bank, if there's a need to; this would've stopped any fear of a run, and thus stop the run before any more dominos collapse.

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

#212

Post by jdaw1 » Sat, Jun 17, 2023, 9:22 AM UTC

boppo1 wrote: post #170

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…

The book is from 2001; are there any substantial changes in the landscape a motivated finance student should be aware of?

There’s a free HTML version on my website, which has some green-boxed updates. But even without those, the book is an excellent beginner’s guide to the interest rate markets. (I am the author, so might be thought not to have a NPoV.)

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

#213

Post by heywhatupboys » Sat, Jun 17, 2023, 9:35 AM UTC

consilient wrote: post #184

lend000 wrote: post #175

Earlier quoted context omitted.

While you're correct that high social spending that relied on high oil revenue was probably the primary cause of Venezuela's economic collapse, they had price controls on food starting back in 2003 and they began nationalizing major industries in addition to oil by 2008. From 2008, it was a full on centrally planned disaster.

Ownership and allocation mechanism are mostly independent axes. Consider for instance Norway (extensive state ownership but highly market-oriented; in certain respects more liberal than the US) contemporary China (state control of most major firms but mostly market-oriented), Gaullist France (nationalized infrastructure plus minority state shares in other sectors, markets supplemented with indicative planning and sta…

> in certain respects more liberal than the US

why would this be surprising? Don't believe for a second that the USA has a generally more liberal financial market than Scandinavia. Employment laws, trade, regulations, etc. are often wayyy less strict in Scandinavia.

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

#214

Post by notahacker » Sat, Jun 17, 2023, 10:07 AM UTC

MrPatan wrote: post #189

FabHK wrote: post #151

Earlier quoted context omitted.

> The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. That is just one of the purposes; others are: - time-shifting of consumption: borrow when you study or build a house, then invest and save during work years, then live of retirement portfolio - maturity transformation enabling investment: extra cash goes in the bank (and can be redeemed…

> But the solution to that is fintech and regulation, not crypto Why? Now we have a trustless, decentralized, tech solution, why do you still want the "guys with guns" solution?

Because whilst crypto provides an excellent solution for the "how to skim money from the economy by persuading less skilled investors to give you money" part of finance, it doesn't address the actual problems finance purports to solve like sending capital to its most productive use, maturity transformation, insurance, pensions etc.

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

#215

Post by earnesti » Sat, Jun 17, 2023, 10:16 AM UTC

croes wrote: post #192

MrPatan wrote: post #189

Earlier quoted context omitted.

> But the solution to that is fintech and regulation, not crypto Why? Now we have a trustless, decentralized, tech solution, why do you still want the "guys with guns" solution?

There is no such thing as trustless

But there is varying degrees of trust required. Also the quality of trust.

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

#216

Post by k__ » Sat, Jun 17, 2023, 10:43 AM UTC

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…

Thanks for the book.

I started with blockchain development, but noticed a huge gap in knowledge when it came to economics.

Hopefully, this book can give me some insights on tokens that resemble "money".

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

#217

Post by e-master » Sat, Jun 17, 2023, 10:46 AM UTC

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?

Generally speaking you can group large financial institutions into two groups: sell side and buy side. I’m no expert, but afaik, these firms either SELL liquidity (e.g. investment banks, market makers etc.) or BUY liquidity (for example pension funds, certain hedge funds). Liquidity is the key here - that is (if any) the benefit they bring to society. I can buy/sell pretty much any financial product/risk with reasonable spreads because there’s always someone on the other side of the trade ready to be my counterparty.

Not that I want to defend some of these institutions, though some are better than others, but it’s important to keep in mind that they do take on risk in order to provide us liquidity, and most of them specialize in managing the risk, some of them are even good at it. Their infrastructure and connectivity and the price they charge you to provide liquidity allows them to make profits, but they do lose money sometimes. Also, compared to 20 years ago, there’s fierce competition now in pretty much every aaset class - if you work in one of the buy/sell side firms, you’ll very often hear terms such as spread compression etc (except the Covid years of course - people just wanted to trade, nobody cared about the price of liquidity (e.g. spreads or sales credit etc.) they had to pay)

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

#218

Post by alecco » Sat, Jun 17, 2023, 10:55 AM UTC

All these Financial guides are very interesting. But beware of falling into the illusion of being a good-enough active investor. It's like entering the Pro league as an overconfident amateur. The other players are the best in the universe. And they have cybernetic extensions: algorithmic trading with virtually limitless amounts of resources and information. And sometimes they have "alpha" you'll never, ever get your hands on. They prey on "dumb money" like naive/retail investors and pension/mutual funds.

And at these times of high rates and inflation, the only safe move seems to be money market accounts and take the delta inflation hit. Try to focus your time in more valuable things like your friends and family. And keeping your sources of income.

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

#219

Post by [deleted] » Sat, Jun 17, 2023, 10:56 AM UTC

notahacker wrote: post #214

MrPatan wrote: post #189

Earlier quoted context omitted.

> But the solution to that is fintech and regulation, not crypto Why? Now we have a trustless, decentralized, tech solution, why do you still want the "guys with guns" solution?

Because whilst crypto provides an excellent solution for the "how to skim money from the economy by persuading less skilled investors to give you money" part of finance, it doesn't address the actual problems finance purports to solve like sending capital to its most productive use, maturity transformation, insurance, pensions etc.

[deleted]

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

#220

Post by less_less » Sat, Jun 17, 2023, 11:04 AM UTC

pembrook wrote: post #186

agentgumshoe wrote: post #163

Earlier quoted context omitted.

> So, in real financial markets, all the arbitrage games etc. [2] at least support actual productive purposes. So without all those games, what would be substantially different?

By referring to arbitrage as “games” OP’s comment has poisoned the well for this entire chain of responses. So to get an understanding, first we need to fix. A “game” implies non-productive or zero sum. By definition, an arbitrage is not that. Any arbitrage is the result of an inefficiency in prices or the economy. When someone arbitrages prices back to where they should be, they are performing a service that everyon…

> When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity!

While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage gives some social utility, but not in proportion to the amount of money it makes for arbitrageurs, and thus not in proportion to the effort put into it. Suppose that society is overproducing finance -- that most people would be better off if the world had slightly worse pricing information, fewer financial datacenters and low-latency microwave links, less human effort devoted to banking, and more of something else that could be built with those resources and that effort.

Maybe this creates another arbitrage opportunity -- maybe in an idealized free market (where there are no barriers to entry) more people would work in finance, and their competition would reduce profits. But it seems to me that this would only worsen the overproduction problem.

Or is there something I'm missing here? Why isn't this really an "opportunity" to (carefully) increase taxes on finance, so that it won't be overproduced by as much?