Such an overly simplistic conclusion implies that Treasuries exist in a vacuum, without taking into consideration fund flows between asset classes and between instruments of different credit quality.
And if a lack of liquidity is the problem in some credit instruments, the Fed's direct purchase of those assets should contribute to a credit thaw.
Now, the obvious concern here is that it would also be in the interest of all bankers to try to correlate the default probabilities of their credit instruments so that they all default together and thus trigger the guarantee.
Three of the biggest dealers in credit derivatives instruments that allow the risk of a borrower defaulting to be bought and sold have launched a project to check the names of all the companies in their contracts.
On the other hand, the proliferation of credit through new instruments and disintermediation has made the financial system more disorderly than ever.
The development of new financial instruments, such as credit derivatives, has also helped to shift risk from the banks to insurance companies, pension funds and others.
We are working with customers because it is meant to bring a lot more transparency, a lot more reporting, much more in market data flows, a lot more storage of trading records for longer and it brings into its orbit a lot of esoteric instruments like interest rate swamps, credit default swaps and collateralized debt obligations.
FORBES: New Financial Regulations -- Profitable Opportunities, For Vendors
It ignored, for instance, the rise of risky, exotic new financial instruments, primarily credit-default swaps.
Will these be sensible, such as rationalizing our myriad, overlapping financial regulatory structures and pushing for the creation of exchanges and clearinghouses for exotic instruments, such as credit default swaps, so we have transparency and standardization?
Long-term interest rates, for instance, are not set by central bankers, but by credit markets that eventually price credit risk into the price of different debt instruments.
Some worry about the increased activity of hedge funds which, lured by the yield on illiquid, complicated instruments, make up as much as 70% of trading volume in credit derivatives, by some counts.
New, exotic financial instruments, such as credit default swaps, are being cast as one of the principal villains in the credit crisis.
Originally conceived as a means for banks to reduce their credit exposure to large corporate clients, CDSs quickly became instruments of speculation for pension funds, insurers, companies and (especially) hedge funds.
Remember, those were the pseudo insurance policies that a lot of financial institutions bought to protect themselves from mortgage-backed securities and other credit instruments in case they went south.
Their instruments are held all over the world, and we could not fail to honor the implied credit of the federal government.
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