Europe to China: Please do not buy any more euros.
EU economic and monetary affairs commissioner Joaquin Almunia said China should not take any steps to increase its euro reserves at the moment. Asked what message the euro zone’s high-level delegation gave China late last month on its purchases on foreign exchange markets, he said: ‘We told the Chinese: it’s not the moment to take decisions, it’s the moment to stay as you are and take decisions in other areas.’
China to the US: The renminbi isn’t the problem, the dollar is. Richard McGregor writes:
“Beijing turned the tables on the US yesterday … warning of the serious global implications of the weak dollar, recent US interest rate cuts and the subprime crisis.”
Chen Deming, China’s future Commerce Minister, was quite direct (Hat tip, Michael Pettis):
“What I am worrying about now is the weakening dollar and its potential impact on global growth. The dollar is the major currency for trade, and its continuous depreciation will push up prices of oil and gold and reduce the wealth of dollar-holding nations. So I want to see a strong dollar.”
It doesn’t take much leg work to get a strong sense that there is more than a bit of friction among what might be termed the G-3.
Europe isn’t happy with the RMB’s depreciation against the euro. China isn’t happy with the dollar’s depreciation — and the United States unwillingness to do much to change the dollar’s depreciation. The US isn’t happy with the pace of RMB appreciation against the dollar.
And perhaps US policy makers are starting to get nervous about the implications of a global financial system whose stability hinges on China’s willingness to add $500b of reserves that it doesn’t need to its already large stock, adding to its already large likely financial losses.
SWFs are hot. CDOs are not. In an eloquent and important column, Martin Wolf argues — I think correctly — that the current credit crisis is “a huge blow to the credibility of the Anglo-Saxon model of transactions-orientated financial capitalism.” That isn’t good for the United States. It has made the US even more dependent than usual on central bank financing.
I don’t have much sympathy for China’s argument. The Unites States’ dollar policy has long been to ignore the dollar’s external value and direct policy toward stabilizing economic conditions in the US. If that means a strong dollar, so be it. If that means a weak dollar, so be it.
And, more importantly, China didn’t have to let its currency follow the dollar down. And if China had actually started to loosen the RMB’s link to the dollar a few years back, it wouldn’t have to import US rate cuts either. US policy isn’t making Chinese policy easy right now, but China cannot really blame the United States for China’s own policy choices.
It has been reasonably clear for some time that the dollar would need to depreciate over time to help reduce the US trade deficit (See Dr. Chinn). And some warned three years ago that a global monetary system that tied the currencies of the world’s largest surplus economies to the currency of the world’s largest deficit economy was bound to cause trouble. China and the Gulf need to appreciate not depreciate.
And it never made much financial sense for China to spend so much money buying a huge stock of depreciating assets. But now that China owns so many dollars, my guess is that – over time — the US and China are starting to interact more as debtor and creditor. China is in effect complaining that the US isn’t paying enough attention to the concerns of its creditors in setting its policy.
The US, on the other hand, can rightly say that it has only accepted the new Bretton Woods system because up it didn’t impose any constraints on US macroeconomic policy.
Call it an additional source of friction in an already acrimonious relationship.
No Responses to “Euro-yuan-dollar diplomacy”
The Chinese are right on the money about the irresponsible US Dollar depreciation that has directly resulted from reckless Federal Reserve monetary policies.
Broad M-3 Money Supply Statistics
Wholesale prices largest jump in 34 years
Wonder why the Federal Reserve has discontinued reporting official broad M-3 money supply statistics? With broad M-3 money supply exploding at an 18 percent annualized rate, Bernanke can hide his irresponsible money printing charade to bailout reckless Wall Street investment banks with “cheap” dollars. What ever happened to the economic monetary principles of “sound money” ?
“The Unites States dollar policy has long been not to ignore the dollar’s external value, and direct policy toward stabilizing economic conditions in the US.”
…..what policy influence they have, that is. From time to time, I reiterate my puzzlement how central banks are able to control interest rates at all, given the relatively small size of their balance sheets (jkh, where are you?). I wonder if we are now seeing the limits of their power.
DC, will you quit droning on about M3. M3 deposits are inside money that are matched by debt. When SIVs are collapsing, banks are going to have to reintermediate, and M3 can be expected to grow rapidly even if credit is as tight as a duck’s behind.
what if ‘china’ implodes: (China’s top-down leadership dithers as economic storm clouds gather http://www.globeinvestor.com/servlet/story/GAM.20071212.IBASIA12/GIStory/ and “… China is just not that big and it will not get that big any time soon.”…” http://www.globeinvestor.com/servlet/story/GAM.20071212.REYNOLDS12/GIStory/)
and what is your/ wolf et al’s end game?
Wonder why the US Dollar is devaluating to toilet paper?
” Merrill Lynch put out a piece this afternoon about the “Term Auction Facility” with this interesting link to the Federal Reserve Bank.
If I’ve read the schedule correctly the “successful bidders” will be able to lodge toxic waste ABS as “collateral” for these loans. Triple A rated ABs, without verifiable market values, will receive 85 cents on the dollar. “Non AAA” ABS will receive 80 cents loan value on the dollar. This is many times what the ABX indices say this junk paper is worth.
What a neat way for Wall Street getting rid of your toxic waste that’s maybe worth 25-35 cents on the dollar for 80 cents, just by pledging it as collateral and then failing to take it back at the expiry of the loan.”
Perhaps this is the “real” reason broad M-3 money supply has exploded in the past several weeks. Upon his retirement, Wall Street will thank Bernanke for the Fed bailout with mega-bucks compensation as a consultant and guest speaker.
Your characterization of US China relationship as acrimonious is shrill and misleading. Certainly, US China economic relationship is deepening and going as well as ever. More US companies are getting bigger footholds in China and vice versa. Trade oversight is improving and even central bank coordination is starting in face of the subprime issue. The only area that’s acrimonious is the silly political rhetoric targeted at specific domestic audiences and that does not characterize the whole relationship.
The Unites States dollar policy has long been not to ignore the dollar’s external value, and direct policy toward stabilizing economic conditions in the US.
I try not to comment on typos, but this one hung me up for a moment. The “not” shouldn’t be there, right?
Helicopter Ben Bernanke has his finger glued to the print button as M-3 money supply is exploding and accelerating.
Reconstructed broad M-3 money supply statistics
mitch — good catch. I changed the sentence and forgot the not. I’ll edit it.
then if you could reconcile:
“It has been reasonably clear for some time that the dollar would need to depreciate over time to help reduce the US trade deficit”
“The [United] States dollar policy has long been to ignore the dollar’s external value and direct policy toward stabilizing economic conditions in the US. If that means a strong dollar, so be it. If that means a weak dollar, so be it.”
and tell us why wolf’s column is important, other than the fact that rge seems to have contributed in some way.
nothing to reconcile. the united states dollar policy is not to have a dollar policy. the dollar goes where the market takes it, or central banks push it. the most likely long-term direction of the dollar has been down because the us has a larger trade/ current account deficit than private markets are willing to finance. a stronger dollar would imply a larger deficit over time — and there isn’t private willingness to finance the current deficit.
as for why martin wolf’s column is important, the quote I excerpted provides the key clue — the world has lost a lot of faith in the anglo-american model of transaction based financial capitalism. and perhaps martin wolf has lost a bit of faith in it too; his analysis is quite scathing.
If the US policy is to stablize economic conditions in the US, then the US dollar, as a reflection on US economic strength, will hold its value. Short term falls or rises are temporary deviations from that fundamental dollar value. (Delong and others make similar observations on US dollar as well.)
Also, it’s now fashionable to state the world has lost faith in US financial/political model, but that all could change in a relative short time, with a new administration or an uptick in finanical conditions next year or two. Over the long run, the US model of economic openess, personal freedom and greater transparency in governing affairs is still very attractive and will make US very competitive. None of this means that Euro-dollar-yuan ringlings going on now will be end of the US financial system. As diplomacy and negotiations go, this sort of fricition is normal interaction and doesn’t change the long term fundamentals.
As you know, I agree with you about the irresponsibility of Fed monetary policy, but you have to be careful in interpreting the evidence for that conclusion. Rapid M3 growth is not very telling evidence, especially when the structure of the financial system is changing rapidly, as it is now. When the Fed lend money against crap, they are directly expanding base money, not M3.
“anglo-american model of transaction based financial capitalism”
I think the London markets still have a great deal more of integrity, proper regulation, and trust than the rotten US financial system. It is worth recalling that the British Northern Rock banking bust was a direct result of the US Subprime CDO fiasco. An elderly British man lining up to withdrawal his money from Northern Rock bank was quoted on the BBC, “Don’t the Americans have any rules and regulations anymore”. Wall Street financial institutions have no compunction in even screwing the British public across the pond. The US capital markets use to be the pinnacle of world capitalism, but not anymore with the US government regulatory agencies themselves hijacked by the Wall Street banksters.
Come to think of it, I dare say that one reason the Fed is adding base money is BECAUSE M3 is increasing. Even though the additional part of the banks balance sheet – crap from the SIVs and deposits from the enhanced money market funds – is relatively immobile, the banks still have to hold reserves against the deposits, so unless the Fed adds reserves, the normal, more liquid part of their balance sheet has to contract.
US sub-prime was only the straw that broke Northern Rock’s back. It just brought the ABCP market that NR relied on for funding into disrepute, even though NR hardly held any US sub-prime paper.
Northern rock got into trouble b/c it relied on the securities market (and the interbank market) to finance its mortgage lending …. British banks weren’t willing to lend to it to make mortgages denominated in British pounds.
given the coming global contraction in oil production and the ongoing loss of available topsoil, the global economy itself is likely to enter upon an extended period of contraction. in such a historical period a contracting money supply would be appropriate, just as an expanding money supply has been appropriate over the decades of boom.
