BOE's Andy Haldane Channels Zero Hedge, Reveals The Liquidity Mirage And The Collateral Crunch
- It's not as if this should come as a major surprise to ZeroHedge readers, but to hear officials from the Bank of England pointing out the sub-optimal nature of the financial system's information asymmetries is refreshing. Be it via any one of Andrew Haldane's three so-called arms-races (Returns - the past, Speed - the present, and Safety - the future), analogizing to the winner-takes-all 'sex-fest' blubberiest-optima of elephant seals and their 'extinction' implications, these socially 'bad' financial system outcomes are channeled superbly by the comedic Brit.
Returns to financial capital and financial labor rose to extraordinary levels by historical context in the lead-up to the crisis and were a key driver or propagator of the market's financial instability. Forget "keeping-up-with-the-Jones", this was "keeping-up-with-the-Goldmans" as the returns-race was achieved by leverage.
The current Speed-race, specifically trade-execution times and high-frequency-trading, where he crushes the hopes of every quote-stuffing algo's dreams of 'helping' the financial markets pointing to the mirage of liquidity that is provided as well as the fact that it removes bandwidth from the slower 'rest' of the market and warns "The Flash Crash was no one-off".
Finally he shifts to the future noting that we have seen since the crisis morph to a quest for safety, as opposed to risk/return, as, for example, bank debt investors increasingly seek security or collateral as "everyone wants to be senior or first in the queue" and just as we noted, the central banks have been willing and self-fulfilling participants in this safety race via their loan, purchase, and QE programs and its implicit subordination of everyone else as banks balance sheets become more and more encumbered.
Focusing on macro-prudential (as opposed to micro-based focus) solutions, he suggest capping leverage (and maybe bonuses), enforce order-cancellation rules to end quote-stuffing, and finally a limit on how much a central bank can encumber bank assets may be needed. A must-watch to reassure one's self that some central bankers really get it as unlike before, when nobody would touch on topics covered by ZeroHedge with a ten-foot-pole, at least they do now, if with a one-year delay.
