Yes, it’s glory time again


The Wall Street Journal is heavily paywalled so a synopsis will do: what it is important to realise is that the assets in short supply are, most especially, government bonds. The main reason is that government bonds now play a crucial role in the world’s financial markets as collateral when lending.

This is a relatively new phenomena: until 2008 companies were willing to put massive sums on deposit with banks without requiring security to ensure that they would be repaid. Then the banks failed. As a result what became apparent was that banks’ capacity to repay was dependent upon the whim of the governments who were really underwriting their solvency. The significant growth of what is called the repo market is the consequence. To simplify somewhat, companies do not now deposit money overnight, leaving them as unsecured creditors of the bank. Instead they sell the bank the most secure and financially stable asset they can use (government bonds) with a contract that guarantees them the right to require the asset the next day with the price adjusted for overnight interest.

A cash depositor will sell a bank a security instead? Err, buy perhaps?

And it’s not about companies, here’s the WSJ piece un-paywalled:

The world is running out of safe financial assets. One reason may be regulators’ push to make trading safer.

A scarcity of safe collateral can create bouts of volatility in the markets where investors fund their purchases. Economists also worry that a lack of quality public-sector assets leads the private sector to create less reliable and riskier substitutes.

Global rules increasingly require that investors deposit cash as security, called margin, when they trade with each other. This money is often left at clearinghouses, which are intermediaries that stand between buyers and sellers and step in if one of the parties won’t make good on a transaction. Regulators are trying to give these clearinghouses more heft to make the financial system safer.

The clearinghouses, in turn, have to do something with the cash, and they frequently take it to repurchase, or “repo,” markets , where they lend it out in exchange for high-quality assets such as German bunds or U.S. Treasurys.

That has the effect of vacuuming up safe assets. Paradoxically, cash—at least its electronic form—isn’t ultrasafe: It needs to be left in bank deposits, and even the strongest banks have some risk. Treasurys and bunds don’t.

It’s clearing houses, not companies. And they buy, not sell. And they don’t sell anything to a bank either.


20 thoughts on “Yes, it’s glory time again”

  1. Having redefined ‘Libertarian’ earlier this week it seems Ritchie wishes to redefine ‘synopsis’ as well. It now means “change to something completely different”.

  2. He relies on his followers knowing even less about the subject than he does. A bold assumption but one which is consistently correct.

  3. Didn’t BiCR take out a contract on people treating “phenomena” as a singular noun?

    But let’s be fair to our tuberous hero. He may have got this all base about apex but he hasn’t gone for the obvious short cut which would be that the state should appropriate tax all companies’ surplus cash to encourage investment, living wages and promote diversity through pink QE.

  4. TMB

    I liked your tuberous description of Murphy.

    Richard Murphy is the root vegetable of all that is wrong with economics thinking and teaching.

  5. Where do you start if you try to unpick the errors in the Fat Prof’s post? It is so wrong in every way that you just can’t find a point of attack. It is just wrong to a baffling extent

  6. Diogenes

    I am just marvelling at the idiocy of the post – I mean, the question is how stupid anyone in the public sphere can be? I am afraid he has not so much feet of clay as a resemblance to the Batman character ‘Clayface’.

    I have to agree that it’s like taking on an IS mouthpiece – the basic premise is so totally divorced from reality that to attack it is actually quite tricky, beyond saying that the author is either immeasurably ignorant or actively seeking to mislead.

  7. It might even be more baffling than his claim the other day that the government creates gilts to fund pension funds

  8. Tim – first time I have been to TRUK in a while – the Fair Tax Mark posts might be worth a comment, Another snipe at the sadly missed FCA blog which did so much to expose his stupidity, and more bullshit on Country by Country reporting. More Kays than Tiffanys but might be some material there…

  9. ‘heavily paywalled’

    Heavily? Meaning what? He couldn’t find a way around it? It worked, he couldn’t get it without paying, and that stopped him?

  10. ‘heavily’ meaning that he couldn’t purloin without paying something which he would have purloined without paying had he been able to.

  11. A new project from TJN, as advertised by Ritchie….

    “How much tax do multinational companies pay in your country? Tax justice campaigners (including the Tax Justice Network and me) and open data specialists are working on helping people find out with their open data for tax justice project.”

    That’s interesting, sounds like a big project…..

    “Launched in 2016, supported by a grant from Omidyar Network”

    Who is that?

    “Omidyar Network is a self-styled “philanthropic investment firm,” composed of a foundation and an impact investment firm. Established in 2004 by eBay founder Pierre Omidyar and his wife Pam”

    Oh, I see. Tax dodging is evil and people not ensuring VAT is paid by the companies they import for is evasion…… unless they bung you a few quid in which case you’ll bite their hand off. Hypocritical cunts.

  12. DBC Reed isn’t here, so I’ll substitute for him:

    Oh yeah? What about the money tree? An’ banks? An’ the money tree! An’ Carol Wilcox!

    There. I don’t know about you, but I feel more at home now.

  13. He doesn’t speak truth to power, campaigners rarely do.
    They will speak ideology to power which sounds better and when denied they can cry and claim its a cover up.

  14. Don’t mock people who are ‘better than you’, and ‘unfailingly good humoured’…..

    Few are better than I and even fewer have less ‘good humour’. From this stems all mockery…

    Shakespeare didn’t say that, but he should have.

  15. Bloke in Costa Rica

    This really wouldn’t be so bad if he were not pumping this bilge into the heads of his students. Can’t we take a leaf out of the Ancient Greeks’ book and feed him some hemlock for corrupting the young (not that The Great Tuber™ bears any comparison to Socrates)?

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