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my @FT op-ed on why emerging and developing countries should ignore the gospel of structural reforms in bond markets @AnnPettifor @KevinPGallagher @CriticalDev @cacrisalves @BJMbraun @nssylla @adam_tooze @MiriamBrett
I expand on very tight word limit: IMF/WB/FSB gospel too easily dismissed the systemic faultlines underpinning US bond market architectures, from the ‘paradox of liquidity’ to moral hazard and the hierarchical nature of the global monetary system.
Lehman's failure demonstrates that the 'paradox of liquidity', that it disappears when it's most needed, is a feature not a bug of US bond market model (with its repo and derivative plumbing).
Asset managers & global banks worry about the paradox of liquidity. Central banks do too - rhat's why Bank of England resorted to clandestine institutional change and expanded its mandate to include market-maker of last resort - a commitment to bond mkt liquidity
market maker of last resort puts floors, but not ceilings on bond prices, comes with moral hazard - and regulation does little to address it: Basel III only targets banks, while FSB rules on repo markets watered down significantly
finally, creating bond markets in the image of the US inevitably runs into Helene Rey's dilemma: free&fickle portfolio flows without monetary policy autonomy.
as we discussed in #TrentoSummerSchool but with pretty graphs @Martin_M_Guzman @devikadutt @ChristinaLaska1 @SudeepKJain
