Thursday, September 18, 2014

They may be Phds in economics

But UCLA's Andy Atkeson, Andrea Eisfeldt and Pierre-Olivier Weill are also masters of understatement;
In conclusion... market participants and regulators are still in disagreement about whether the private profits that large dealer banks gain from intermediating trade in OTC [derivative] markets encourage socially optimal market structures.
But that hasn't exactly stopped the regulators from doing something...anything;
While efforts to promote centralisation and transparency in OTC markets should help to shed light on the surplus that is created and its distribution across participants, they will also change this surplus in ways that may not be anticipated.
Our bold.
Many of the proposed and implemented regulations effectively reduce the surplus accruing to dealers [large banks], and so reduce their incentives to participate in OTC markets.
We pause, for effect.
Clearly, this hurts dealers; however, the overall change in value may either increase or decrease...
Again, our bold, and our pause.
...depending on whether there was previously too much or too little dealer activity. Our model shows that typically in equilibrium some reduction in dealer rents is warranted. However, one should be careful not to reduce rents so much as to discourage socially valuable intermediation.
Or, as Edward Teller once said, apropos some scientific controversy; Sometimes we have to do that which is very difficult. Sometimes we have to think.
Our work also suggests that particular care should be given not to reduce rents when dealer participation costs are high, such as during times when negative shocks drive exit.
AKA, recessions.

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