Comments on: Dollar Appreciation in 2008: Safe Haven, Carry Trades, Dollar Shortage and Overhedging http://www.aleablog.com/dollar-appreciation-in-2008-safe-haven-carry-trades-dollar-shortage-and-overhedging/ Alea Jacta Est Mon, 12 Jul 2010 20:04:31 +0000 hourly 1 http://wordpress.org/?v=3.0 By: Don the libertarian Democrat http://www.aleablog.com/dollar-appreciation-in-2008-safe-haven-carry-trades-dollar-shortage-and-overhedging/#comment-3666 Don the libertarian Democrat Wed, 09 Dec 2009 21:44:29 +0000 http://www.aleablog.com/?p=4444#comment-3666 "The recent financial crisis led to homing in global bond markets, but also to safe haven demand for US Treasury securities, especially bills (Table 1). With the intensification of the crisis after the Lehman Brothers bankruptcy, US investors sought to de-risk their portfolios by selling foreign bonds and stocks in the latter half of 2008. For their part, private foreign investors turned to selling US corporate bonds, including asset-backed securities, and accelerated their sale of agency mortgage-backed bonds and debentures. In contrast to this homing, however, was the flight to quality by private foreign investors into Treasury securities. On these rainy days, the safe haven of Treasuries gained in value as equities plunged and credit spreads widened to record levels. While government bonds performed well in France, Germany, Japan, the Netherlands, Switzerland and the United Kingdom, the attraction of Treasury bills kept global investors from staging a general retreat from US securities. To the extent that global investors sold other currencies against the dollar to take refuge in Treasuries, safe haven flows strengthened the dollar." What's important about this is that it's a flight to liquidity and govt guarantees. I believe that the Govt Guarantees were the main attraction. If that's true, then the only thing that can stop a panic and a debt-deflationary spiral is a govt guarantee. If that's true, the Govt cannot help but offer guarantees in a panic. In fact, the sooner the better, since you hope the guarantees will stop the panic and allow an orderly unwinding of positions. Also, there will have to be a de facto LOLR in the future for a cross-national panic. In this case, it was the US Govt. Given that there's no way for the govt to avoid being a LOLR, I believe that only some form of Limited/Narrow/Utility Banking can act as a firewall against the govt getting involved. It can act as a backstop or LOLR in the beginning of a panic, and hopefully avert the govt and taxpayers getting involved. Only a govt has the believable resources to stop a panic, and only Narrow Banking offers a strong firewall that offers believability of banks not being necessarily involved in a panic. “The recent financial crisis led to homing in global bond markets, but also
to safe haven demand for US Treasury securities, especially bills (Table 1).
With the intensification of the crisis after the Lehman Brothers bankruptcy, US
investors sought to de-risk their portfolios by selling foreign bonds and stocks
in the latter half of 2008. For their part, private foreign investors turned to
selling US corporate bonds, including asset-backed securities, and accelerated
their sale of agency mortgage-backed bonds and debentures.
In contrast to this homing, however, was the flight to quality by private
foreign investors into Treasury securities. On these rainy days, the safe haven
of Treasuries gained in value as equities plunged and credit spreads widened
to record levels. While government bonds performed well in France, Germany,
Japan, the Netherlands, Switzerland and the United Kingdom, the attraction of
Treasury bills kept global investors from staging a general retreat from US
securities. To the extent that global investors sold other currencies against the
dollar to take refuge in Treasuries, safe haven flows strengthened the dollar.”

What’s important about this is that it’s a flight to liquidity and govt guarantees. I believe that the Govt Guarantees were the main attraction. If that’s true, then the only thing that can stop a panic and a debt-deflationary spiral is a govt guarantee. If that’s true, the Govt cannot help but offer guarantees in a panic. In fact, the sooner the better, since you hope the guarantees will stop the panic and allow an orderly unwinding of positions. Also, there will have to be a de facto LOLR in the future for a cross-national panic. In this case, it was the US Govt.

Given that there’s no way for the govt to avoid being a LOLR, I believe that only some form of Limited/Narrow/Utility Banking can act as a firewall against the govt getting involved. It can act as a backstop or LOLR in the beginning of a panic, and hopefully avert the govt and taxpayers getting involved. Only a govt has the believable resources to stop a panic, and only Narrow Banking offers a strong firewall that offers believability of banks not being necessarily involved in a panic.

