Archive for May 23rd, 2008

Who is giving this speech?

May 23, 2008

Read this:

As everyone knows, the cost of food and energy is at record highs, creating economic distress for millions of working families in … and around the globe,” …. said. “At home, rising food and gasoline prices put a real and immediate strain on family budgets. And overseas, the consequences are even more dire. My own conclusion is that index speculators are responsible for a big part of the commodity price increases, and we …. ought to do the best we can to protect the public interest in an effort to bring food and energy prices down

I am sure most would say this is coming from some policymaker/politician in an emerging economy. But this comes from USA and these are words from Homeland Security and Governmental Affairs Committee Chairman – Joe Lieberman.

I read sometime back a post doing a similar kind of comparison. The words were from Zimbabwe’s Central bank but to the writer it appeared as if they were from India’s Central Bank! I mean you can’t compare India to Zimbabwe.

I keep reading the words of various experts on how ineffective India’s policies are and how good the west is. To me all looks pretty much the same. Policymaking is a tough job and usually comes with dilemmatic choices. It is not as easy as it is made out to be.

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Credit Default Swaps- the next big crisis?

May 23, 2008

I wrote a paper on the Credit Default Swap Market. The concerns over CDS market has been raised recently by Satyajit Das. I have also seen a few comments on Eurointelligence which say:

The danger of credit default swaps

Are credit default swaps – financial instruments that insure against non-payment of interest – the next subprime? The Naked  Capitalism blog has dug up a Bloombery story, quoting a BNP Paribas analyst, as well as Eurointelligence contributor Satyajit Das, saying that there is ticking time bomb. Andrea Ciccione from BNP Paribas has done the maths, and concluded conservatively default of over $150bn. Altoghether about $1.3 trillion is at risk. Das makes the point that CDS are going to complicated the financial crisis, saying that this may well freeze up the financial system. Ciccione in particular fears counterparty risks from hedge funds, who have written many CDS. The crisis could be triggered by a rise in bankruptcies from their previously low levels, as global growth slows down. (The point is you don’t a long and deep recession to produce a scary scenario. A mere return to normal is all it takes.)

The conclusion of my paper is much the same – CDS is moving towards increasingly dangerous territory. Fed and other Central Banks by their interventions avoided what could have been a crisis in CDS. As it is simple CDS are difficult to price butthe players are increasingly moving onto more complex, low investment graded and longer tenure CDS products.

I have received some comments not agreeing to the problem but that is how it is. Unless there is a crisis we never agree to a problem at hand. Post-crisis analysis is always better than pre-crisis. When Nouriel Roubini said in 2006 that sub-prime crisis could be a big disaster, no one agreed to him. Not that I am Roubini but I believe policymakers need to look at the developments in CDS.

Update:

Bloomberg has an article summarising the developments in CDS market. It ios on very similar lines of my paper

Assorted Links

May 23, 2008

1. ICL Blog on rating agencies

2. WSJ Blog on Fed

3. NB updates list of countries using automatic tax return. It points parents are slightly less confident than their students. It pointsHP figured out default longback

4. Mankiw points his blog has has 5 million visits since first post! Great Blog. Mankiw points Vincent Reinhart comments on the Bear Stearns bailout.

5. Rodrik on recent UEFA Championship league final. Even I have a problem with final match being settled via penalties

6. Econbrowser has some fantastic comments on whether speculation is driving oil prices


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