Interesting. Rent default domino effect.
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This makes me think that financialization of mortgates via bundling etc is a problem primarily because it discards the illegible trust on which debt forgiveness/debt rescheduling type actions rest. Creates a financial doomsday device.
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If I owe you $100, and can't pay, you and I can negotiate and maybe I give you $50 on schedule, and $50 later at slightly lower interest. But if you sell the debt as 100 $1 loans to 100 anonymous people on a market, that flexibility is lost because I can't negotiate with them.
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Basically consequences of distress and defaults should never be automated because they tend to be complex contingencies requiring human responses. Automating AND distributing them is double jeopardy. Sudden automated repo trigger on 1 missed payment, flash crash etc.
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This is the sort of thing that a sensible government should have predicted in week 1 of COVID and created measures to prevent. Put the economy into suspended animation : all debts, taxes, indefinitely frozen. Government pays the minimal actual needed to keep each actor afloat.
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I don't think it's a prediction problem. Anyone can see this failure cascade a mile off. It's a trust and incentives problem: who has an incentive to try to solve the problem, and are they trusted enough by others. I personally don't trust government backstopping here.
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Everyone expects that everyone else is able to end up holding the bag
You can't stop a system predicated on, built for perpetual motion and expect some components to not bust
Even with the Fed/gov. lubing it to high hell with dollars
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Have been wondering about this one. When does the leverage kick in, how long does it take the shocks to work through the system and multiply at each step
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This is article is a h/t to your blog post in April titled, ‘Defaults and Defaults’.
“The word default has two meanings: failure to fulfill an obligation, and a preselected option. We are finding out the hard way exactly how they are related.....”






