Dimon, now Summers: There's a liquidity problem (Why don't I trust these jerks?)

[still_one]

Former Treasury Secretary Larry Summers said regulators should make a priority of addressing the problems of bond market liquidity, brought on by their very efforts to make institutions safer after the financial crisis.

Summers, speaking Thursday on "Squawk Box," responded to comments made by JPMorgan (NYSE: JPM) CEO Jamie Dimon who said recent volatility in the currency and Treasury markets was a "warning shot across the bow."

The drumbeat about liquidity questions in the corporate bond market but also Treasury market has gotten louder, and Dimon used his annual letter to shareholders as soap box to warn about the issue.

Bond market participants blame post-financial crisis regulations aimed at making the activities of financial institutions safer by restricting capital use. In the Treasury market, they point to the fact that the Fed holds a massive amount of Treasury supply on its more-than-$4 trillion balance sheet, keeping it off the market. Another issue often discussed by traders is the reduced head count at Wall Street's primary dealers.

http://finance.yahoo.com/news/dimon-now-summers-theres-liquidity-130120509.html

[Autumn]

1. This is exactly why we need someone to run for President who will not

look after these assholes at the expense of the American people, Another 9 years of this shit can not stand If these two men said the sky was blue I would't believe them, presidential cuff links and all that shit. Fuck them.

[raging moderate]

2. A warning, or perhaps a veiled threat?

And, Mr. Dimon, as you have called this event a "shot across the bow," the question arises, just who is the shooter, and what purpose does he have?

[Orsino]

23. Neither. Just a whine.

The Dimons of this world don't give even half a fuck if there's another crash. They would just like to ge making more money now than they are.

[A HERETIC I AM]

3. Out of curiosiy.....

Do you understand what it is they are talking about?

What is "liquidity" in this regard and why do you think they are expressing concern?

[rogerashton]

4. Let's see if I can fill in some blanks.

I was recently reading some of Summers' recent writing on "secular stagnation" which is not going to encourage the financial elite.

http://www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf

So: all financial instruments are more or less risky. The main real way of reducing risk is to share it. As long as the risks are independent, the risk-sharing agreement is less risky than the individual risks shared. This is the principle behind diversification and insurance. For example, investing in municipal bonds, you can reduce your risk of losing to municipal bankruptcy by buying a mutual fund that buys bonds of many different cities.

Risk can also be avoided if there is a very active market for the financial instruments. Then you can sell out quickly if you smell a rat. But who will want to buy? For that reason, the riskier the instrument is, the less likely it is traded in an active market.

If an instrument has relatively low risk and an active market we say it is relatively "liquid." Money is the most liquid of all assets. Like money, government bonds bear some risk of loss of purchasing power to inflation, but all other bonds share that risk, so that, in a country that prints its own money as the US does, government bonds are very safe and liquid.

Summers argues that changing regulations have increased the demand for safe, liquid assets while the supply has dropped. This forces the interest rate of the safe, liquid assets down near the zero lower bound. Summers argues that this leads to "rational bubbles" and thus instability -- danger of another crash.

The Swiss have tried another solution -- taxing safe, liquid assets. That lowers the rate of return below the "zero lower bound" and might help. Perhaps a general wealth tax would help. I don't think Summers has taken a position on those ideas, but I might have missed it.

[A HERETIC I AM]

5. I wasn't asking the question because I didn't know.

I was asking the question to see if the OP knew.

But thanks anyway.

[sabrina 1]

17. Do YOU know the role deregulation played in the disastrous Global Economic Collapse?

[A HERETIC I AM]

24. Dammit! I just spent 20 minutes typing out a complete response to your question...

And my damned iPad locked up and it went away!
DAMMIT DAMMIT!


I'll have to do it all over, but I'm so pissed off right now I can't think straight!

God damned computer bullshit!

