A simple macro model of collateral

Regulators are pushing for non-centrally cleared trades to be backed by high levels of collateral, such as cash or government bonds. This is where the $10tn figure comes in. It is the amount of extra collateral that could be required according to estimates by the International Swaps and Derivatives Association.

Here is the full FT article.  It stresses that figure of ten trillion may be too high an estimate, but a separate lower estimate still runs at $2 to $4 trillion.

Let’s play out the scenario.  In some future world, what if most savings is done by corporations and also by traders at the clearinghouse, in the form of collateral.  Collateral, however, is not “smoothed” across assets but rather is an either/or decision.  They won’t take your sheepdog as collateral, nor will they take shares in small tech companies.  Most of the saving is done in the form of approved safe assets and the rest of the economy is somewhat starved for investment.

I call it the return of financial repression.  Let’s see how far it is allowed to go.


Comments for this post are closed