tag:blogger.com,1999:blog-6704573462403312459.post8801582412568649622..comments2024-03-28T06:39:48.988-04:00Comments on Moneyness: Fear of illiquidityJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-6704573462403312459.post-57359374028395369432014-10-30T10:05:06.880-04:002014-10-30T10:05:06.880-04:00"...a wide swath of the economy is helped by ..."...a wide swath of the economy is helped by the Central Bank providing liquidity. "<br /><br />That's a fair point, in the same way that society might be made better off by free government-provided medical insurance. However, taxpayers understand health care... its very immediate. But they don't understand finance. So I don't know how many of them are in a position to calculate if they are winners or losers in a regime with under-priced liquidity insurance for banks. Liquidity insurance could also be provided by the private sector, but does the private sector have a comparative advantage in creating this insurance? Would market prices for liquidity insurance provide better information?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-15451929436682312832014-10-30T09:44:04.520-04:002014-10-30T09:44:04.520-04:00Yes. That would work.Yes. That would work.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91552394124236531712014-10-30T05:10:20.733-04:002014-10-30T05:10:20.733-04:00OK. So maybe the better analogy in your second wa...OK. So maybe the better analogy in your second way would be if the insurance company agreed to lend to you when required, against the security of your assets. A sort of committed liquidity facility.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-50574226662217739422014-10-29T19:42:09.957-04:002014-10-29T19:42:09.957-04:00I was picking up on the idea that "arbitrage&...I was picking up on the idea that "arbitrage" results in equality of price when two paths lead to the same result. Instead, it seems to me that one path will have some natural advantage that will cause it to be the price driver. That would force the second path into an inferior position, forcing it to differentiate on other than pure price criteria.<br /><br />My concept of a common price is not quite the same as your expressions of "cost of pursuing" or "equally expensive" so to a large degree, my comment is off-topic. Sorry about that.<br /><br />But, in the back of my mind, not well expressed, was the thought that a wide swath of the economy is helped by the Central Bank providing liquidity. Yes, the taxpayer is ultimately funding this liquidity but at least some taxpayers think they are the winners in this system.<br /><br />Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-24027908144871375182014-10-29T15:05:14.289-04:002014-10-29T15:05:14.289-04:00Hi Becky, thanks for stopping by.Hi Becky, thanks for stopping by.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-23779201119102110912014-10-29T15:00:59.949-04:002014-10-29T15:00:59.949-04:00I'm not sure I get you. Are you implying somet...I'm not sure I get you. Are you implying something about monopoly?JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2204872999339708242014-10-29T14:44:21.429-04:002014-10-29T14:44:21.429-04:00From a policy perspective we don't have to thi...From a policy perspective we don't have to think too much about houses and couches since central banks doesn't participate in these markets. Financial assets will typically have an existing bid and offer price, so the Fed would provide a bank with liquidity by always standing ready to purchase any amount of that asset within the spread, even if the order exceeds the size of what is being bid and offered in the market. <br /><br />Yes, central banks don't buy assets outright, but the idea is still the same... they will take all collateral at market prices. The bank is insured in that it knows ahead of time that its collateral always has a market.<br /><br />Finally, I think I agree with you that central banks are "usually just facilitating the first bit." Or at least, that's what they do when the crisis finally hits and private banks call in liquidity. Since crisis are rare, central banks are usually just providing liquidity insurance, but that insurance is not being triggered.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-20572428201894704652014-10-29T14:21:22.840-04:002014-10-29T14:21:22.840-04:00Re: deposit insurance. I was thinking that might e...Re: deposit insurance. I was thinking that might explain some of the missing cost. I don't believe deposit insurance fees are very high, probably not enough to cover both deposit and liquidity protection.<br /><br />Re: lines of credit. Yep, very similar concept to liquidity insurance. Having a pre-arranged line of credit to be secured by each of your assets would do the trick. <br /><br />http://www.youtube.com/watch?v=fRoW-NrSgYQ&feature=youtu.be<br /><br />Great interview, by the way. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-2884889048164991572014-10-29T09:53:31.914-04:002014-10-29T09:53:31.914-04:00"Since option #1 is so expensive, arbitrage r..."Since option #1 is so expensive, arbitrage requires that option #2 will be equally expensive."<br /><br />I think this expectation is incorrect. Instead, there is the possibility that option #2 can be perpetually LESS EXPENSIVE to maximize market share. In other words, option #2 can have some sort of inherent cost advantage that allows enduring economic relationships to exist in an economy.<br /><br />Yes, this enduring situation can result in under-pricing or a shift in ultimate risk taker. And, yes, this shift will result in economic winners and losers. Winners and losers that can be labeled or otherwise identified.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-15165163428316884882014-10-29T07:08:50.490-04:002014-10-29T07:08:50.490-04:00I'm not sure how you would even draw up such a...I'm not sure how you would even draw up such a policy. How would you define the "market price" of an illiquid asset in such a way that did not reflect its illiquidity? For some things you might be able to get two way quotes and take the mid-market average. But how can I get a two way price specifically in my house? No one else can provide an offer price but me. I don't think there is a market price that is independent of the illiquidity.<br /><br />When central banks provide liquidity insurance, I think there generally providing funding liquidity rather than market liquidity aren't they. They don't buy assets outright, they lend and take the assets as collateral.<br /><br />When I sell my house I do two things. One, I get cash which I can use to make payments. Two, I remove any future exposure to the value of my house. In theory I could do those things seperately. I could repo my house (or just borrow against it), which gets me the cash, but doesn't remove my exposure. Or I could sell it for settlement after 12 months, which removes my exposure, but doesn't get me cash. Central banks are usually just facilitating the first bit, I think.<br /><br />Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-40902359719778653672014-10-29T04:32:51.407-04:002014-10-29T04:32:51.407-04:00These are exactly the kinds of thoughts that enter...These are exactly the kinds of thoughts that enter one's mind when looking at a "start from scratch" set up in equilibrium, where internal strength needs to be devised and hopefully remains within scale for a small time investor as well. But the costs of complete liquidity across equilibrium tend to knock out that possibility!Becky Hargrovehttps://www.blogger.com/profile/06893439243744595860noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-49276637548806114512014-10-28T23:57:10.066-04:002014-10-28T23:57:10.066-04:00My guess: liquidity insurance is bundled in with d...My guess: liquidity insurance is bundled in with deposit insurance, which is priced. How that price is determined, I don't have a clue.<br /><br />A line of credit is a form of liquidity insurance. you don't sell your assets; you borrow against your assets.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com