‘Hostages To Their Own Policies’: The Fight To Stave Off The Biggest Tail Risk Of Them All

One theme we've revisited in these pages over and over again is the concept of developed market central banks as the largest volatility sellers on the planet. To be clear, we don't mean that entirely literally, as some folks would have you take it. Rather, what we mean by that characterization is that policymakers are engaged in an ongoing effort to keep rates vol. suppressed in order to ensure that the chances of the greatest tail risk of them all being realized remain infinitesimal. That tai

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One thought on “‘Hostages To Their Own Policies’: The Fight To Stave Off The Biggest Tail Risk Of Them All

  1. As usual a very good analysis that links several topics. Central banks have to play very carefully with expectations, a key ingredient for the investment cycle in the real economy, but also to avoid volatility that can have an impact on margin calls, collateral, haircuts, and create cascade effects difficult to stop once the ball is in motion. The Basel III rules on liquidity coverage ratios and central clearing procedures don’t give banks/brokers much room when those effects begin, they can’t so easily “lend their balance sheets” as in the old days before 2008.

    A recent IMF paper went deeper into these issues, at the end there are other several links to learn more if interested https://www.imf.org/en/Publications/WP/Issues/2018/10/31/The-Morning-After-The-Impact-on-Collateral-Supply-After-a-Major-Default-46315