Home

The Political Economy of LTRO

Printer-friendly versionPDF version

Asymptotix has in co-publishing with QFINANCE produced a White Paper on "The Political Economy of LTRO".

Executive Summary

This is not a liquidity trap; in the political context it’s a confidence vacuum!

As monetary economists we have observed crowding out in sub-markets around the world. But whether or not it exists in the global capital market system of today has not been finally empirically proven as yet. Not until today, is my view.

Some now argue that the ECB is actually telling us that we have regime-shift in the transmission mechanism; we have now a new transmission mechanism to which all the research of the recent past does not apply. There are no new studies of this new transmission mechanism, not yet but there will be soon.

It’s simple, the authorities pump money in, capital markets go in one direction but the real economy goes in the opposite one; we are crowded out. This is my new thesis: LTRO (longer-term refinancing operations; all forms of monetary stimulus) are just propping up the equity market and all securities markets, not necessarily directly via banks’ prop-desk trading but more crucially via prime-brokerage lending to hedge funds that’s the [new] transmission mechanism. But if the new transmission mechanism is effectively LTRO-predicated, what happens when LTRO (or QE, in the UK) stops?

My model is slightly more complex; that is the cheap money pump primes the prime brokerage function which on lends short term to the hedge funds who then effectively engage in round tripping at arm’s length, it is a win/win for the capital market system it inflates the equity markets and supports yields in risky government securities.

In summary this monetary inflation has all sorts of perverse effects in all sorts of (actually) indeterminate securities markets. The new normal, the new transmission mechanism is about the state pump priming capital back to the private sector via the securities markets complex, it’s a very strange zeitgeist “never been tried before.” This LTRO howitzer is massive, its really weird and its regime shifting of the modern transmission mechanism, why would you not expect to see some wild and wonderful consequences and in pretty short order in the tail of your distribution, surely that would in reality be only simply rationally expectational? LTRO and all QE variants are like vitamins; they pump up a bubble and then flush out the other side, but they so confuse the risk appraisal heuristic with political uncertainty and underlying regime shifts that they trap the real capital markets and private sector into a vacuum of political uncertainty.

Download the paper here: http://www.qfinance.com/capital-markets-white-papers/the-political-econo...

Read the blog post here: http://asymptotix.eu/news/political-economy-ltro

 

QFINANCE

Asymptotix

Short URL
Asymptotix on Twitter

Are the key legislative pillars such as Basel II & III, UCITS IV and Solvency II forcing you to re-examine how you identify, measure and manage risk and capital?

Asymptotix work closely with our partners to help clients develop a more proactive, systematic and integrated approach to governance and risk management to deliver proper value.

Asymptotix can offer the support you need to deliver on time. Read more...
 

Is the goal of your website to sell services or products, educate, or collect data?

A positive customer experience is vital to conversion, no matter what your conversion goals may be. Our designers and developers will create a positive experience to maximize your conversions and deliver the optimal return on your investment. We strive to find the perfect balance between the web site’s design and functionality.

Asymptotix implements interactive solutions for European companies. From corporate websites to social communities, our clients will tell you an investment in building a scalable online experience will deliver long-term tangible benefits.

Based in Luxembourg we can help you all over Europe. Our multi-lingual team can work with projects and speak your language! Read more...