BRIEFLY NOTED: 2022-03-13 Su: CONDITION: HELP!Charlie Stross: ’2016: Brexit, Trump, voted in. My reactions: 2017: We need to be invaded by the Culture. 2018: I’ll settle for the Daleks. 2019: Moon Nazis? Anyone?…
"I would add, substituting government expenditure for dissipative grifts—for low interest rates induce organizations that are not well-setup to judge risks to take risks in reaching for yield, and one of the oldest tricks in the financial book is to make money by inducing your counterparty to take on risks that they do not understand."
My bank noticed that my savings portfolio is not 100% equities. Naturally, the fixed-income component has a very low yield. So they called me up to pitch something that they portrayed as a high-yielding note. I looked at the structure, and it was just a bunch of options - a strip of autocallables wrapped up in a knockout barrier. Limited upside and 100% downside risk, the opposite of most notes with embedded options pitched to retail investors.
I was too lazy to try to price the structure (and I do this for a living), but since the terms were fixed in advance, it follows that it could not have been at-market and must have been not only just a bunch of options, but just a bunch of options *at rippoff prices*.
Re: Monetary & Fiscal Policy in a Low-Interest Rate Economy:
Seems like a problem is in reframing policy as "what interest rate." The Fed should just stick to it's mandate of stable prices (=2% PCR inflation) and maximum employment and interest rates are whatever they have to be to carry out that policy. Of course that puts the uncertainty on "maximum employment" but that's surely closer to being observable than r*.
And whatever the Fed's instrument, there is no role for "fiscal policy" unless the Fed is self constrained in its willingness to purchase private vs public debt (as it seemed to be in the QE days).
"I would add, substituting government expenditure for dissipative grifts—for low interest rates induce organizations that are not well-setup to judge risks to take risks in reaching for yield, and one of the oldest tricks in the financial book is to make money by inducing your counterparty to take on risks that they do not understand."
My bank noticed that my savings portfolio is not 100% equities. Naturally, the fixed-income component has a very low yield. So they called me up to pitch something that they portrayed as a high-yielding note. I looked at the structure, and it was just a bunch of options - a strip of autocallables wrapped up in a knockout barrier. Limited upside and 100% downside risk, the opposite of most notes with embedded options pitched to retail investors.
I was too lazy to try to price the structure (and I do this for a living), but since the terms were fixed in advance, it follows that it could not have been at-market and must have been not only just a bunch of options, but just a bunch of options *at rippoff prices*.
Re: Monetary & Fiscal Policy in a Low-Interest Rate Economy:
Seems like a problem is in reframing policy as "what interest rate." The Fed should just stick to it's mandate of stable prices (=2% PCR inflation) and maximum employment and interest rates are whatever they have to be to carry out that policy. Of course that puts the uncertainty on "maximum employment" but that's surely closer to being observable than r*.
And whatever the Fed's instrument, there is no role for "fiscal policy" unless the Fed is self constrained in its willingness to purchase private vs public debt (as it seemed to be in the QE days).