- and secondly. its not just europe and china – saudi arabia made a veiled warning recently to united states policy makers. the message is – ‘if you value being in sole charge of the global economy’s reserve currency, then give us dollars worth saving. your recent policies are exporting inflation and dumping mortgage debt dressed up as AAA investments. you are messing up our economies. you are not just living beyond your means – you are living beyond ours.’
they did not say exactly that out loud – but they wouldn’t. would they ?
re: “the key clue”
are you advocating a sino-arab model and what might that be?
I don’t think anyone who reads this blog thinks I am a fan of the Chinese model! I am in favor of a reformed anglo-saxon model. But I believe there is a need for serious reforms — tho I don’t as of yet have a precise agenda in mind.
I think I have also encouraged frequent commentators to pick an identifiable moniker — GuestA for example.
gillies — interesting comment. tho someone has to live beyond their means (in the sense of borrowing a ton) if china and the gulf are going to save a ton. i would have more sympathy for their critique of the US is they were not so keen on financing it — and might have more sympathy for their complains about $ weakness if they stopped selling $ for euros and other currencies and thus took some pressure off the market –
And unfortunately (for the us, not for other countries taxpayers) is seems like us and european banks that borrowed in the us money market ended up with more AAA subprime than the rest of the world …
The curious thing is that the retail derivatives market in the United States is far more regulated than in the United Kingdom. In the UK, you can walk into any bank and buy really, really complex derivative instruments. In the US, you can’t.
So the big complex derivative desks are actually in London and Hong Kong rather than in NYC.
A large part of the problem is that the LIBOR market is very different than the Fed Funds market. The LIBOR based European market shares much of the credit risk origination problem. Hence the very wide spreads between LIBOR and funds. Similarly for the US commercial paper market. The key question for the Fed is whether further easing of Fed Funds will be required to lower absolute levels of LIBOR and commercial paper – as opposed to yesterday’s year end turn band-aid ‘solution’. Only one of the Fed’s communication problems yesterday was that they confused a tactical year end goal with the market’s demand for strategic action.
could you spell out the difference between LIBOR and Fed funds a bit more? It isn’t something I understand well but it is something that I sort feel like I have to understand.
I’ve never been to the far east, maybe you can tell more than me, but I think that in a place where financial markets are (a bit) less developed and where you can even be arrested if you dare arbitraging with currencies (see the Economist of couple of weeks ago) financial derivatives might be less attractive than they are in more developed countries.
One of the most interesting features of today’s world is that it feels like it is so unsafe. I also feel that our reaction to this is being that of shouting to each other pretending that ours is the worse situation. This is not a good strategy and it may only yield a big misunderstanding. We can’t all be on the right side. Each of us should take responsability for his own faults. Here is an example: only last summer China’s government decided to invest some money on Blackstone Group. Did you take it as a sign that China’s bargaining power is strong? I did not.
I think August 2007 crisis will end up as one of Poe’s narratives for the USA and probably for Europe as well. Will it be Countrywide, or Bernanke or supbrime borrowers’ fault nobody knows. But it was not sustainable, no matter what the rest of the world wanted to save (sorry Brad, but “CA=0 for the world” argument is not enough for me to clear the shrewd lenders’/borrowers’ faults).
I hate saying this, but risk is not just a theoretical aspect of economics. And risk implies that losses occur, sooner or later. These might be stressing moments. They will not last long, hopefully.
“…many business loans and credit card interest rates are based on Libor, meaning that many Americans are paying higher effective interest rates than they were six weeks ago – despite the Fed having cut the short-term interest rate it controls…” http://www.washingtonpost.com/wp-dyn/content/article/2007/12/10/AR2007121001612.html
a fair amount of us external debt is also indexed to LIBOR.
“DC, will you quit droning on about M3. M3 deposits are inside money that are matched by debt. When SIVs are collapsing, banks are going to have to reintermediate, and M3 can be expected to grow rapidly even if credit is as tight as a duck’s behind.”
Sssshhhh!!! Don’t rock DC’s boat too much Rebel. The conspiracy by the Fed to hide M3 growth is at the basis of the leftist alternative view that the global economy is a house of cards based on the “fiat petrodollar”. The US is able run a free printing press to pay its bills in order to enforce “US dollar hegemony” (did you know that the US will invade any oil country that threatens to bill customers in Euros and not USD? It’s true, I read it in the Asia Times) The wild inflation that would normally be caused by this kind of behavior really is happening, it’s just being hidden from naive economists by our sinister government authorities.
Doesn’t the USA have a LIBOR-like index of its own?
speaking of LIBOR, i’ve noticed a number of preferreds, such as BAC.PR.E, base (fluctuating) dividend payments on the LIBOR rate, which is kind of interesting.
It’s funny that Wolf doesn’t seem to think of the obvious answer – figuring out a way to end term transformation (maturity mismatching).
Why on earth does everyone seem to assume that term transformation is a socially productive function? Its association with these kinds of crises is about as regular, about as obvious, and (IMHO) about as debatable, as the association between smallpox and the smallpox virus. No term transformation, no financial panics, no “business cycle.” (Actually, if this is indeed a case of blaming the victim, “banking cycle” might be a better term.)
Sure. It makes more present money available to people who want to borrow. So does a policy of having the Fed just print money and lend it. (Excuse me, “back currency with debt.”) In the end term transformation turns out to be just an especially opaque and tortuous (if not indeed tortious) way to accomplish this same strategy. Because term transformation does not work without a liquidity guarantee, and there is no way to construct a liquidity guarantee which is not also an insolvency guarantee.
The TAF is an obvious baby step toward this future. I’m sure that if you disguise it sufficiently, it won’t smell at all. My inclination would be to go in the other direction, and formally nationalize.
(For example, why aren’t the GSEs part of the Fed? Isn’t the Fed itself basically the original government-sponsored enterprise? If the Fed simply purchased all outstanding equity of the GSEs, at the present market price, with its “device called a printing press,” who, exactly, would be the loser? At least we could start thinking about how to actually privatize the damned things.)
Furthermore, term transformation is an attempt to win at a zero-sum game, because it is creating present money but not, of course, present goods. The more future money is transformed into present money, the more present money chases present goods. From a social welfare standpoint, the only way this can possibly be beneficial is if you consider income redistribution socially beneficial.
Which, when the primary beneficiaries of your redistribution appear to be hedgies in London who promptly exchange their profits for M3s – and I’m not talking about the monetary indicator – is a rather difficult case to make, n’est ce pas? I’d really hate to see what would happen if the marks started to figure this one out.
RE, I think what you (like Hussman) are missing is the large quantity of assets whose present price is guaranteed by the implicit power of the Fed to do exactly what I propose above. Eg, of course, agency notes. And if it isn’t the Fed, it’s the BWII codependents.
B.Setser “tho someone has to live beyond their means (in the sense of borrowing a ton) if china and the gulf are going to save a ton.”
No offense, but this really is a dollar liquidity problem. These SIV’s and CDO’s and whatever else are the proverbial junk mail that got stuck in the letter box. Saying that they shouldn’t save so much is like telling them to shove more letters in. They have no choice but to save! Equally, blaming it on not knowing who has what subprime exposure is like blaming the problem on not being able to see who sent the mail. I’m not sure if the liquidity or these junk credit vehicles came first, though for the point of this metaphor I don’t think it’s all that important, the point is that the problem is a dollar problem. It’s disingenous to blame it on anybody else.
“and might have more sympathy for their complains about $ weakness if they stopped selling $ for euros and other currencies and thus took some pressure off the market”
That’s it, be a good soldier and bite the bullet. Stand tough and don’t complain! Take it for the USA.
The same approach can be observed in Bali. Even though the US is the biggest emitter in the world, it’s really China’s fault.
Written by bsetser on 2007-12-13 16:51:56
LIBOR is the interbank deposit interest rate index for lending between non-US banks in US dollars (or in what used to be called much more regularly Eurodollars – the introduction of the Euro sort of mucked up this terminology.)
Fed funds is the interbank deposit interest rate index for lending between US domestic banks in US dollars. Domestic banks can also lend using LIBOR but I believe in general this is done using their offshore domiciles.
The difference between the two is very important for this crisis. I don’t have a ready source of data, but I believe the spread is normally fairly small, but positive – in basis points. The spread these days is huge – I think in the order of 1 per cent give or take.
The reason for the current spread is twofold. One is that European banks have been a big source of US dollar revealed credit risk during this crisis. So these banks have tiered in their willingness to lend each other money and pushed LIBOR up, other things equal. Two is that on the other side, fed funds is the rate that the Fed targets and essentially controls through its own intervention from a supply and demand perspective. It is little understood that the Fed in fact has been RELATIVELY successful in maintaining a minimal trend deviation of the actual funds rate to the target rate during this crisis. To prove this, simply find a source of data known as the ‘fed effective’ rate, which is essentially the actual average fed funds rate on a daily basis. It deviates from the current target, but it tends to deviate either side of the target. True it has been more volatile in recent months, but the fed is inevitably effective in getting the actual to trade roughly around target on average.
One corollary is that the Fed can target the funds rate pretty well. But it can’t target the LIBOR spread in this environment. Yet that is precisely what it is now attempting to do with this recent action. I don’t think its going to work. On the other hand, given the current LIBOR spread against funds, it can take this into account and indirectly target the full LIBOR rate by targeting fed funds – i.e. by lowering the funds rate more. LIBOR spreads will only return to normal, and gradually, if the full LIBOR rate is lowered by lowering the funds rate. This is in my view what they need to do urgently.
