muses of the moment

July 15, 2013

Bill Black Interview

Peak Prosperity interviews Bill Black. Good one from July 13, 2013. Click here.

From the transcript:

And we have not even discussed derivatives to this point. Which is the not-800-pound gorilla, but the $8-trillion-ton-gorilla that is out there. So we already have the insanity of derivative trades in which both of us book a gain because we have different evaluations for the asset. So we have phenomenal paper gains that cannot be true. When the markets no longer trust each other, then those kinds of transactions do not work anymore, and there is no liquidity, and you are in the equivalent of trying to sell minority shareholder interest in a privately held corporation. How is that going to work out for you? Ever tried to do that?

So all across the globe, all across history, minority shareholders get completely screwed in that circumstance, when liquidity dries up. Well, the same thing can happen to much broader markets, including in particular the derivatives markets.

And if it does, when trust is interrupted, much less eroded, in the ways I have talked about it in the derivatives market, liquidity completely dries up. Anything that functions like a market-maker collapses, and you get whole financial systems that grind to a halt. And they do not happen just a few times. It can happen in thousands of markets roughly simultaneously.

You asked me earlier about Dodd Frank, and I said it had no coherent strategic vision. And a couple of the areas in which it had no coherent strategic vision we have talked about. It did not deal with the international competition-in-laxity. It did not deal with “too big to fail.” And it did not deal with derivatives. So I would say that was strike one, strike two, strike three.

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