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Larry Summers Withdraws from Fed Consideration [pdf]

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Re: Larry Summers Withdraws from Fed Consideration [pdf]

#21

Post by onebaddude »

malandrew wrote: post #16
effn wrote: post #6

Earlier quoted context omitted.

The vast majority of OTC derivatives was far less disruptive to the banking sector than your average vanilla home mortgage loan during the crisis. An overwhelming majority of all the banks that failed during the crisis had zero OTC derivatives on their books, but plenty of average vanilla home mortgage loans. Internal documents from the banks that did deal in more sophisticated financial products show that they had a…

Not really. OTC derivatives greatly contributed to what happened because it obscured who your counterparty was in a transaction . This is really important because as the world falls apart around you, you don't know if your OTC derivatives happen to be based indirectly and at least in part on some other failing financial institution. Multiply this by everyone you do business with and you have a complete dissolution of…

I take issue with the connotation as you describe derivatives; they hide and obscure. They are a tool, nothing more.

Other than that, I agree. It was the lack of a central clearing house for the derivatives -which would have allowed issuers to determine counter party risks and price it properly -that was the failing. But that's a human error. There's no need whatsoever to blame the securities themselves.

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#22

Post by DanielBMarkham »

onebaddude wrote: post #20
DanielBMarkham wrote: post #9

Earlier quoted context omitted.

Wow. This is 180 degrees away from the mainstream narrative of how the crisis developed. I'm not trying to bait you or argue, but do you have any links? I'd be interested in some supporting documentation for your claim.

>I'd be interested in some supporting documentation for your claim. No offense, but it starts with having an understanding of what a derivative is and how they are used. There is nothing sinister about them in any fashion, nor were they the "cause" of anything. The mainstream, as usual, has it wrong. At the base level, excessive risk was the problem, and because derivatives employ leverage, that risk is amplified.

I'm going to have to categorize that as being non-responsive.

Let's assume I know what a derivative is. We can go from there. The specific accusation made in the mainstream press was that by the time the instruments were sliced and diced a dozen times, risk was not made clearly visible to derivative purchasers, and that the buying and selling of derivatives got way ahead of the banks' ability to track the risk inside of them. At high leverages, it became such that being wrong by just a few percentage points could mean financial disaster. The guarantee that Freddie and Fannie made contributed to a general feeling that the market was mostly protected from huge systemic risks, when that wasn't the case at all.

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#23

Post by Steko »

jrn wrote: post #4

I think opposition started with Scott Sumner in July. http://www.themoneyillusion.com/?p=22379 Very good news. I expect to see the markets react tomorrow, ala balmer on a much greater scale.

Opposition has been almost universal and started before Summers was even floated as the favorite. Here's Matt Yglesias in May:

http://www.slate.com/blogs/moneybox/2013/05/27/summers_for_f...

Ezra Klein's piece on gender that prompted the original "word" that Summers was going to be the nominee:

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/19/t...

Krugman pro-Yellen case before annoucement:

http://krugman.blogs.nytimes.com/2013/07/19/the-fed-successi...

Felix Salmon:

http://blogs.reuters.com/felix-salmon/2013/07/24/dont-send-s...

Wall Street:

http://www.huffingtonpost.com/2013/07/26/wall-street-yellen-...

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#24

Post by tedunangst »

DanielBMarkham wrote: post #22
onebaddude wrote: post #20

Earlier quoted context omitted.

>I'd be interested in some supporting documentation for your claim. No offense, but it starts with having an understanding of what a derivative is and how they are used. There is nothing sinister about them in any fashion, nor were they the "cause" of anything. The mainstream, as usual, has it wrong. At the base level, excessive risk was the problem, and because derivatives employ leverage, that risk is amplified.

I'm going to have to categorize that as being non-responsive. Let's assume I know what a derivative is. We can go from there. The specific accusation made in the mainstream press was that by the time the instruments were sliced and diced a dozen times, risk was not made clearly visible to derivative purchasers, and that the buying and selling of derivatives got way ahead of the banks' ability to track the risk inside…

You are generalizing from one specific derivative to all derivatives.

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#25

Post by [deleted] »

Steko wrote: post #23
jrn wrote: post #4

I think opposition started with Scott Sumner in July. http://www.themoneyillusion.com/?p=22379 Very good news. I expect to see the markets react tomorrow, ala balmer on a much greater scale.

