14 April 2015

The Alchemists by Neil Irwin

Not particularly recommended reading, but I find this a useful review of recent financial markets history and events.

Quote (from chapter on the King's Speech)

Over the years, the governor has sometimes posed a question to his audience at the start of his annual Mansion House speech, offering his answer at the end. In 2010, he inverted the practice. The answer, he announced to the financiers, was “23.” He would tell them the question only at the conclusion of his speech: 
To what question is 23 the answer? Several plausible answers come to mind. First, 23 is the number of players in England’s World Cup squad in South Africa. Second, it is of course 23 years since England last won the Ashes “down under.” But neither of these are the right answer which is that 23 years is the age difference between the Chancellor of the Exchequer and the Governor of the Bank of England. In case there is any doubt, George is the younger. This age difference is highly desirable because the appropriate incentives are to allocate the responsibility of determining monetary policy to the older generation, which has a real interest in preserving the value of money, and the responsibility for fiscal policy to the younger generation, on whom falls the burden of excessive debt. . . . Given those incentives, Chancellor, I look forward to a harmonious coordination of monetary and fiscal policy


1 comment:

Taichiseal said...

When the Fed is ready to buy, a special sound emanates from the computers on trading floors at each of the primary dealers. It’s a strange, fluttering tone—the musical note F, followed by an E, followed by a D, in rapid succession. F-E-D means that the Fed is in the market. The dealers then have forty-five minutes to put in their offers—the Fed is indifferent as to whether they involve securities the giant banks own themselves or those owned by their clients. Marchioni’s staffers monitor the incoming offers, and when one comes in that doesn’t make any sense—the bank is offering to sell bonds to the Fed either way above or way below the market price—they press a button on an elaborate phone known as a turret (the one in front of Marchioni has a sticker on it identifying it as the Super Turret) that immediately connects them with the trading floor at J.P. Morgan or Barclays or Goldman Sachs or whichever dealer may have put in the offer.
On that first day of QE2, the offers were piling up: The dealers were ready to sell $29.039 billion in bonds to the Fed. The traders watched as a computer program sorted the incoming offers to find the ones that offered taxpayers the best deal. After all, a bond maturing in October 2014 should have a different price from one maturing in January 2016, so their job is to ensure that they buy the ones in which dealers are offering the best relative price.
With one minute to go, the traders’ computers begin flashing red. They watch CNBC and monitor the Bloomberg feed to make sure there is no major market-moving news; in that event, they might delay the end of the auction in order to give the bidders time to adjust their offers accordingly. When the clock expires, the Fed’s computer sorts through all the offers to choose the ones that offer the best deals. On November 12, 2010, of the $29 billion being offered on twenty-four different individual securities being offered, the best prices were being offered for sixteen different securities, such as $141 million for a Treasury bond scheduled to mature on February 15, 2015, that when originally issued offered a 4 percent yield.
The traders had bought billons in bonds, which were now owned by the Federal Reserve Bank of New York. The sellers—the banks and their clients—had billions of newly created dollars sitting in their accounts, money that they could lend out or spend to their heart’s content. The traders would repeat the practice 139 times over the ensuing eight months, until an extra $600 billion was floating around the world economy. Those dollars would, if Bernanke and Dudley were right, create more lending and investment—or, if the hawks were right, higher prices and bubbles.