You are right to be interested in this topic. It could be useful in understanding the flows.
Written by bsetser on 2007-12-13 16:51:56
Plus all other comments I see above re LIBOR are generally correct. LIBOR is a more developed market in terms funds than is fed funds. So term LIBOR developed into a convenient index for some domestic US asset pricing. But the distinction between the two remains in terms of money that banks lend to each other.
Both fed funds and LIBOR are unsecured lending. Discount window borrowing and yesterday’s announced facility are secured.
Also, the London financial services industry is dominated by basically the same largely American-headquartered banks that run Wall Street. They really aren’t two separate markets but rather part of one 24-hour global market. It’s very common for someone in NYC to be assigned to a team whose manager is in London and vice versa, and with e-mail, telephone, IM, and the occasional trans-Atlantic flight, it’s really one single team.
Bernando Alto: if you dare arbitraging with currencies (see the Economist of couple of weeks ago) financial derivatives might be less attractive than they are in more developed countries.
That actually makes them more attractive since in these situations derivatives are used for someone to do something that they can’t do directly. Want to arb currencies but can’t because of capital controls, have we got a product for you!!!!!
bsetser: could you spell out the difference between LIBOR and Fed funds a bit more? It isn’t something I understand well but it is something that I sort feel like I have to understand.
LIBOR is what banks in London charge to lend money to each other. Fed funds is what banks in the US charge to lend money to each other. Most dollar securities are based on LIBOR rather than Fed Funds since the Federal Reserve does have the authority to force banks to lend to each other at a certain rate (although it hasn’t used that authority in years) whereas the Federal Reserve doesn’t have that jurisdiction over banks in London.
bsetser: I am in favor of a reformed anglo-saxon model.
The problem I have with talking about models is that things change and change quickly. The current way the US economy works is somewhat different from the way it works in 1997, very, very different from the way it worked in 1987, and if you go back to 1977 and 1967, it becomes unrecognizable.
This becomes a huge problem when you talk about having China copy the “Anglo-Saxon model.” Which Anglo-Saxon model? In 1994, the Chinese government decided to copy the structure of the US banking industry by imposing a wall between commercial and investment banking, and by creating a set of what in the US would be called regional banks. That legal barrier still exists in China even though the US got rid of it in 1998 prompting a set of financial mega-mergers that give you banks that look rather German and are gobbling up regional banks.
Functional complex systems evolve and are not planned. The current US finance structure came about through trial and error and lots of messy politics, and there is no reason to think that China would be better off if it didn’t go through a process of trial and error and lots of messy politics.
Written by bsetser on 2007-12-13 16:51:56
Plus maybe when macro man reads this tomorrow morning he’ll have something to say about LIBOR versus fed funds. He’s in the thick of it and should understand it well. I’d be interested myself if he corrects anything I’ve got wrong.
Written by bsetser on 2007-12-13 16:51:56
Finally, to be clear, Bernanke is in the process of making a huge error in monetary policy – and this LIBOR symptom is a big part of it.
There is a story here about how you have to think very carefully about regulation….
European banks have been more quick about implementing Basel II in part because Europeans have a more unified system of banking regulations whereas you have about a half dozen bank regulators in the United States. So bank regulators impose stronger capital requirements on their banks, which means that you have European banks looking for AAA securities that having high-yields. Hmmmm…… I wonder where we can find those……. Say, don’t you have that asset backed commercial paper and sub-prime CDO……
It’s going to get interesting because European banks report after six months, which means that the bad news is just about to come out now…….
Written by Twofish on 2007-12-13 20:54:58
LIBOR is used in London but not just in London – it’s used anywhere outside of the US for US dollar interbank lending. E.g. it would be used by Citi Tokyo lending to UBS Nassau.
moldbug: Why on earth does everyone seem to assume that term transformation is a socially productive function?
Because if it weren’t people wouldn’t be making money off doing it…….
Moldbug is fascinating.
There are a lot of socially-unproductive ways to make money! Some of them involve these new color laser-printers that are just coming on the market
anonymous — it might be a bit clearer if you started with “in response to bsetser at 16:51; that way it is clear that you are writing, not me. no matter tho. huge thanks for your response.
a couple of questions tho — my sense is that fed funds is banks lending mandatory reserves (i.e. something they have to hold) among themselves, while libor is broader, i.e. it captures all bank lending among themselves, not just to meet mandatory reserve requirements. is that remotely correct?
and if say citi london is short on $ cash (as it needs to in effect buy the assets of a city SIV or meet a commitment to supply credit to firm), would it borrow the funds in London at LIBOR or in NY at fed funds. My sense is in London, not in NY — but given the price differential i don’t understand why. The same applies to most European banks — they have NY operations. why not borrow more cheaply in NY?
I am sure there is a really simple explanation for all this, but it isn’t something I know well. I do appreciate the tutorial.
2fish — your point about the evolution of the anglo-saxon model is a good one. and I am waiting for you to find a way to offer a one-year RMB forward at a price close to the current interest rate differential between USD and CNY!
Brad 15:42:02 -
Your response to gilles’ comment is wrong and light-hearted:
1. Saudi Arabia and China ARE NOT SELLING USD FOR EURO.(When the Euro is traded at 1.27 previously, ECB asked China not to buy Euro, and China already agreed.) If the USD is a sinking ship, India, Russia, Korea, Thailand, etc. can jump (and already did), for certain reasons, Japan, China, Saudi Arabia, Hong Kong, Taiwan, etc., basically will stay to the bitter end – together with the captain.
2. Saudi Arabia is not intentionally hoarding USD. It has a very simple exit strategy – selling less crude oil. Domestically, Saudi Arabia has room to improve. But I expect you to be far more intelligent to criticize its USD predicament.
bsetser- why not borrow more cheaply in NY?
Could it be that there are regulations preventing the $ from leaving ny for london or the possibility for transaction costs to be jacked up beyond the price differentials. Would be nice to have an answer, remember reading it in one of those textbooks on finance but never could remember the text.
twofish- term transformation
bet those economic profs are all falling off their chairs, “term transformation” is a blatant ignoring of basic treasury management rules but the again, most people view rules as something to be vbroken
In Response to bsetser on 2007-12-13 22:15:15
Banks that borrow and lend fed funds directly with other banks must have reserve accounts with the Fed system in order to do so. This is the way in which banks ‘square’ their reserve account positions in order to meet their reserve requirements. Conversely, borrowing and lending fed funds always affects their reserve account with the Fed.
Banks that borrow and lend in Eurodollars at LIBOR (offshore dollars) are either foreign banks operating offshore or US banks operating offshore (i.e. anywhere but the domestic US). This is indeed the broader global market for US dollars. Reserve effects with the Fed are not an issue for foreign banks. Reserve requirements for US banks operating offshore are not a direct issue to the degree that LIBOR transactions would not clear directly through a Fed account. But they would clear internally against the US parent bank, and ultimately through its Fed account.
The second part of your question is why banks in Europe wouldn’t use their US operations to borrow in fed funds and downstream (US banks) or upstream (foreign banks) funds from New York to London. I’m not 100 per cent sure on this, but I think that US banks are probably subject to constraints in terms of regulatory and tax implications that preclude excessive downstreaming of funds from US operations to foreign branches and subsidiaries. I’m guessing there are some rules about balancing foreign domiciled assets and liabilities, imposed by US and/or foreign jurisdiction authorities. I know that’s vague, but I’m fairly sure its a factor. In the case of foreign banks operating in the US, they can’t access the fed funds market (directly) because they don’t clear through a Fed reserve account. They would clear through an account with a domestic US bank.
In Response to bsetser on 2007-12-13 22:15:15
By the way, this is already implied in some of my comments, but the early morning demand for US LIBOR borrowing in Europe has been a tremendous headache for the Fed during this crisis. They can’t response directly to the LIBOR pricing pressures. These pricing pressures may also reflect in unusual funding requirements through the internal clearing accounts of US banks operating in Europe with their parent operations in New York, as well as in the New York clearing accounts of European and other foreign banks (through their domestic US clearing agent banks). The Fed initiative yesterday is an attempt to respond to all of this. Again, I doubt its going to work very well. The market doesn’t seem to think so either at this point.
anonymous — many thanks; that makes sense to me.
Disgruntled — I am with you on Bali. The US clearly could (and in my view should) commit to do more. And there are known policy steps that US could take that would reduce US emissions.
I am not with you on “forced savings” outside the US — savings rates are a choice, and often a public policy choice. two examples.
the Saudis have chosen to budget for $50 a barrel oil next year. They could have budgeted for $70 or $90 (and saved less), or budgeted for $30 and saved more. They also could choose to pay dividends to all saudi citizens out of the oil revenue and let the saudi population decide how much to save.
And china could have required that profitable state owned enterprises pay dividends to the state and then used to the dividend income to finance higher levels of social spending, reducing individual incentives to save. The SOEs have the cash and could pay — cutting into enterprise savings. But the Chinese government opted not to make this policy change.
I could outline the ways the US could reduce its carbon footprint as well — import Brazilian sugar cane ethanol rather than use energy inefficient corn based enthanol for bio-fuels, tax gasoline at a eurpoean level, impose higher CAFE standards on cars and critically light trucks, start building a lot nuclear reactors (a la France) and so on … there we opted not.