Opposition has been almost universal and started before Summers was even floated as the favorite. Here's Matt Yglesias in May: http://www.slate.com/blogs/moneybox/2013/05/27/summers_for_f... Ezra Klein's piece on gender that prompted the original "word" that Summers was going to be the nominee: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/19/t... Krugman pro-Yellen case before annoucement: http://krugman.b…

[deleted]

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#26

Post by Steko »

[deleted] wrote: post #25
Steko wrote: post #23

Earlier quoted context omitted.

Opposition has been almost universal and started before Summers was even floated as the favorite. Here's Matt Yglesias in May: http://www.slate.com/blogs/moneybox/2013/05/27/summers_for_f... Ezra Klein's piece on gender that prompted the original "word" that Summers was going to be the nominee: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/19/t... Krugman pro-Yellen case before annoucement: http://krugman.b…

[deleted]

I read and enjoy Scott Sumner and recommend him to everyone. To suggest that he drove the opposition to Summers is bananas.

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#27

Post by mcphilip »

pcurve wrote: post #7
jrn wrote: post #4

I think opposition started with Scott Sumner in July. http://www.themoneyillusion.com/?p=22379 Very good news. I expect to see the markets react tomorrow, ala balmer on a much greater scale.

and opposite side. The market will tank tomorrow by 1.5-2%.

Here's an in depth explanation from PIMCO as to why Summer's withdrawal will likely be very bullish for credit and equities:

http://www.businessinsider.com/el-erian-market-reaction-to-s...

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#28

Post by preempalver »

effn wrote: post #6
mcantelon wrote: post #5

Earlier quoted context omitted.

Bigtime. Summers is a key proponent of the financial practices that led to the 2007 financial crisis. >Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall ... He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives http://chronicle.com/article/Larry-Summersthe/124790/

The vast majority of OTC derivatives was far less disruptive to the banking sector than your average vanilla home mortgage loan during the crisis. An overwhelming majority of all the banks that failed during the crisis had zero OTC derivatives on their books, but plenty of average vanilla home mortgage loans. Internal documents from the banks that did deal in more sophisticated financial products show that they had a…

Ahem : http://fcic-static.law.stanford.edu/cdn_media/fcic-testimony...

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#29

Post by mcphilip »

DanielBMarkham wrote: post #9
effn wrote: post #6

Earlier quoted context omitted.

The vast majority of OTC derivatives was far less disruptive to the banking sector than your average vanilla home mortgage loan during the crisis. An overwhelming majority of all the banks that failed during the crisis had zero OTC derivatives on their books, but plenty of average vanilla home mortgage loans. Internal documents from the banks that did deal in more sophisticated financial products show that they had a…

Wow. This is 180 degrees away from the mainstream narrative of how the crisis developed. I'm not trying to bait you or argue, but do you have any links? I'd be interested in some supporting documentation for your claim.

It's 180 degrees against the mainstream narrative because it is a ridiculous oversimplification of the crises and misleading in its claims about OTC derivatives. For a serious look into the complex causes of the crisis, I recommend Econned by Yves Smith [1].

My (weak) take on the crisis TL;DR:

Prolonged, low interest rates set by the Fed in the aftermath of the dotcom bubble led to investors looking for better returns outside of AAA bonds. With the introduction of CDOs, investors were given the option of purchasing AAA rated tranches that paid better rates than bonds. The interest in CDOs exploded, leading to weakening of lending standards allowing the housing boom to really take off. From there it gets much more complex, but ultimately the maths on CDOs didn't work out and everything came crashing down.

[1]http://www.amazon.com/gp/aw/d/0230114563

Re: Larry Summers Withdraws from Fed Consideration [pdf]

#30

Post by CamperBob2 »

malandrew wrote: post #16
effn wrote: post #6

Earlier quoted context omitted.

The vast majority of OTC derivatives was far less disruptive to the banking sector than your average vanilla home mortgage loan during the crisis. An overwhelming majority of all the banks that failed during the crisis had zero OTC derivatives on their books, but plenty of average vanilla home mortgage loans. Internal documents from the banks that did deal in more sophisticated financial products show that they had a…

Not really. OTC derivatives greatly contributed to what happened because it obscured who your counterparty was in a transaction . This is really important because as the world falls apart around you, you don't know if your OTC derivatives happen to be based indirectly and at least in part on some other failing financial institution. Multiply this by everyone you do business with and you have a complete dissolution of…

Are you thinking of CDSs?
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