Comments on: "The Central Bank as Market Maker of the Last Resort" http://www.nakedcapitalism.com/2007/08/central-bank-as-market-maker-of-last.html Sun, 22 Nov 2009 21:02:38 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Anonymous http://www.nakedcapitalism.com/2007/08/central-bank-as-market-maker-of-last.html#comment-382 Anonymous Wed, 15 Aug 2007 03:41:00 +0000 http://www.nakedcapitalism.com/2007/08/the-central-bank-as-market-maker-of-the-last-resort/#comment-382 Pardon what is either an astoundingly ignorant question or perhaps merely ignorant but <br/><br/>Were the MBS which the Fed accepted as collateral last week agency MBS or private and, given the Fed requirement that an instrument's acceptance is contingent upon federal guarantee, might this latter have been created through use of agency CDS? Pardon what is either an astoundingly ignorant question or perhaps merely ignorant but

Were the MBS which the Fed accepted as collateral last week agency MBS or private and, given the Fed requirement that an instrument’s acceptance is contingent upon federal guarantee, might this latter have been created through use of agency CDS?

]]> By: Lune http://www.nakedcapitalism.com/2007/08/central-bank-as-market-maker-of-last.html#comment-377 Lune Wed, 15 Aug 2007 01:05:00 +0000 http://www.nakedcapitalism.com/2007/08/the-central-bank-as-market-maker-of-the-last-resort/#comment-377 I think the article makes a fundamental mistake. As Roubini <a HREF="http://www.rgemonitor.com/blog/roubini/209779/" REL="nofollow">explains</a>, we're facing an <i>insolvency</i> crisis, not a <i>liquidity</i> crisis. The reason no one wants to buy all this debt is because they're finally realizing that it's worthless, not because it's a good deal but they just don't have any money for it.<br/><br/>The role of the central banks should be as it is, to ensure liquidity. If the private markets have adequate liquidity and they <i>choose</i> not to buy subprime loans or whatever, then that means the market is making a decision that the assets are priced too high. This has nothing to do with liquidity.<br/><br/>Why should the Fed play market-maker for assets that no one in the private world wants to buy (which in this market is a perfectly rational response to current prices)? If there's adequate liquidity (something I agree the central banks should ensure), then there's no need for a central market-maker. The money being pumped into the system will ostensibly find its way to appropriately priced assets, and stay away from mispriced assets. I think the article makes a fundamental mistake. As Roubini explains, we’re facing an insolvency crisis, not a liquidity crisis. The reason no one wants to buy all this debt is because they’re finally realizing that it’s worthless, not because it’s a good deal but they just don’t have any money for it.

The role of the central banks should be as it is, to ensure liquidity. If the private markets have adequate liquidity and they choose not to buy subprime loans or whatever, then that means the market is making a decision that the assets are priced too high. This has nothing to do with liquidity.

Why should the Fed play market-maker for assets that no one in the private world wants to buy (which in this market is a perfectly rational response to current prices)? If there’s adequate liquidity (something I agree the central banks should ensure), then there’s no need for a central market-maker. The money being pumped into the system will ostensibly find its way to appropriately priced assets, and stay away from mispriced assets.

]]> By: Anonymous http://www.nakedcapitalism.com/2007/08/central-bank-as-market-maker-of-last.html#comment-375 Anonymous Tue, 14 Aug 2007 18:56:00 +0000 http://www.nakedcapitalism.com/2007/08/the-central-bank-as-market-maker-of-the-last-resort/#comment-375 One senses a hint of a guilty conscience (due to regulatory and or moral encouragement), or industrial policy and not a little central planning in this recommendation to attach a sovereign guarantee to risks the private financial sector either wishes to cede or is deemed no longer capable to manage. A regulatory maturity mismatch to compensate for financial one? It also I think shows a fundamental misunderstanding of the market based on the recent recourse of holders with large maturity mismatches to liquidity lines. <br/><br/>The MBS market has a maturity mismatch between its markets price discovery and price discovery in its underlying asset.<br/><br/>There is in addition a significant difference between the illiquidity risk assumed by, the past and future return to, and thus the price of these securities depending on maturity mismatch profile of their holders. <br/><br/>It should in fact be no surprise that trading might be slow, and price discovery mismatches be evident beacause these are fundamental characteristics of the underlying assets and the traders of their instruments One senses a hint of a guilty conscience (due to regulatory and or moral encouragement), or industrial policy and not a little central planning in this recommendation to attach a sovereign guarantee to risks the private financial sector either wishes to cede or is deemed no longer capable to manage. A regulatory maturity mismatch to compensate for financial one? It also I think shows a fundamental misunderstanding of the market based on the recent recourse of holders with large maturity mismatches to liquidity lines.

The MBS market has a maturity mismatch between its markets price discovery and price discovery in its underlying asset.

There is in addition a significant difference between the illiquidity risk assumed by, the past and future return to, and thus the price of these securities depending on maturity mismatch profile of their holders.

It should in fact be no surprise that trading might be slow, and price discovery mismatches be evident beacause these are fundamental characteristics of the underlying assets and the traders of their instruments

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