I do not know quite how to prevent — in a private system — US households from borrowing more (And saving less) when the financing is there. I guess the US could have imposed stricter regulations on certain kinds of mortgages, but that risks pushing rates down until someone borrows or someone decides to save less to bring the system back into equilibrium. in retrospect (for that matter even at the time) it seems like a good idea.
but nonetheless some in a closed system (like the world economy) has to offset a surplus with a deficit — and my read is that policies in the surplus countries played a large role in inducing the deficits in the deficit countries (With the evidence being low interest rates which imply a surplus of savings … )
China is asking the U.S. to set monetary policy for the globe, which is quite a concession on sovereignty for a nationalistic government. OTOH, U.S. has long proclaimed global leadership and a strong dollar policy so it is not quite so responsibility free as what Brad made it sounds like. It is true though the Fed has never been officially authorized to take into account of other nations when setting monetary policy.
This may be a little off-topic, and may get me hammered in this forum, but while the Anglo-Saxon financial model may well need some reform, perhaps I am a little more optimistic than you are about its functioning. In my view a well-functioning financial system needs lots of moving parts to maintain flexibility and needs systematically to assume, transform and pass risk around. As Minsky has argued, it is impossible even in theory to eliminate this risk, and an inevitable consequence is that there will be crises – and so they are not necessarily evidence of a failure of the system. The real question for me is whether the financial system can work its way out of the crisis quickly and can resume functioning as an efficient allocator of capital. In other words will the current crisis lead to Japan after 1989 or the US after 1987. I discussed this in Volatility Machine, especially in reference to a fascinating (to me) bit of speculation by the Belgian historian Raymond de Roover. Sorry for self-quoting, but here it is:
…the relationship between hard and stable money and rapid economic development is perhaps not as clear as it ought to be, even though among most economists the importance of sound money is often an article of faith. Economic historians, however, have been much less certain. The problem arises in part because periods of rapid economic growth were not always periods of sound banking and stable money. Bank historian Raymond de Roover makes the point explicitly when he surmises, in discussing the early economic experiences of the United States, that “perhaps one could say that reckless banking, while causing many losses to creditors, speeded up the economic development of the United States, while sound banking may have retarded the economic development of Canada”.
I too would love to hear more about the fed funds / LIBOR distinction…….I am not sure that we are doing it justice here yet. I once looked into it contractual reasons (re the remuneration rate for cash collateral), and I never did get to the bottom of it!
There are various considerations than I can think of:
(1) Fed funds settles at the Fed
(2) Fed funds settles later in the day (LIBOR is defined as overnight in London)
(3) LIBOR settles spot (T+2), when does Fed funds settle?
(4) There is no FDIC premium payable on fed funds
(5) hierarchy in bankruptcy?
Grateful for anyone who can shed even more light on this issue, which must be significant when the spread can get so large.
Incidentally, a similar increase in spread has occurred between the BoE repo rate and sterling LIBOR.
The kernel of the problem with the ‘Anglo-Saxon’ model is the intellectual view of risk. Since Markowitz’s article on portfolio theory in 1952, finance has embraced the notion that risk is equivalent to standard deviation. The financial services industry began to embrace it a bit later, including various efficient portfolio models, options, and ‘value at risk’. These models are all based on standard deviation as the core notion of risk.
There are a few problems with it but in general, an evolving financial services architecture tends to make historic measures of standard deviation unreliable as indicators of future risk. The notion of the ‘black swan’ event is creative, but silly, in that it still superimposes a ‘remote’ risk event over an old standard deviation measure.
Perhaps Minsky’s theory should be applied more directly to the heart of the notion of the measure of risk, so that future armies of quants can be less self-delusional about the thoughtfulness and usefulness of their output.
At the heart of it, this crisis is no different than LTCM. It is broader and more systemic, but no different in its true cause. It is a simple fact that the standard deviations that were used in both the LTCM models and in the ABS and CDO models were ultimately inapplicable. This isn’t a black swan problem. It’s a risk epistemology problem. At the heart of it, naive standard deviation fuelled the supply of excess funds to the subprime and related mortgage markets. Even the n-standard deviation events that are bolted onto a 3 standard deviation model as ‘scenarios’ are deceptive pretenders of comprehensive risk.
The world is upside down. It’s interesting to consider how successful institutions have avoided the problem. It has to do with some sort of management consideration that filters the problem of risk epistemology through a black box of judgement. But you have to know something about what a standard deviation is in order to call the bluff of the 26 year old quant and still retain leadership credibility before the ship goes down.
RebelEconomist on 2007-12-14 05:58:36
Your concerns seem more mechanical than conceptual.
Fed funds settle the day of – i.e. real time t in terms of a daily calendar. If you’re short fed funds at 6 p.m., you go to the discount window if you have an account with the Fed. That’s the drill. Eurodollar LIBOR settles t + 2 and no LIBOR funds settle directly through the Fed. They settle t + 2 through a clearing bank which then settles its entire position including that day’s fed funds borrowing and lending through the Fed. There’s no FDIC premium on Fed funds because they’re not technically deposits (they’re considered ‘borrowed funds’). There’s no FDIC premiums on LIBOR priced Eurodollar deposits because they’re not domestic US deposits.
how the eurobar rate factors in?
“…The euro interbank offered rate banks charge each other for such loans rose 80 basis points to 4.95 percent, the European Banking Federation said today. That’s 95 basis points more than the European Central Bank’s benchmark interest rate. The three- month borrowing rate stayed near a seven-year high for a second day…” http://www.bloomberg.com/apps/news?pid=20601087&sid=aVVQyRlrUMLM&refer=home
anonymous — what is the condition that prevents arbitraging the difference between onshore fed funds (i.e. borrowing funds in that market) and offshore LIBOR (i.e. lending in that market)?
My guess is that settlement through the fed is key, so there is no counter-party risk with fed funds and there is with offshore LIBOR.
re “it is a risk epistemology problem” –
I have a lot of sympathy for your view. What I see is over-reliance on quantifiable past data even as the core conditions of the market change, rendering the past data less useful. For example, regional housing markets in the US used to be distinct at least in part b/c of limits on intra-state banking (Kansas banks couldn’t do business in Missouri, and vice-versa) and regional S&Ls. The introduction of a “Countrywide” mortgage lending market and a “countrywide” loosening of lending standards (sorry to pick on one firm, but the name is just too fitting) helped change correlations in ways that no backward looking model would predict.
the regular invocation of 100yr or 1000 yr floods as explanations for large losses also suggests that such events are much more common than is generally assumed — especially when a large player becomes large relative to the market and any stress it encounters starts changing market dynamics.
Anonymous: Since Markowitz’s article on portfolio theory in 1952, finance has embraced the notion that risk is equivalent to standard deviation.
This is simply not true. Standard deviations are a useful tool in thinking about risk because they can give you very quick, very rough numbers, but they are only one tool in the toolbox.
Anonymous: It is a simple fact that the standard deviations that were used in both the LTCM models and in the ABS and CDO models were ultimately inapplicable.
This is also not true. LTCM got in trouble with convergence trades which have nothing to do with standard deviations. The heart of CDO modelling involves coorelations. If company A goes under, how does that affect the chances of company B going under? This again has nothing to do with standard deviations.
Anonymous: But you have to know something about what a standard deviation is in order to call the bluff of the 26 year old quant and still retain leadership credibility before the ship goes down.
This is completely backwards. The risk models that quants came up with seemed to be pretty accurate about what was going to happen, and you don’t need a Ph.D. in mathematics to know that lending to people with bad credit on inflated real estate prices was a stupid idea, and if you put in likely default rates into the models, then the output is surprise, surprise, surprise, you lose lots of money. If management forces you to put stupid numbers in, you’ll get stupid numbers out.
The banks where the quants and people with some basic common sense were able to run things did well. Those that didn’t, didn’t.
It might be helpful to people to realize a basic fact about the world’s money system. USD never leave NY, GPB never leave London, JPY never leave Tokyo, CHF never leave Zurich. Each currency always remains under the control of its respective central bank. When USD “leave” the US, those dollars are being transferred from a customer’s NY branch account with a US bank, to the customer’s Grand Cayman, or London Branch account. At the end of the day, all these tranactions are settled in NY through a US NY clearing bank. For example, China’s massive USD reserves are effectively bookkeeping entries on the books of US banks in New York. The US government has the ability at any time to “freeze” these assets ie not allow them to be transfered.
Perhaps a good way to visualize this is to visit the massive gold vault built on top of solid bedrock beneath the Federal Reserve Bank of New York in Lower Manhattan. Stacks of gold bars are visible in countless rows of little cages. Each cage belongs to a different sovereign nation. When one nation decides to settle an account with another nation, they send instructions to the Fed, who then send some guys down to open one cage, take some gold bars out and put them into another cage. I don’t know if the Fed is still allowing visitors, but this used to be one of the least known, but most fascinating tourist sites in NY. Please note that they used to require that you make an appointment one day in advance.
“…Unlike BBA Euro LIBOR, EURIBOR, the complementary fixing which has been established by the European Banking Federation and ACI to benchmark in-zone rates, applies a concept of country quota. Each in-country has at least one bank represented on the Panel and smaller countries will rotate membership of the Panel amongst their leading commercial banks every 6 months. EURIBOR has a panel of 49 reference banks from in zone countries as well as international banks. Bank of Tokyo-Mitsubishi, Chase, Citibank, JP Morgan Bank of America and UBS have been selected to represent international banks. The averaging method of BBA LIBOR (wherein the top and bottom quartiles are discarded and the middle 50% averaged to produce the LIBOR fixing) is similar to EURIBOR’s although only the top and bottom 15% are rejected in the FBE/ACI process. This differential topping and tailing will result in there being a greater ratio of smaller banks to larger banks in EURIBOR. The degree to which EURIBOR and BBA Euro LIBOR are used in the wholesale markets could be determined by differences in perception about the credit quality of the 16 large banks comprising the BBA Panel and the banks on the EURIBOR Panel, some of which are comparatively small. The BBA Euro benchmark is vested with the same degree of authority and worldwide acceptance as the existing BBA LIBOR fixing series. Banks in London can be sure that the BBA Euro LIBOR rate is as representative of activity in Europe’s major financial centre and many are likely to prefer it to EURIBOR in their wholesale cash and derivative contracts…” http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=225&a=1415
Guest — I visited the vaults at FRBNY last year and that is exactly how gold is moved across borders. There are even special protective shoes to protect the feet of those who actually move the gold bricks around — gold is very dense, and dropping a brick on your foot could do serious damage.
