Tyler Cowen’s essay on the inequality generated by the political economy of finance has received deserved attention. I think Tyler is exactly right that financiers are going short on volatility, that this is hard to detect and therefore regulate, that politicians have incentives to bail out the banks following increases in volatility, and that it [...]
Tags: banking, Cowen, dynamic inconsistency, finance, globalization, inequality, moral hazard, naked puts hypothesis, Too Big to Fail
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Over at the FT, Gavyn Davies writes concerning the Eurozone, Member states cannot print the euro, which automatically increases the risk that they will default on their debt. (Admittedly, it also reduces the risk that they will inflate their debt away. The markets are not too worried about this in these deflationary times, though one [...]
Tags: Davies, EU, Euro, finance, sovereign debt crisis, Taleb
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My new favorite website is this one, which monitors credit default swaps and displays some useful free data about them (you can pay to get more data). The most interesting statistic is the cumulative probability of default for various sovereign bonds. The site calculates these over a five-year period based on the term structure of [...]
Tags: credit default swaps, cumulative probability of default, finance, risk premium, sovereign debt crisis
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As politicians and pundits debate what regulations are needed to fix the financial industry, I want to draw attention to a neglected issue: an important factor in the stability of the financial sector is its degree of globalization. All the big American banks have some international dealings. But true globalization of banking would be an [...]
Tags: banking, diversification, dynamic inconsistency, finance, globalization, moral hazard, Too Big to Fail
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