Chris White

Fed's Folly: Fooled by Flawed Futures?

It seems to me that Barry is pointing productively to one of the international features of what is going on, namely, the unwinding of the leverage geared up through derivative contracts. Quantifying losses, and estimating effects of losses, is difficult because the leverage ratios are not known, and because the assets which are leveraged, and re-leveraged, and re-releveraged are neither identified, nor can they be valued accurately. Therefore timescales and discount rates are black-holes. After all ground rent is included with interest in the pricing of assets as part of the 'cost' of 'producing' the asset. Where will US housing prices end up? When? How will the totality of mortgages and agreements related to mortgages be affected by the continuing slide in housing prices? How does this affect taxes and government debt.

Soc Gen's loss must be some fraction of what was in the black-hole.
Was it stock, commodity, mortgage or whatever-based? Who knows, probably no one will ever know. However until more attention is given to the matter of leverage unwinding as an inter-market, international process discussion about amounts and largeness or smallness of problems will miss the target. It's the barn door the target was pinned to which has disappeared. We all need to know how big the barn was and what was inside when the door disappeared to make judgements about size and evaluate effects.