I disagree a bit with your argument about $ being book keeping entities in NY — not in full, but in part. there are, of course, cash dollars that circulate globally — over $300b by the US gov’s count. Those are global cash — basically untraceable, used to settle accounts globally. Of course, when the cash reenters the banking system, then it reverts to being a book keeping entity.
That though is minor. I think the bigger difficulty is that the US can only freeze your account if it can identify the account as “yours” — and that gets harder and harder. Suppose a middle eastern fund invests in a london hedge fund. its money is intermingled with all sort of other money. The US could freeze the hedge funds accounts, but that casts a much broader net. I think even direct ownership can be disguised — the PBOC opens an account with a bank in Singapore, and the US custodian simply knows it is holding a security owned by someone with an account in singapore.
Your point tho raises the question of why not arbitrage fed funds and libor, since everything (in your story) settles through NY in any case …
Written by Twofish on 2007-12-14 09:02:06
I generally ignore your know-it-all, negative, ‘twofishipedia’ comments.
But if you knew anything at all about the mathematics of the subject, you would understand that standard deviations are the building blocks of covariance and correlation statistics. The rest of your observations warrant a similar caveat but I can’t be bothered.
And I thought you didn’t know anything about gold! Where can I order some of these special protective shoes? And can I wear my Gold Toes under them?
Of course “standard deviation” is a mathematically unsophisticated way to express your point, and 2fish is right to jump on you for this. But you are still right and he is still wrong.
A more general way to express your point, I think, is that the problem is in stochastic financial models which work by defining a pattern generator which the past behavior of some financial number appears to resemble, then defining “risk” in terms of the behavior of this model. Black-Scholes is of course the canonical example.
Nassim Taleb’s use of the word “pseudoscience” to describe this is entirely accurate. It is a classical example of using mathematical abracadabra to disguise a well-known fallacy: in this case, the idea that past performance predicts future results. Financial numbers are not just numbers – they are the consequence of patterns of events in the real world. These patterns can be arbitrarily complex in both short time scales and long.
One pattern of events which tends to break these models is – as we’re seeing – the pattern of credit expansion and contraction caused by (IMHO) term transformation. Even Fed economists understand that term transformation creates a system with multiple equilibria – see the Diamond-Dybvig theory of bank runs. When you combine phase changes (toggling between multiple equilibria) with stochastic risk models which expect the future to mirror the past, you have a pretty good recipe for financial nitroglycerine.
(Are there any mathematical economists in the house? How, exactly, do you reconcile the efficient market hypothesis with the Diamond-Dybvig model, or with any model that implies the presence of multiple equilibria? We’ll ignore for a moment the fact that the benign mode of a Diamond-Dybvig bank isn’t really an equilibrium at all in the absence of official guarantees, because the only 100% effective way to actually verify that the bank’s balance sheet is balanced is to actually have a bank run…)
response to bsetser on 2007-12-14 08:19:50
I’d be guessing somewhat at your fed funds/LIBOR arbitrage question. But fed funds are essentially onshore and LIBOR offshore. I think there are regulatory or tax constraints that would prevent too much in the way of on-shore fed funds funding of offshore LIBOR lending. Fed funds are funds borrowed between banks and they are unsecured. I’m not sure the interposition of the Fed as the clearing bank changes the credit risk. LIBOR lending is also unsecured. I think there is a real differentiation in this market between onshore credit risk and offshore credit risk, although I’m not sure why the spread should be as large as it is – doesn’t make entire intuitive sense given the shape some of the US institutions seem to be in. I think its more the fact that the Fed can directly force down the funds rate by injecting reserves – funds borrowing and lending can’t come to a complete halt so I assume domestic insitutions would favor other domestic institutions.
Guest: When USD “leave” the US, those dollars are being transferred from a customer’s NY branch account with a US bank, to the customer’s Grand Cayman, or London Branch account. At the end of the day, all these tranactions are settled in NY through a US NY clearing bank.
That’s not true. Transactions can be settled anywhere in the world. A lot of transactions are settled outside the United States precisely to avoid US regulators. The people that started the Eurodollar market were actually the Soviets, who didn’t want their money seized. Cubans, Iranians, and North Koreans will gladly take US dollars since they know that they can do transactions with them outside of the US.
Guest: For example, China’s massive USD reserves are effectively bookkeeping entries on the books of US banks in New York.
There are bookkeeping entries, but they don’t have to be located in New York. In fact, they don’t have to physically be located anywhere.
Money is a virtual commodity that exists mostly in cyberspace.
Point taken. But I believe a targeted ‘unsophisticated’ (i.e. simple) way of referencing the mathematical kernel of the thing (e.g. standard deviation and correlation obviously as the engine of Markowitz and co) is in keeping with the theme that mathematical sophistication has become a catalyst for a very unsophisticated and slavish devotion to quantification.
Anonymous: But if you knew anything at all about the mathematics of the subject, you would understand that standard deviations are the building blocks of covariance and correlation statistics.
Covariance and correlation are useful for “quick and dirty” estimates, but no one uses them for anything other than that, and certainly no one uses them to model extreme situations.
moldbug: stochastic risk models which expect the future to mirror the past
They don’t. The risk models that people use are usually “what-if” simulations. Suppose the Dow dropped 50%, what happens? Suppose the Dow *rose* 50%, what happens? The goal in the non-proprietary part of an investment bank is to be market neutral so that your assets and liabilities match regardless of what the market does. Because the basic assumption is that the market cannot be predicted and anything can happen.
A really, really good trader with years of experience will guess market moves incorrectly about 40% of the time.
Twofish on 2007-12-14 12:10:34
You’ve immediately contradicted yourself following your emphatic protestations that the LTCM problem was one of correlation and not standard deviation (which in itself was a contradiction). Now I know why rebel economist goes crazy trying to debate you.
Every model needs inputs, and these inputs are stochastic. If your risk model does not assume that it is more likely for the Dow to drop 50% than for it to drop 75%, it’s a very strange model indeed.
And how likely is this? Well, you could look at what the Dow has done in the past… and this is how you get to Taleb’s 10,000-year-old economist.
moldbug: Every model needs inputs, and these inputs are stochastic. If your risk model does not assume that it is more likely for the Dow to drop 50% than for it to drop 75%, it’s a very strange model indeed.
In doing risk management, you really don’t care how or why an extreme event happens, you just want to be able to survive it. What happens if the Dow drops 30%? It doesn’t matter how or why, you just want to make sure that you survive it. You go through the list of extreme events you can think of. What happens if interest rates go negative? What happens if interest rates to go 20%? What happens if you have deflation? What happens if you have hyperinflation? What happens if you have all possible combinations of the above.
If you have a reasonable assurance that the bank can survive all of these weird events, then it is more likely that when the tidal wave does come, it won’t break the bank.
Also just because an input is strange doesn’t mean it can’t happen.
Anonymous: You’ve immediately contradicted yourself following your emphatic protestations that the LTCM problem was one of correlation and not standard deviation (which in itself was a contradiction).
I said: This is also not true. LTCM got in trouble with convergence trades which have nothing to do with standard deviations.
Market makers do not use models to predict future prices. (Prop traders do.)
This is what they do. Suppose I find that the price of apple is $1 and the price of a orange is $2. What is the fair price of one apple and one orange? The answer is $3. What about half an apple and 2/3′s an orange? etc. etc. What if someone gives me the price of half an apple and half an orange? What should I sell one apple at?
So given a set of market prices, it is possible to come up with a consistent price of a combination instrument. Derivatives pricing is just a complex form of this.
Also people who write these models do have something called common sense. If a model comes out with the answer that you should sell gold and buy chicken feathers, then people will question the model, and sometimes you don’t need math to tell you that you are doing something really stupid.
ah — but don’t most correlation trades assume that nothing strange will happen –
i.e. if the price of 29 yr old treasury rises, so will the price of a 28 yr treasury and a 30 yr treasury.
what killed ltcm, if memory services is that they were consistently long the illiquid and short the liquid instrument across all their convergence trades.
that and they had a huge bet that equity vol would fall from its high pre-russian levels, and hedging their long-term equity vol position with more liquid short-term equity vol bets (am sure I have some details wrong) was very hard post russia.
bsetser: ah — but don’t most correlation trades assume that nothing strange will happen
Most statistical arbitrage trades assume that a relationship is statistical. Some of the time things will go the way that you think they will, some of the times they want, but you hope that you win more than you lose, and when you lose, you don’t lose big enough to be pushed out of the game.
Part of effective risk management and trading is to know when to close your positions and take your losses so that you don’t throw good money after bad.
The dangerous thing about computer trading is that you can’t just shut down your machines when things go bad. In October 1987, and 8/7, 8/8 and 8/9, this year, it was perfectly obvious to people what was happening. People were selling, this was pushing down prices, and causing more people to sell. Why didn’t people stop trading? Well, if *you* stopped trading and everyone else didn’t, you lose. So the rational thing to do is to join the stampede. This is why one of the changes is now to have everyone shut off the computers when the price goes up and down a certain amount on the NYSE.