[sabrina 1]

33. No problem, thanks for responding anyhow. I know how that is!

[A HERETIC I AM]

34. I'll get it done!

I swear, I had a whole BUNCH typed! And ::poof:::

[rogerashton]

37. Oh -- you were just snarking.

I think the marginal value of a snark on DU is pretty far into the negative range.

[A HERETIC I AM]

39. No snark intended in the least

I explained my reasoning in post 11

[still_one]

6. The one thing I know is that Dimon and the other bankers are trying to roll back Dodd/Frank, and

they blame most of the problems on regulation. Before Reagan, Bush, and Clinton deregulated everything, there was no problem with liquidity, at least for investments that were solid. It was those that had more risk that presented a problem, and frankly, that is the way it should be.

No matter what Dimon says here, he does NOT believe in too big to fail. That is why he along with other bankers have tried to "punish" Elizabeth Warren, and any elected Democrat who supports her

He is worried about hyper-inflation, and he states the treasury market is vulnerable to that. From all the deregulation games they played, including giving mortgages to people who should not have been given mortgages, those actions led to the financial collapse that almost sent us into a liquidity crisis. The government did they only thing they could to prevent and all out depression, and that is increase liquidity, which is inflationary, but since the economy was collapsing that wasn't a problem at the time.

They are now slowly increasing interest rates, but in a very controlled way to minimize disruption to the economy.

A problem they helped create is why I have a major problem with these clowns

[A HERETIC I AM]

11. I have no love for Dimon or the rest of those clowns, but I asked for a reason...

And please, I am not trying to be snarky or a smartass or anything of the sort. My aim is to simply make sure that there is an understanding of terms, that's it.

All too often I see articles such as this one that are posted and followed by replies that indicate a COMPLETE lack of understanding on the subject matter.

I think it behooves the poster, in this case you, to explain if they can, why THEY think the article is important or not and/or what it is saying in laymans terms, so to speak. If the poster does not completely grasp what is being talked about, I think it is appropriate to say so. Many posters do that very thing on DU, as I'm sure you have noticed.

Simply posting the text and a link to an article does not tell me or any reader what YOU think and how YOU feel it is important.

I read the article. Like him or hate him, Dimon has a point, BUT, he is overreacting in my humble opinion, but that's also part of his job.

[still_one]

16. There is always a potential for hyper-inflation due to artificially keeping interest rates too low.

It is risk verses reward.

The philosophy of the fed has always been to prevent hyper-inflation. That was Volker's whole reason for increasing interest rates, and most likely contributed to Jimmy Carter's loss.

Greenspan's policies contributed to the liquidity crisis we had, and in my view, Bernake actually saved the country from a lot of pain, though there were some at the time saying let the banks go under. I don't think they appreciated the consequences of what those actions would have been

[obnoxiousdrunk]

27. Do I need

to understand to be outraged ?

[A HERETIC I AM]

35. Sometimes it helps to truly understand what it is you are outraged about....

Yes?

[bemildred]

7. "liquidity problem" == "can't move our dodgy paper at the price we want". nt

[A HERETIC I AM]

13. What "Dodgy paper"?

US Treasury bonds?

Do you see them as dodgy?

Corporate paper? Is it all dodgy?

Or do you think that every single bond in the world is a CCC rated, overextended, incapable of being paid back, gonna default in 2 days tranche of a mortgage backed issue?

None of that is what the article is about.

[mmonk]

18. Probably just the ones when they tried to create a market

with and fraudulently got the rating houses to rate them AAA.

[A HERETIC I AM]

21. Well, the article is not talking about junk bonds and has nothing to do with that sort of

security.

He isn't talking about the inability to easily buy or sell crap.

[mmonk]

25. They weren't considered junk bonds even though they were.

When interest rates are held by policy to low rates or yields to artificially boost stocks, bond investors who want to balance portfolios complained. So these bonds created with consumer debt and bundled with sub prime mortgages were created to give better yields to compensate for those rates by investment banks and then were pushed to be AAA rated. That is all the result of "self regulation" instead of true regulation and then institutions including banks invested heavily in them as did governments and their pension funds and what not. When it went bust, so did both bank to bank liquidity (because they knew what these institutions held and wouldn't lend to each other) and then we had the libor rate crisis. No more Jamie Dimons, Republicans, or Third Way Democrats for me. It wrecked my family and it's finances. The chance I will vote for either is zero from now on.