]]> By: jck http://www.aleablog.com/dollar-appreciation-in-2008-safe-haven-carry-trades-dollar-shortage-and-overhedging/#comment-3662 jck Mon, 07 Dec 2009 15:03:52 +0000 http://www.aleablog.com/?p=4444#comment-3662 well, not sure it was bank prop leverage, more like standard banking book leverage funded the traditional way (short term) and regulated in terms of capital ratios but, in theory, without a lender of last resort. but now we know better, there is a lender of last resort, if you are part of a bunch of french and/or german tbtf banks, the ecb and the fed will "cooperate" and send the missing $ your way and if some u.s. tbtf banks was running short of euros, same trick would apply in reverse. vive la cooperation... well, not sure it was bank prop leverage, more like standard banking book leverage funded the traditional way (short term) and regulated in terms of capital ratios but, in theory, without a lender of last resort.
but now we know better, there is a lender of last resort, if you are part of a bunch of french and/or german tbtf banks, the ecb and the fed will “cooperate” and send the missing $ your way and if some u.s. tbtf banks was running short of euros, same trick would apply in reverse. vive la cooperation…

]]> By: Cassandra http://www.aleablog.com/dollar-appreciation-in-2008-safe-haven-carry-trades-dollar-shortage-and-overhedging/#comment-3661 Cassandra Mon, 07 Dec 2009 14:49:01 +0000 http://www.aleablog.com/?p=4444#comment-3661 agreed that was the keystone, but it is hard to disentangle bank prop lev spec form the transformational lev spec on behalf of their erstwhile "clients". The systemic issue of currency mis-match stems from a classic composition fallacy, no? - and this remains a regulatory no-man's land. agreed that was the keystone, but it is hard to disentangle bank prop lev spec form the transformational lev spec on behalf of their erstwhile “clients”. The systemic issue of currency mis-match stems from a classic composition fallacy, no? – and this remains a regulatory no-man’s land.

]]> By: jck http://www.aleablog.com/dollar-appreciation-in-2008-safe-haven-carry-trades-dollar-shortage-and-overhedging/#comment-3660 jck Mon, 07 Dec 2009 14:29:54 +0000 http://www.aleablog.com/?p=4444#comment-3660 the problem started with banks unable to fund dollar assets, the "others" lev players, cta/trend followers etc.. are pretty small fry in the scheme of things and if the fed and other c.b. did massive amounts of swaps to stop a dollar buying panic it is to save the banks. so perhaps what should addressed is the issue of banks carrying assets in a currency that their own c.b. can't provide on its own. the problem started with banks unable to fund dollar assets, the “others” lev players, cta/trend followers etc.. are pretty small fry in the scheme of things and if the fed and other c.b. did massive amounts of swaps to stop a dollar buying panic it is to save the banks. so perhaps what should addressed is the issue of banks carrying assets in a currency that their own c.b. can’t provide on its own.

]]> By: Cassandra http://www.aleablog.com/dollar-appreciation-in-2008-safe-haven-carry-trades-dollar-shortage-and-overhedging/#comment-3659 Cassandra Mon, 07 Dec 2009 13:59:02 +0000 http://www.aleablog.com/?p=4444#comment-3659 oops - see Gallopin' Gertie here: http://www.youtube.com/watch?v=j-zczJXSxnw oops – see Gallopin’ Gertie here: http://www.youtube.com/watch?v=j-zczJXSxnw

]]> By: Cassandra http://www.aleablog.com/dollar-appreciation-in-2008-safe-haven-carry-trades-dollar-shortage-and-overhedging/#comment-3658 Cassandra Mon, 07 Dec 2009 13:58:12 +0000 http://www.aleablog.com/?p=4444#comment-3658 Seems like a thorough though rather obvious glimpse of the quite fascinating and large feedback loops at work here reinforced by all manner of leveraged specs, systematic macro, CTAs/trend-followers. "Wir, alle sind Macro Traders...." By extension, it also seems as if there are large systemic negative externalities in leveraged spec - both domestically and internationally - that need to be addressed else we find ourselves witnesses to a Financial <a>Gallopin' Gertie</a> Seems like a thorough though rather obvious glimpse of the quite fascinating and large feedback loops at work here reinforced by all manner of leveraged specs, systematic macro, CTAs/trend-followers. “Wir, alle sind Macro Traders….” By extension, it also seems as if there are large systemic negative externalities in leveraged spec – both domestically and internationally – that need to be addressed else we find ourselves witnesses to a Financial Gallopin’ Gertie

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