But that’s very different from CDO’s, ABS’s and complex derivative pricing. There are about a two dozen different things that people do with mathematical models in finance, and part of the confusion is that people get things mixed up. Hedge funds are different from investment banks. Different parts of investment banks do different things and different hedge funds do different things. You have execution, algorithmic trading, portfolio management, and derivatives valuation, all of which involve different things.
Anonymous on 2007-12-14 12:20:52:
I’ll just let twofish slip over me!
Having been both in my time, I have a feeling that it suits the market practitioners to let conceited academics think that they are stupid. My own view is that the more savvy market practitioners understand that most of their strategies essentially involve using other people’s money to take tail risk with no excess return after fees, but that their management and performance fees will probably make them rich before they blow up.
It also didn’t help LTCM that once is was clear that they were in trouble everyone was out to kill them.
Twofish wrote: That’s not true. Transactions can be settled anywhere in the world. A lot of transactions are settled outside the United States precisely to avoid US regulators. The people that started the Eurodollar market were actually the Soviets, who didn’t want their money seized. Cubans, Iranians, and North Koreans will gladly take US dollars since they know that they can do transactions with them outside of the US.
Twofish – No, I insist. Eurodollar payments are all settled in NY through the CHIPS system like all other dollars. Go ahead. Google it. The difference between dollars on deposit with a US entity and a non-US entity has to do with their regulatory and legal status. Despite this status Eurodollars must settle at the end of everyday within the CHIPS system. Money may be “virtual”, but if you want to move dollars you have to move them at one physical place and at one physical time. While it is true that it is more problematic for the US government to seize USD that are on legal deposit with a non-US entity, I assure you, payment of those dollars can by stopped by intervening in the CHIPS payment system, which is a private corporation owned by a consortium of US Banks. The same can be said for US securities, which are also all settled in NY by the Depository Trust Company, another private company owned by a consortium of US financial institutions. Oh, and like the people who run CHIPS, the folks over at DTC are on pretty good terms with the Fed.
Certainly the Fed and the US government are bound by domestic and international laws, but in a crisis Washington and/or the Fed would act swiftly to protect either the common interests of the financial system, another nation’s interests or US national interest. For example, if the Chinese government tried to start exchanging their hundreds of billions of USD for foreign currencies en masse this wouldn’t even get as far as the CHIPS system. The players in the interbank foreign exchange market would out of their own self interest stop providing liquidity. I know. I traded currencies in NYC for 20 years. I had a direct phone line on my desk to the Fed and to Chinese quasi governmental entities. Even if the Chinese tried to use a proxy it would swiftly become apparent on whose behalf those proxies were acting. If FX market participants suddenly became irrational and tried to accomodate this activity, the Fed could politely request that the 30 or so banks that make up the bulk of the FX market stop providing liquidity for awhile. Legal? Probably not. Would they do it in a crisis? No doubt.
I don’t think the Soviets had any illusion that their dollar assets were fully protected by transferring them to London based entities, thus creating the first Eurodollars. They probably did this just to add a layer of legal protection. In a full blown crisis, the US would have kept their dollars in NY (to the extent to which they could identify them anyway), whether or not they were deposited in a London account or a Grand Cayman account. The only way anyone can remove the dollars from the Fed’s control is to either sneak them out or exchange them for another currency. The Fed can stop this by not allowing the FX transaction to settle in the CHIPS system, Eurodollar or not.
BSetzer – I understand there is a lot of paper US currency being held outside of US borders. I don’t have the numbers, but this is a microscopic percentage of US money supply. I also understand a lot of bank money can be hidden about through proxies and such, but China’s trillions is a lot to hide that way. They are the proverbial elephant in the China shop. My point is that they are not just caught in a USD liquidity trap, meaning there are no alternative markets for them to invest in, but they are in a crisis situation, just flat out in checkmate.
Anonymous on 2007-12-13 22:51:05 and Anonymous on 2007-12-13 23:02:08
Excuse this dumb question but surely there must be recognition that in times like these when Fed funds seem much “cheaper” than Libor funds that there must be regulations restricting the borrowing of funds by foreign banks and other entitites channelled through US banks/entities, if not there would be a “carry trade” of sorts in these loans, considering the spread?
Accounting wise, wouldn’t it be difficult to square associate/subsidiary A seeking financing by asking associate/subsidiary B or C based in the states to borrow Fed funds and transfer it to A ? Transfer fees and the red tape in transfer procedures might weigh the entire process down, or is this too simplistic a view?
The problem is that somewhere, somehow, you have to come up with a probability number. The sigmas are not handed down by God. Do you stress-test your system to the Dow falling 50%, 75%, 90%, 99%? What about the Rapture? What’s the chance of a Rapture, and how would it affect the dollar?
Raptures aside, the numbers come from somewhere. Obviously, they come from past performance. Or are you saying that risk managers just make them up?
Guest on 2007-12-14 18:42:37:
According to the Fed, the value of the stock of US currency in circulation was $759.5bn as of December 3rd. For the latest figure, see:
In 2002, it was estimated that at least half of dollar banknotes circulated outside the United States, although if Jay-Z and reports from Russia are to be believed, this proportion may have fallen as the dollar is being supplanted by the euro for gangster business. For an interesting account of external dollar circulation see:
I leave it to you and others to consider whether this amount of currency is insufficient to support dollar banking without recourse to payment systems under US control.
and the currency of choice for this business?
“Brian Mulroney, Canada’s former Conservative prime minister, said yesterday that he made the biggest mistakes of his life by meeting and then accepting C$225,000 ($220,000, €151,000, £108,000) in cash from Karlheinz Schreiber, a German arms industry lobbyist…” http://www.ft.com/cms/s/0/9f2d9a36-a9e9-11dc-aa8b-0000779fd2ac.html
“…India, China and Russia bring up the rear in TI’s [2006 Bribe Payers Index] BPI ranking. India consistently scores worst across most regions and sub-groupings. China is the world’s fourth largest exporter and ranks second to last in the Index… Turkey, in 27th place, is nearly at the bottom of the BPI… Of Turkey’s peers in Europe, France and Italy, both large exporters, score poorly…” http://www.transparency.org/news_room/latest_news/press_releases/2006/en_2006_10_04_bpi_2006
Guest — I suspect you are right. The US would step in in one way or another to block truly massive sales intended to disrupt markets. Of course, that is only act one in a bigger game; China would respond in one form or another.
Judy Yeo — not a silly question at all (I asked it myself earlier). not 100% sure we have a precise answer yet tho …
To Guest: Most transactions are settled through CHIPS, but there is no legal requirement that they be settled that way. If you doing things legally and aren’t afraid of the US government, there’s no reason not to, but if you are, then you can settle things by cash filled suitcases.
To Guest: If FX market participants suddenly became irrational and tried to accomodate this activity, the Fed could politely request that the 30 or so banks that make up the bulk of the FX market stop providing liquidity for awhile. Legal? Probably not. Would they do it in a crisis? No doubt.
The Fed gets on the phone to the banks to politely ask that they do (or not do) certain things all of the time. It’s quite legal since the Fed has the authority to look after the overall stability of the monetary system, and they cooperate very closely with the big banks to make sure that things go smoothly. It the Chinese government suddenly wanted to dump $200 billion in treasuries, there would be a frantic set of phone calls and the circuit breakers would get tripped, what happens next is an interesting question.
moldbug: The problem is that somewhere, somehow, you have to come up with a probability number.
No you don’t. In risk management, you care about whether or not the bank can survive a 50% drop in the Dow. The probability that this happens is unknown, probably unknownable, and in the case of risk management, irrelevant.
moldbug: The sigmas are not handed down by God.
In the case of derivatives pricing the sigmas are handed down by the market. Based on the price of the bond, you can calculate that the market believes that there is a 10% chance of event happening, therefore to price some other bond consistently, you set that chance at 10%.
Note here that that *doesn’t* mean that the chance of the thing happening is 10%. It means that the market thinks it is 10%, and if you price something at 15%, someone is going to make money off of you..
moldbug: Do you stress-test your system to the Dow falling 50%, 75%, 90%, 99%? What about the Rapture? What’s the chance of a Rapture, and how would it affect the dollar?
Risk management people think about this, yes. The goal is to have a balanced book. If the Dow falls 90%, then some things in your book will drop in value, but some other things will increase in value. Of course, when extreme moves in the market, then you have to worry a lot about counterparty risk. If the Dow dropped 90%, you are likely to see a massive number of people go under. However, if people go under and you wrote your contracts correctly to allow “netting”, then you don’t owe them money.
moldbug: Raptures aside, the numbers come from somewhere. Obviously, they come from past performance. Or are you saying that risk managers just make them up?
No they don’t come from past performance. Past performance tells you nothing about future performance.
If you want to know what happens to your book if the Dow drops 90%, then you look at the contracts you’ve written and go from there. Either the contracts get executed or they don’t, and if they don’t get executed (counterparty risk), and if they don’t get executed, then there are processes for dealing with that.
As far what the odds are that the Dow drops 90%, who cares? Risk managers don’t. If it happens, it happens.
I should point out that there is only one situation in which I can imagine China actually attacking the US financial system and that is in case of US intervention to support a Taiwanese declaration of independence. In that case China would dump dollars. This would cause all sorts of circuit breakers to trip, and the markets would freeze, but frozen markets would mean that we are in a new and scary world. In particular, frozen markets would mean that the US would have difficult borrowing money from anyone.
RebelEconomist: I leave it to you and others to consider whether this amount of currency is insufficient to support dollar banking without recourse to payment systems under US control.