[still_one]

19. Big difference between government backed verses corporate backed. The government can always print

money, inflationary and not good, but it won't default, unless the country is gone. Corporate bonds are only as good as the corporation backing them. I had some AAA Lehman bonds, enough said about the rating system I think. I don't know, but S&P and standard and poor ratings I hope are more relevant now

[A HERETIC I AM]

22. Perhaps I should make it clear that I have a fairly good grasp on this subject matter.

I guarantee you I know the differences you allude to.

Your AAA Rated paper from Lehman Brothers hardly represents the entirety of the bond market, Corporate, Treasury or Municipal. I'm sorry you had to go through what you did with those bonds, but that sort of thing is not common. It happened (Their bonds becoming worthless) when it happened for the reasons it did, but it is not common.

[still_one]

29. They were actually Principal protected, wasn't that much anyway, and believe it or not from the

litigation, I have been getting little settlement amounts periodically. Won't recover my full principal, but I have nothing to complain about, compared to what a lot of people lost. It was 4 bonds, 4000 dollars. Just thankful I didn't move a lot in there, but I probably would not of done that anyway since I had not dealt with Principal Protected Paper before, and wasn't that comfortable with Lehman as it was, but I could see people putting their life savings into such a thing thinking it very safe. The sad thing is those folks is even to get some relief, it took several years before I got some settlement. A lot of people can't wait that long.

The other thing that is almost ridiculous is when a class action is levied against a company, by the time they get around to the shareholders if they want to take part in it, 9 or 10 years have passed. It is really a joke. I followed through one time on that for an AOL class action, filled out all the forms, submitted all the proofs, and never heard from them. I suspect the lawyers got all the money.

Now when I get such correspondence, they go in the shredder.

I am sure you are quite knowledgeable.

This sure is interesting times. I never thought I would see record high interest rates, and record low interest rates. What a ride

[City Lights]

8. If they are too incompetent to succeed then let them fail. nt

[still_one]

9. That is why they should not be so big as to take everything else down with them

[City Lights]

10. Works for me! nt

[A HERETIC I AM]

14. The issue raised in the article has NOTHING to do with incompetence. n/t

[mmonk]

12. For the same way I don't trust Third Way Democrats.

Deregulation has led to boom/bust cycles, just like that which occurred before New Deal regulations.

[Trillo]

15. One rationale for giving banker's control in 1913

was it would reduce the boom/bust cycle.

[mmonk]

20. I'm an evidenced based person and noticed the regs ended the cycle

until they were screwed with again.

[djean111]

26. Aw, Jamie, didn't Hillary say we all got into this mess together, and we will all

work together to get you out of it? We taxpayers will pay our taxes, and the banks will get bailed out with our money! So easy!

[hifiguy]

32. She will be the best friend the banksters ever had.

[louis-t]

28. Oh, I trust them about as much as

I trust oil 'analysts' who tell us that oil is going (a. down to $20 bbl or (b up to $200 bbl. Often in the same day.

[closeupready]

30. Making the dismantling of TooBigToFail banks even MORE imperative.

[hifiguy]

31. Maybe you don't trust them because they are greedy, double dealing shitweasels

who are so crooked they need two people to help them screw their pants on every morning.

[Rex]

36. Disaster capitalism destroyed the entrepreneurial system.

Fuck these private companies! Break them up and make sure they never get so big again that they are Too Big To Go Out Of Business.

I wonder how many working class families will be left homeless this time around? FUCK these parasites! So sick of banksters and their theft from the Treasury!

[hughee99]

38. Just a hunch, without reading the article

They either want more money from the fed or for the government to relax regulations they put in after the financial crisis.