Playing Whack-a-mole With Risk, Roulette With Inflation

Matt Welch | April 29, 2009

The Wall Street Journal's "Heard on the Street" column argues today that, because of Too Big to Fail policies, market fear has essentially been transferred from private equities to public debt.

What has eased equity-market fears is the huge government bailouts of the financial system, which have apparently de-risked the equity markets. The previously implicit guarantees that have always underpinned the financial markets have become explicit. Instead of the infamous Greenspan Put -- the assumption the Federal Reserve would ride to the rescue of investors with interest rate cuts -- the markets now have quantitative easing, whereby central banks actually shore up prices by buying assets.

But these bailouts are hugely risky -- as reflected in the high cost of insuring government debt. Credit Derivatives Research's government-risk index, which measures credit-default swap premiums on seven large sovereign borrowers including the U.S., U.K. and Japan, continued to rise this year even as the VIX [Volatility Index] fell. It currently stands at 75 compared to a pre-boom level of around 3 and implies a VIX in the 60s, according to CDR.

Comments former bonds trader (and my former boss) Henry Copeland:

Though the Fed has been buying hundreds of billions in Treasuries and corporate bonds to keep a lid on rates, the government's skyrocketing debt sales to fund the deficit, the gradual erosion of the foreign appetite for US debt and the fear that the Fed's bond buying will itself eventually fuel inflation, make it inevitable that 30-year t-bond yields, currently at 4%, will be far higher in coming months and years.

Back in our souveneir "Bush's Disaster Socialism" issue, Jeffrey Rogers Hummel detailed the risks associated with "the most dramatic peacetime experiment in monetary and fiscal stimulus in U.S. history."

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|4.29.09 @ 8:29PM|#

Obama will go down in history as one of the Great Presidents. Why? Because of his extraordinary expansion of government. All of the Greats have a major war associated with them, along with an extraordinary paradigm-shifting expansion of government power.

Lincoln : Civil War + death of federalism
Wilson : WWI + IRS/Fed, Prohibition
Roosevelt : WWII + New Deal
Johnson : Vietnam + War of Poverty/Drugs
Obama : ??? + War on Fiscal Responsibility

What major war is Obama going to get us in? Will it be an expansion of Iraq/Afghanistan? Or an invasion of Iran and/or Pakistan? Nuclear showdown with North Korea? Mexico?

hmm|4.29.09 @ 5:46PM|#

I own at whack-a-mole. Maybe I can get a job with the Big O administration.

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Invisible Finger|4.30.09 @ 6:27PM|#

It's not market fear. It's government's own fear that IT TOO will have to de-leverage. It's how every empire failed.

Your government hates you|4.30.09 @ 6:34PM|#

Ben Bernanke is a goddmaned liar. He said he'd drop money from helicopters. Instead he merely walks over to the favored few and hands them billions. The advantage of new money falls to those who get the new money first.

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