Friday, August 25, 2017

Down The Jackson Rabbit Hole

Janet Yellen's speech as critiqued by Hyman Minsky...

"over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance...the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system"
- Hyman Minksy, Financial Instability Hypothesis

Yellen today: "Excessive speculation will return sooner or later, we just don't know when..."

ZH: Janet Yellen In Wonderland
"A decade has passed since the beginnings of a global financial crisis that resulted in the most severe financial panic and largest contraction in economic activity in the United States since the Great Depression. Already, for some, memories of this experience may be fading...[Skip several pages of bullshit]...The evidence shows that reforms since the crisis have made the financial system substantially safer"

"The annual stress-testing exercises in recent years have led to improvements in the capital  positions and risk-management processes among participating banks"

This week, second largest U.S. bank:

"Credit default swaps suggest that market participants assign a low probability of default at large U.S. banks"

In summary, credit default swaps were massively mispriced due to the misallocation of late cycle liquidity, giving the illusion of low risk: 

"Economic models of the resilience of the financial sector--so called top-down stress-testing models--reinforce the message from supervisory stress tests that the riskiness of large banks has diminished"

"I suspect many in this audience would agree with the narrative of my remarks so far"

Commercial & Industrial Loans

"We can never be sure that new crises will not occur, but if we keep this lesson fresh in our memories--along with the painful cost that was exacted by the recent crisis--and act accordingly, we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly"

ZH: Dovish Yellen Monkey Hammers Dollar