Yes for North Korea and Iran and for any corrupt and petty dictators. No for China. If you want to move $100 million without going through the US you can. If you want to move $100 billion without going through the US you can’t. My original objection was to the statement that dollars *never* leave the US. They do. If the statement was revised slightly to generally don’t leave the US then I don’t object.
This actually came up in a discussion about “negative interest” rates. Interest rates can’t be negative, can they? Normally the argument against negative interest rates is that if interest rates go negative, people do “matress arbitrage”. You go the bank, withdraw the money in paper, and stuff it into a matress. This works if you are dealing with $25 billion, but not $100 billion.
Also, in the conversation, the consensus was one shouldn’t worry too much about China dumping dollars. If China wanted to dump dollars, there would be a series of phone calls between Washington and Beijing to figure out how to go about doing this in an orderly manner. Same with Russia. The problem is the Middle East, since there is not one person on the other side of the phone.
This has relevance to my views on the relationship between governments and markets and the myth of the “Anglo-American neo-liberal model.” There’s this nonsense idea that American markets just go out and operate without government interaction, when in fact there are constantly phone calls and meetings going back and forth between the banks, the regulators, and the Fed all to keep the markets running smoothly.
Also, the distinction between *never* and *almost never* might seem like nitpicking but it isn’t. When you tell someone with a mathematical background, *never* that means *never*, and if you mean *almost never* then say *almost never*. In quantitative modelling, it’s the exceptions that kill you. If you look at the performance of quant stock funds for the last ten years, every single day works according to the model,,,, except for three. August 7, 8, and 9 2007, and if what happened on those three days had continued for another two then we would have been in a major, major crisis. What kept things from falling apart were a likely a whole bunch of frantic phone calls and polite requests to do certain things that were done.
One other fun story about how business is done in Russia. When you want to sell a business or do a transaction in Russia for say US$50 million, you physically go to a bank, where there is a vault where there is physically in paper money US$50 million. You can count and inspect the money, and once you are satisfied that yes, there is US$50 million in the vault, you sign the papers at the vault and transfer ownership. This is why there is a demand for paper money there.
One other interesting thing to think about….. CHIPS and DTC is where TIC gets their statistics from. Now there were large flows of currency which somewhere weren’t going through CHIPS or DTC, then they wouldn’t make it onto TIC. I doubt that official or quasi-official agents of Beijing are bypassing CHIPS or DTC, but….. There are a lot of private actors in the game that want to take advantage of the possible upcoming revaluation, and these actors are good at bypassing governments whether Chinese or American.
Twofish: Most transactions are settled through CHIPS, but there is no legal requirement that they be settled that way. If you doing things legally and aren’t afraid of the US government, there’s no reason not to, but if you are, then you can settle things by cash filled suitcases……………The Fed gets on the phone to the banks to politely ask that they do (or not do) certain things all of the time. It’s quite legal since the Fed has the authority to look after the overall stability of the monetary system.
Reminds me of one day quite a fews years back when I was a trainee. During one of the many long periods of boredom common to financial market trading, our chief dealer, Johann, picked up the phone to one of our brokers and asked for a price on a Burger King Whopper, small fries and coke. The broker said $4.75 and Johann said, “I’ll take 100.” He then picked up the line to another broker and asked him for a price on a Whopper, fries and coke. This other broker quoted $5.25. “I’ll sell you 100″ said Johann. Then Johann put the phone down, looked at me and me said, “You’re in charge of settling the trade.” Needless to say, it was a very interesting afternoon for yours truly, as I created quite a scene at various places throughout Lower Manhattan, purchasing, transporting and delivering my delicious foodstuffs(which incidentally created a unique odor that I have never quite been able to extinguish from my aroma memory). In addition to making a quick buck, Johann was teaching me an important lesson about the amount of work performed by our unsung colleagues in the back office every day.
I am neither a banker, nor an economist, but I doubt if an extensive sophisticated shadow US dollar banking system has evolved based our expatriated suitcases of $100 bills. The amount of infrastructure required to administer and control such a system is mind boggling. Such a fantasy reminds of the evil character Dr. No from the James Bond films, who somehow managed to secretly construct a vast underground city beneath a small Caribbean island right off the coast of Jamaica. I may not be calculating this correctly, but if – as Brad suggested – the amount of physical cash outside of the US is $350 billion and M2 is $7 trillion, then offshore cash would only represent about .5 per cent of existing dollars, even less if you count all the Eurodollars and Repos that used to be included in the broader M3 releases. If I’m wrong on this, I’m sure Twofish will be quick to point out the factual error, while ignoring my broader point, since that seems to be his MO (no pun intended).
By my recollection, I brought of the notion of USD never leaving NY, GBP never leaving London, JPY never leaving Tokyo simply because people have started discussing LIBOR and the Eurodollar market due to recent funding issues resulting from the subprime crisis. I think people get a little confused when talking about USD being borrowed and lent in London and I thought it would be helpful for them to gain a little better understanding of what was really going on in terms of where and how USD and other currencies actually move about. The Eurodollar market may have been created by the Soviets, but it grew and developed into the market it is today simply because of a desire by financial institution to bypass the Fed’s reserve requirements, not due to the patronage of Columbian drug lords and North Korean arms dealers. I’m not sure how this turned into a discussion of suitcases full of $100 dollar bills. I will leave it to you experts to sort out, but it doesn’t seem to me that this is a significant activity in terms of macro economic flows, the USD and US monetary policy.
“but it grew and developed into the market it is today simply because of a desire by financial institution to bypass the Fed’s reserve requirements”
your point about relying on existing settlement infrastructure also seems right to me.
there is a not-so-anonymous guest who is rather obsessed with illicit flows (mafia, etc) which is probably how the discussion shifted.
but it nonetheless was quite good — and quite interesting.
I really need to research the real mechanics of fed funds and libor (any recommendations), but i think fed funds is borrowing to meet required reserves, and that in some ways constrains folks ability to borrow at fed funds and lend at libor, capturing the spreak. you only borrow fed funds to meet the reserve requirement.
I am not a banker so I don’t know all this intuitively, but my strong sense is that libor is so widely used in US contracts that it isn’t really the offshore dollar rate these days. tis more like the rate to borrow dollars unsecureed for short-terms.
fed funds is the rate to borrow required reserves s-term.
please correct me if i have this all wrong.
Setzer – I really need to research the real mechanics of fed funds and libor (any recommendations), but i think fed funds is borrowing to meet required reserves, and that in some ways constrains folks ability to borrow at fed funds and lend at libor, capturing the spreak. you only borrow fed funds to meet the reserve requirement.
I am not a banker so I don’t know all this intuitively, but my strong sense is that libor is so widely used in US contracts that it isn’t really the offshore dollar rate these days. tis more like the rate to borrow dollars unsecureed for short-terms.
Sorry, can’t help. The funding desk was always on the other side of the room from us FX “gamblers”. We never learned much about their business. Our adrenaline was running too high and interrupted the higher thought processes necessary for funding the bank’s assets. The only day we paid attention to those guys was on Dec 31. We were always bored and the Fed Funds rate would gyrate wildly due to the over the year funding. It was the one day of the year they had to trade like us. I assure you, there are already a few scrotums tightening up anticipating funding the year end turn this year.
Guest: I am neither a banker, nor an economist, but I doubt if an extensive sophisticated shadow US dollar banking system has evolved based our expatriated suitcases of $100 bills. The amount of infrastructure required to administer and control such a system is mind boggling.
The speed at which a complex financial infrastructure can get created if there is a demand for it is also mind-boggling, and creating complex financial infrastructures is something that Chinese people seem to be particular good at.
I should point out that Hong Kong has an alternate interbank settlement system, that has a transaction rate of $250 billion/month. CHIPS has a transaction rate of US$2 trillion/day. It’s true that the HK interbank system is a small fraction of CHIPS, but there is so much money flowing back and forth that its possible to have macroeconomically significant flows that go outside the US.
The *really* interesting thing is that amount of dollars cleared by Hong Kong interbank suddenly spiked in October whereas the amount of RMB cleared through HK interbank went up by a factor of five in July.
Some interesting historical notes to point out how important all of this is…..
The reason Hong Kong exists is that the PRC needed some place to clear their payments. The PRC could have marched into Hong Kong at any time since 1949 and there isn’t anything Britain could have done about it. The main reason that the didn’t was that there was a large set of PRC controlled banks in HK, and the PRC needed this financial lifeline to the rest of the world.
Also, I doubt North Korea settles their transactions through New York City, but one of the things that pulled NK to the bargaining table was when the PRC froze some accounts in Macau. The amounts were tiny, US$25 million, but they would have killed the North Korean economy.
brad – if you could point out the ‘guest’ “(mafia, etc)” comments…
“…”We have formed a very competitive team to respond to the proposal and we are ready to compete when it does come out,” Mark Kronenberg, vice president for business development in Boeing’s arms business, told a news conference. “This is going to be an absolutely critical competition … it’s going to be fierce,”…” http://www.reuters.com/article/companyNewsAndPR/idUSBOM17767520070206
“…Canada was required to accord “national treatment” to U.S. firms, meaning that Canada could no longer discriminate in favour of domestic firms in its taxation and subsidy policies. Nor could Canada create new publicly owned firms to compete with U.S. corporations without paying out crippling financial compensation to them… They twist arms, fight wars, educate economists to peddle their line, and yes, they bribe wherever it is necessary.” http://www.rabble.ca/news_full_story.shtml?x=65355
re: “frozen markets would mean that we are in a new and scary world.”
just to review: “…On 9 August 2007 BNP Paribas announced that it could not fairly value the underlying assets in three funds [as of Aug. 7] as a result of exposure to U.S. subprime mortgage lending markets. Faced with potentially massive (though unquantifiable) exposure, the European Central Bank (ECB) immediately stepped in to ease market worries by opening lines of €96.8 billion (US$130 billion) in low-interest credit…” http://en.wikipedia.org/wiki/BNP_Paribas#_note-0
“…the funds are held by BNP clients and represented just a fraction, about 1.6 billion euros of the 600 billion euros the bank has under management…” http://www.nytimes.com/2007/08/10/business/worldbusiness/09cnd-eurobank.html?_r=1&hp&oref=slogin
“…”There’s so much CP out there, and if one part of the market locks up, it tends to be contagious”…” http://immobilienblasen.blogspot.com/2007/08/conduit-siv-trouble-in-canada-coventree.html
from the same BNP wikipedia post shown above, the significance of drawing attention to this? “…On September 23, 2005, BNP Paribas is set to take a 20% stake in China’s Nanjing City Commercial Bank, a Chinese official and state press reports said on Friday… BNP Paribas refused to comment. The International Financial Corporation, the investment arm of the World Bank, already owns 15% of Nanjing City Commercial Bank, which has regulatory approval to list on the country’s domestic stock markets.”
