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And failed to hedge or prepare for higher interest rates despite seeing them coming from 18 months ago. It’s like standing at the mouth of a train tunnel, hear

by eloff 4y ago

And failed to hedge or prepare for higher interest rates despite seeing them coming from 18 months ago. It’s like standing at the mouth of a train tunnel, hearing a train, seeing the reflections from its lights, and deciding to walk through it anyway with no contingency plan.

jerf 4y ago
I think this is being oversold as a solution. These insurance policies are just that, insurance policies. I'm sure they are not all independently backed by enough currency to make everyone good, any more than any other insurance policy is. Those "hedges" are probably derivatives stacked on other derivatives stacked on other derivatives until the situations has been satisfactorily fudged to everyone's satisfaction that permits them to pretend they're "hedged", but I'd bet if the entire banking system tried to draw on them at once it would rapidly turn out there wasn't anywhere near enough "there" there. You can't have a system where everybody pays X into it and then simultaneously tries to draw 1000X (who knows what the cost of this was, but certainly much greater than X) out of it. You can build a derivative structure that hides this fact from everyone as long as they don't test it, but there is no derivative structure that can make that work if they do. Proper hedging might have delayed this, but something bad still would have happened. It's possible proper hedging might also have put the first fire out, but it would have over time only made the situation more volatile as those hedges would have had to spike in cost and possibly driven other things over the brink. The fundamental problem is that the financial system is so stuffed with tinder that it makes the California forests look like they're not even trying. What sparks it is of a certain amount of academic interest, but in the end, it's not the sparks that create the raging conflagration. A spark may cause a fire, but the raging conflagration is caused by the fuel. Sparks are inevitable. A "hedge" that promises to send out a couple dozen fire fighters if a particular spark starts a fire is of little consequence if a hundred fires start at once and the "hedge" is the exact same dozen fire fighters for all of them.
- eloff 4y ago
  Yes, there’s limitations to hedging. The problem here is making a huge directional bet that interest rates won’t go up, not adjusting that bet as it becomes clear they will go up, not adjusting as they start going up, etc. It’s like you bought a stock with half your portfolio that’s clearly going to suffer and you hold on hoping you’ll be able to get your money back in 10 years. Oh and using 10x leverage too, so even a 20% drop is enough to wipe out your portfolio completely. It’s just so stupid. And predictably stupid.

by eloff 4y ago

jerf 4y ago

I think this is being oversold as a solution. These insurance policies are just that, insurance policies. I'm sure they are not all independently backed by enough currency to make everyone good, any more than any other insurance policy is. Those "hedges" are probably derivatives stacked on other derivatives stacked on other derivatives until the situations has been satisfactorily fudged to everyone's satisfaction that permits them to pretend they're "hedged", but I'd bet if the entire banking system tried to draw on them at once it would rapidly turn out there wasn't anywhere near enough "there" there. You can't have a system where everybody pays X into it and then simultaneously tries to draw 1000X (who knows what the cost of this was, but certainly much greater than X) out of it. You can build a derivative structure that hides this fact from everyone as long as they don't test it, but there is no derivative structure that can make that work if they do. Proper hedging might have delayed this, but something bad still would have happened. It's possible proper hedging might also have put the first fire out, but it would have over time only made the situation more volatile as those hedges would have had to spike in cost and possibly driven other things over the brink. The fundamental problem is that the financial system is so stuffed with tinder that it makes the California forests look like they're not even trying. What sparks it is of a certain amount of academic interest, but in the end, it's not the sparks that create the raging conflagration. A spark may cause a fire, but the raging conflagration is caused by the fuel. Sparks are inevitable. A "hedge" that promises to send out a couple dozen fire fighters if a particular spark starts a fire is of little consequence if a hundred fires start at once and the "hedge" is the exact same dozen fire fighters for all of them.

eloff 4y ago
Yes, there’s limitations to hedging. The problem here is making a huge directional bet that interest rates won’t go up, not adjusting that bet as it becomes clear they will go up, not adjusting as they start going up, etc. It’s like you bought a stock with half your portfolio that’s clearly going to suffer and you hold on hoping you’ll be able to get your money back in 10 years. Oh and using 10x leverage too, so even a 20% drop is enough to wipe out your portfolio completely. It’s just so stupid. And predictably stupid.