MF Global - explained (?)

[oddlots]

If nothing else I will forever refer to the perps preceded by the definite article: "the Jon Corzine" / "the Alan Greenspan."

Quibbles?

Via New Economic Perspectives.

Note the sales pitch at the end: hard assets via ownership of natural resource shares. Ha! That market is a shark pool FWIW. Hardly need to say this here, but you need damned good advice here to not be de-limbed.

[oddlots]

Re: MF Global - explained (?)

The Oddlots responds to his own post:

It seems ironic that the points made here in the video about "money printing," the buying of government bonds by a central bank is simultaneously being urged on Europe by the MMT-inspired brain trust of New Economic Perspectives while it's also being criticized in the above video as a highly regressive form of inflation tax. It is, incidentally, something that seems obviously necessary to the Oddlots. Is this a fatal flaw?

I guess I've convinced myself I can live with the contradiction for the following reasons:

- the example of France during the great depression comes to mind. From my understanding they clung doggedly to the gold standard to the last and their economy and workers suffered mightily as a result, with France being the last to exit from the depression. The result: apparently an even worse outcome for both capitalists and workers. The moral: while stable currency is a laudable goal, in practice, in a world of competing currencies (and more to the point: competing currency devaluations) it is a fatal arrogance to believe that you have freedom of movement. It's a game and your moves are determined as much by others as yourself. Principles, in this context, are likely a liability.

- I think that, once you've allowed a credit bubble to develop you've already lost the credibility to foreswear Keynsian stimulus. The bubble's bust is not the event, it's the recognition of the event (which was the malinvestment of the bubble years.) In this context, the ECB's single focus on price stability seems analogous to France's fixation on the gold standard.

- Beyond this point directly above, this single focus on price stability also seems to simply ignore one of the main rationales for central banks as I understand it: defining the difference between a solvency crisis and a liquidity crisis. I put it this way intentionally. The sense I get from watching the contagion spread in Europe to the point that even Germany is being "downgraded" is this: without a central bank to actually define the difference between solvency and liquidity the market itself becomes incoherent.

- What I mean by the above is: if interest rates on government debts are allowed to rise to any level any economy will become insolvent. If the central bank refuses in principle to intercede then liquidity crises will lead inevitably to solvency crises.

- a sort of Statism follows from this: the market is actually a creation of the state to the extent that it can only operate within parameters set by the sovereign power. It is incoherent without it, which is not to say that the state can simply ignore market economics but rather that the sovereign operates within a kind of "flight envelope" dictated by the market and the market can similarly only operate within an envelope dictated by the state.

- in this context (and this was entirely unintentional when I posted the Air France thread here), I think you could almost describe the EU ongoing disaster in a similar vein. The EU seems to be behaving as if the market can sort this out itself and that all the EU has to do is to swear itself credibly to market principles and the market will again regain confidence and the crisis will pass. But the market seems to know that it is fully capable of driving the plane into the sea because, in pure market terms, the debts are unpayable. It is basically no different than a bank run, and since it's unthinkable politically that the market be allowed to simply pilot the plane into the ocean (does anyone really believe that Germany is somehow meaningfully bankrupt?), the market is incredulous but the panic spreads in the apparent inability of the EU to comprehend the problem.

- It's some variation on the market believing they are operating under "normal law" with the EU politicians believing it's operating under "alternate law."

That is undoubtedly a ridiculously simplified version of what's at stake, but it's the only explanation I can find for these bizarre statements coming out of European leaders regarding the need for confidence. It's almost as if they somehow think that reassuring the passengers like a stewardess in a storm is tantamount to piloting the plane. That is a market fundamentalism they can't blame on Anglo-Saxon banking.

[oddlots]

Re: MF Global - explained (?)

Some good detail Bruce Krasting on MF Global and Reg T:

"We shall see in the coming weeks if, in fact, re-hypothecation is the cause of the problems. I’m convinced it is.

The rules on broker's ability to A) Hypothecate and B) Re-hypothecate in the USA are spelled out in Reg T. This set of rules has been established by our good friends at the Federal Reserve Bank. Let me provide some telling words on this re Reg. T rule 15c3-3: (emphasis mine/Link)

• Except as otherwise agreed in writing by the OTC derivatives dealer and the counterparty, the dealer may repledge or otherwise use the collateral in its business;

• In the event of the OTC derivatives dealer's failure, the counterparty will likely be considered an unsecured creditor of the dealer as to that collateral;

• The Securities Investor Protection Act of 1970 (15 U.S.C. 78aaa et seq.) does not protect the counterparty.

Well there you have it. Reg. T does permit the broker to “repledge” (AKA re-hypothecate). In the event of default by the broker, the counterparty will be considered an unsecured creditor. (AKA customers lose money). And SIPC provides zero protection to account holders in the event of a broker default.

For me, there is sufficient information to conclude that Reg. T is flawed and must be changed. I have to believe there is any army of lawyers over at the Federal Reserve looking into this as I write and they are struggling with what they can do to “fix” the problem.

For sure a fix is required. MFG has not, as yet, morphed into a systemic problem. But we are getting closer by the day. The Fed is aware of this. The risk is that customers start to withdraw funds and assets from other brokers. The deleveraging this would cause would be catastrophic. A significant chunk of the shadow banking system (about $10 trillion) is dependent on the liquidity that is created by hypothecation. (The situation is bigger and more problematic in the UK)"

http://brucekrasting.blogspot.com/20...ce+Krasting%29

Perfect example of how what a roach motel de- or unregulated finance is: you can get in but you can't get out.

Given the fact that Canadian customers of MFG were made whole, I'm wondering whether a) this will mean an influx of money into Canadian-regulated institutions and b) whether this will ultimately represent a kind of raid on these same institutions, as much of the munny is purely fictional.