Twofish – I should point out that Hong Kong has an alternate interbank settlement system, that has a transaction rate of $250 billion/month. CHIPS has a transaction rate of US$2 trillion/day. It’s true that the HK interbank system is a small fraction of CHIPS, but there is so much money flowing back and forth that it’s possible to have macroeconomically significant flows that go outside the US.
Twofish – you are killing me, man. You are getting as bad as DC.
OK, some more basics. FX transactions are supposed to be simultaneous exchanges of funds, but they can’t be, because – as I have hopefully pointed out successfully by now – each currency ultimately settles in its home country under the auspices and oversight of its own central bank. The countries are located in different time zones, with NY by chance being the last currency center time-wise in the trading day. (While I believe this is by chance, DC probably would argue that world time zones have been conspiratorially ordered in this manner to support dollar hegemony) This creates a significant settlement risk for folks who have bought USD in exchange for another currency, say for example HKD. They deliver the HKD in Hong Kong, but don’t receive their USD until over 12 hours later in NY. That leaves over 12 hours for their counterparty to declare bankruptcy and not pay. This is why you have to be very careful about credit risk when entering into even a spot valued currency transaction. Banks in the Far East have for decades offered their good customers advance USD “clearing” in order to ease their concerns about counterparty settlement risk. In reality, the banks were extending their credit to the transaction, guaranteeing the funds if indeed their counterparty failed to deliver in NY later in the day.
The Hong Kong dollar clearing system is just an elaboration of this same idea. Its purpose is to reduce the perceived settlement risk inherent in FX transactions, thereby making FX transactions available to more counterparties, thereby increasing the size and flexibility of their financial markets and ultimately their real economy. The BIS provides a very detailed description of how the HKCL works on their website. http://www.bis.org/publ/cpss53p07hk.pdf To understand what this means vis-a-vis the issue we are discussing I will quote from page 17 of this document:
“In the course of examining options for implementing the USD clearing system in Hong Kong, we had
widely consulted the banking sector and had been in dialogue with the Federal Reserve Bank of New
York. They indicated a preference that the settlement institution be a commercial bank, and such a
private sector solution is consistent with the recommendation by the Bank for International
Settlements. Such practice is also in line with Hong Kong’s tradition of adopting market-led solutions.
After going through a vigorous selection process, the HKMA appointed HSBC to be the settlement
institution for the USD clearing system in Hong Kong.”
In other words, the Federal Reserve Bank of New York is allowing HSBC, under the direct oversight of the HKMA, to pre-clear some USD in Hong Kong. Later in the day HSBC, a member of the CHIPS system, will do a final settlement of their entire USD book via CHIPS. This figure will include any net USD flows resulting from their “clearing” activities earlier in Hong Kong. If there is a significant default resulitng from the HK based flows, HSBC will resolve this default either out of their own resources, in conjunction with the HKMA, or in conjunction with the HKMA and the Fed at the end of the day. The Fed retains complete control over this system, in that at any point they can kick HSBC out of the CHIPS system, denying them any access to ultimate USD clearing.
A final point on suitcase money. If an efficient money laundering system didn’t exist that allowed black market participants to ultimately convert their bills into Federal Reserve sanctioned USD deposits, these suitcases of paper would be worthless. So, ultimately everything depends on the Fed anyway, as it has to. However in deference to your arguments I will correct my initial statement that USD never leave New York. I should have said over 99.5% of USD never leave New York. Thanks for your input.
You keep managing to elude my point.
Past performance may be – or may not be – a factor in your analysis of what happens if the Dow drops 90%. But it is necessarily a factor in your decision of whether to structure your balance sheet so that it blows up if the Dow drops 90%, or 99%, or 20%, or whatever.
The question is: what is the probability that the Dow will drop 99%? Or X%? And the goal is a balance sheet that will only blow up “once in 10,000 years” or whatever.
The former probability can only be obtained by analysis of past performance. The latter probability is a prediction of future performance. Ergo, past performance is being used to predict future performance.
Guest: That leaves over 12 hours for their counterparty to declare bankruptcy and not pay.
Which actually happened once on 26 June 1974 with Herstatt
Thanks for the info. I’ll need to read more about clearing systems and about FX transactions. My point is that even if the amount of suitcase money is 0.5%, that’s plenty in order to support macroeconomically significant flows.
moldbug: But it is necessarily a factor in your decision of whether to structure your balance sheet so that it blows up if the Dow drops 90%, or 99%, or 20%, or whatever.
If you are running a bank, you should be structuring your balance sheet so that it doesn’t blow up no matter what the Dow does. (Which isn’t that hard, since banks don’t own that much stock.)
People will come to the bank asking for put options on the SP500 that will pay only when the SP500 drops 90%. When this happens, you need to 1) quote them a price and 2) figure out what happens to your own balance sheet if the SP500 drops 90%.
moldbug: The question is: what is the probability that the Dow will drop 99%? Or X%? And the goal is a balance sheet that will only blow up “once in 10,000 years” or whatever.
No, thats not how risk management works. Your goal is a balance sheet that can take whatever gets thrown at it. If the balance sheet breaks, you need to know under what conditions it breaks, and try to strengthen it against those conditions. The big thing that will kill a bank is massive counterparty defaults, so the question that risk managers think about is 1) what default rate will kill us and 2) what can we do to make sure that we never get anywhere close to that default rate.
A lot of things that happen in finance are “black swan” events that trying to even calculate a probability for them is both useless and dangerous. It’s dangerous because it is much better to say “I don’t know” than to come up with a bogus number that gives you a false sense of security, and one lesson of finance is that when people try to estimate the probability of freak events, they consistently get it too low. So don’t even bother trying to estimate the probabilities. Think about what would happen if the SP500 did drop 90%.
The other thing about freak events is that there probabilities build up. The odds of the SP500 dropping 90% may be low, but a bank is invested in so many things that the odds of *something* that it owns dropping 90% are quite high. If your balance sheet can’t stand a 90% drop in the Dow, then it may not be able to withstand a 90% drop in something else (like CDO indices).
One point here is that Nassim Taleb wrote a wonderful book on “Black Swan” events. The point that is missed is that a lot of what he writes is conventional wisdom on Wall Street.
bsetser-fed rates and libor
Agree in part with guest on the fed borrowing to meet reserve requirements but ‘cos the fed is last lender of resort, it’s also for emergencies, kinda like the emergency services, it’s a central bank -to- non-central bank type of transaction, LIBOR is bank to bank and whoever else needs the funding. Fed and BOE (plus other central banks, yes, they do exist rates impact on those ‘cos banks usually charge a “mark-up” rate on the base rates charged by the central banks, by the time it gets to those who don’t have a commercial banking arm , the rates are usually quite “different” from base rates. My best bet is the mark-up and fed regulations, not to mention red tape , blocks the type of borrowing you mentioned.
Our adrenaline was running too high and interrupted the higher thought processes necessary for funding the bank’s assets. The only day we paid attention to those guys was on Dec 31. We were always bored and the Fed Funds rate would gyrate wildly due to the over the year funding. It was the one day of the year they had to trade like us. I assure you, there are already a few scrotums tightening up anticipating funding the year end turn this year.
Written by Guest on 2007-12-15 20:11:06
waay too much testosterone here, maybe the cycling world could reference you guys?!
but seriously, that’s why accountants have a much less fun time , dealing with the fx and the funding, try explaining the dodginess of it all in simple terms!
as for the mafia issue- huh? whats with those $100 bills? would have thought money laundering was a lot more sophisticated these days…
“waay too much testosterone here, maybe the cycling world could reference you guys?!
but seriously, that’s why accountants have a much less fun time , dealing with the fx and the funding, try explaining the dodginess of it all in simple terms! ”
Sorry for the locker room talk, Judy. I have a lot more respect for accountants than I do for financial market traders. I found them over the years populated largely by borderline sociopaths with an unwarranted macho ethos. They have a lot of nerve carrying themselves with the swagger of Air Force pilots. Not only are their lives not at risk, but 99 pct of the time, they aren’t even risking their own money. Also, I can’t tell you how many of these guys actually never turned a profit, but were able to keep jumping to better and better jobs on the basis of a false reputation. Finally, unlike policemen, firemen and our military, traders serve no higher calling than personal profit. Be happy about being an accountant.
Guest on 2007-12-18 06:46:38
sorry to disappoint, I’m not an accountant but you could see my response on my blog foesskewered.livejournal.com. Just to confirm that you’re not an acquaintance, you didn’t like jokes about dead horses, did you?