The Stimulus Evidence One Year On

I read this piece by Robert Barro in the WSJ shrugging my head in distrust over macro-economists and their analysis. To understand what I mean, contrast this piece with this one by Krugman written in January http://www.nytimes.com/2010/01/18/opinion/18krugman.html

The real moral of the story here is that there will always be a very reputable and leading economist to support whatever position one wants to take on a macro economic issue. Why is that? The answer lies in the number of assumptions one needs to make without much hedging backup to come to any prescription.

From the distance of BICs master obsessed with being able to hedge probabilistic assumptions, I was tinged by:
- the widespread assumption that multipliers used are fixed quantities,
- Wildly speculative sentences such as "...second, this multiplier provides a reasonable gauge (and likely an upper bound because of the strong wartime boost to labor supply due to patriotism) for the effects of nondefense government purchases.".
- I did not see any inflationary discount when adding up the numbers.

Citi Plans Crisis Derivatives

This CLX plan appears to be a pickup from my article in the investment professional where I lambasted Krugman's analysis of the Treasury's PPIP and the fallacy of expectations based risk management he perpetuated in his analysis. In particular I pointed out the rise in funding cost at times of crisis not priced into such analysis to show how the computation of the so-called free lunch to PPIP investors was misguided.
The prescription in the article was to find replication contracts such as BICs that replicate the risks taken on as early as possible and keep uncertainty to a minimum.

However this contract, interesting as it may be only marginally addresses the range of risks. Anyway was it not Citi who would have needed such a contract last time? How could it safely be the underwriter?

Power-Reverse Dual Currency (PRDC) business & BICs

On January, 28th, 2010, Risk.net reported that losses and increasing hedging costs have led many smaller firms to leave the Power-Reverse Dual Currency (PRDC) business, leaving a rump of major banks operating in the market. This represents yet another example where had a BICs market on the currencies and interest rates involved existed, there would have been no such issue. Not only hedging activity would have been contracted before hand, in addition the atomic structure of replicating BICs would have made nearly impossible for counterparties to identify what the contract held is in order to attempt a 'squeeze'; furthermore most of the individual BICs would be used for other hedging purposes unrelated to PRDCs, ensuring the liquidity of the market on those contracts.