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maybe the US FRB will save the day by buying a ton of Greek and Spanish bonds at discounted prices, precipitating a drop in the dollar which would result in a collapse of German exports and a change of government in Germany.
by rootless2 on Fri Dec 9th, 2011 at 09:45:44 PM EST
The US cannot become the world's Central Bank.  

BoA has slipped $53 trillion worth of derivative loss risk into the FDIC which is going to be a booger to try and monetarize without jacking inflation up eight or nine percent.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sat Dec 10th, 2011 at 12:26:28 AM EST
[ Parent ]
Bailing out banks doesn't cause inflation, unless the original asset prices added enduring inflationary pressure. It just returns the bailout recipient's balance sheet to the status quo ante, and if that wasn't inflationary in 2007 then there is not a snowball's chance in a blast furnace that it'll be inflationary now. (It avoids deflation, but I don't know anyone other than the Austrian nutcases who considers that equivalent to causing inflation.)

Bailing out banks is crap policy because it bails out bondholders who should have gotten to see their wealth vaporise, and rescues management that should by all rights have been subjected to prosecutions and berufsverbot. Not because it causes inflation - any inflation from excessive asset valuation has already taken place prior to the crisis.

That aside, there is nothing wrong with eight or nine per cent yearly inflation that depreciating the currency by six or seven per cent vs. the €-Mark won't solve. OK, that's probably a little too aggressive, considering the US' foreign trade balance - but depreciating the currency by three or four per cent per year while retaining the 2-3 per cent yearly domestic inflation target is certainly possible.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 10th, 2011 at 04:41:41 AM EST
[ Parent ]
The problem in the US would be running even five percent a year inflation and still being able to service the debt bubble.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 10th, 2011 at 05:24:16 PM EST
[ Parent ]
No, inflation makes it easier to service debts. That's why the banksters don't like it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Dec 11th, 2011 at 11:51:22 AM EST
[ Parent ]
That's why they use variable rates. In Spain most mortgages have variable rates.

res humą m'és alič
by Antoni Jaume on Sun Dec 11th, 2011 at 06:48:32 PM EST
[ Parent ]
The central bank sets the baseline for the variable interest rate.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Dec 11th, 2011 at 07:00:57 PM EST
[ Parent ]
Furthermore, collateral is not indexed to inflation. When inflation increases, the real value of the debt falls, no matter what the effect is on interest rates.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Dec 12th, 2011 at 12:35:39 AM EST
[ Parent ]
That would not do you any good if the interest rate behaved like the loanable funds models predict and just added inflation to the market-clearing real interest rate. It would help the bank, because your unpayable loan (due to high interest compensating for the reduction of the excessive principal through inflation) would be secured on less crummy collateral. But it wouldn't help you.

Fortunately, interest rates don't work according to the loanable funds model.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Dec 12th, 2011 at 01:04:06 AM EST
[ Parent ]
Oh yes, I didn't think about that. Still, it would work if you hadn't got a variable rate loan. Having a fixed rate loan is, more or less, a bet you make on what the inflation rate will be.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Dec 12th, 2011 at 01:22:26 AM EST
[ Parent ]
That's a really poorly reported story. Notional derivative value has nothing to do with possible loss and FDIC regulations plus Dodd-Frank do not permit those losses to go against FDIC guaranteed balances.
by rootless2 on Sat Dec 10th, 2011 at 09:00:51 AM EST
[ Parent ]
I have seen estimates that the actual value of the world wide $700 trillion derivative bubble is about $20 trillion. That is about 3.5%. Apply the same ratio to the $53 trillion BOA derivative exposure that just got transferred to the deposit taking part of the holding company with Bernanke's blessing and that becomes $1.85 trillion.

And if those derivatives are credit default swaps and there is a default event, the claims of those who purchased the insurance take precedence over all others. Not a good time to have your money in BOA, even if only a small portion of bonds defaulted. And the FDIC is hand to mouth and looks at its available cash to decide who they can "resolve" in any given week. Why do I suspect that voting for a few hundred billion dollars to hold BOA retail depositors harmless might be where Congress finally draws the line?

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 10th, 2011 at 05:37:04 PM EST
[ Parent ]
Actually, the regulator provides netted out data so there's no trillions of exposure. And Dodd-Frank as well as standard FDIC law permits the FDIC to move assets and obligations of the institution to a newly created institution to protect insured assets. In fact, Dodd-Frank has a specific provision to permit a 1 day hold on all collateral seizure so that the regulators can do this more conveniently.  Furthermore, FDIC is required by law and certainly empowered to require more cash to be kept by depository banks to meet possible collateral calls. So transferring derivatives to the depository bank from the holding company may actually cause banks to have to increase their capital holdings.

http://occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq111.pdf

by rootless2 on Sat Dec 10th, 2011 at 07:26:13 PM EST
[ Parent ]
Finally, if you read the article carefully, you can see that it was a lot less than $50T that was transferred and that it is standard procedure for banks to have derivatives in the depository branch. That "story" was just scaremongering - which like most of similar crap appears designed to distract people from underlying issues of asset allocation, income/wealth inequality, and corporate organization that might be more troubling to Bloomberg than faux-scandals.
by rootless2 on Sat Dec 10th, 2011 at 07:59:44 PM EST
[ Parent ]
Dodd-Frank has a specific provision to permit a 1 day hold on all collateral seizure

That is more reassuring...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Mon Dec 12th, 2011 at 09:08:53 AM EST
[ Parent ]
One thing people do not appreciate is that the vast majority of bank derivatives, if we can believe them and their regulators, are interest rate swaps. In interest rate swaps, as I understand them, the notional value is the size of the underlying loan/bond but the risk is purely in the ratio between the two rates of interest.  That is A agrees to pay B 8% for 3 years on $1B and B agrees to pay A libor rates for 3 years on the same $1B. Notional value is $1billion, actual worst case risk for A is that libor falls to 0 and it pays 8% of $1B for 3 years for nothing.
by rootless2 on Sat Dec 10th, 2011 at 07:33:17 PM EST
[ Parent ]
That is likely why the actual value of $50 trillion notional could be something like $1.75 trillion, on average. It would be less if they were interest rate swaps but, in the case of a default, they would be much more if they were CDSs. The CDSs are the real weapons of mass financial destruction.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 10th, 2011 at 10:32:11 PM EST
[ Parent ]
Over 60% are interest swaps. The other questions then are the value of the collateral and the counterparty netting.  There is a lot not to like in they system, but Bloomberg is providing misdirection.
by rootless2 on Sun Dec 11th, 2011 at 09:41:58 AM EST
[ Parent ]
But it does not take so much to do great damage. Morgan Stanley has written about $40 billion in CDS for French banks and that is several times the value of their equity. How many US banks could withstand HAVING to write off 80% of a $40 billion debt? And how likely is it that only two or three banks would be affected?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Dec 11th, 2011 at 11:13:27 AM EST
[ Parent ]
Is that based on the Zero Hedge article? Because I don't really see that as persuasive. What's the counterparty net? Without that and some understanding of the collaterals it's impossible to have even an approximate sense of the exposure.

http://articles.businessinsider.com/2011-10-19/wall_street/30296727_1_morgan-stanley-exposure-french -banks

by rootless2 on Sun Dec 11th, 2011 at 11:26:01 AM EST
[ Parent ]
See here.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Mon Dec 12th, 2011 at 09:18:24 AM EST
[ Parent ]

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