CHAPTER 34Notional Interest-Rate Swaps, Credit-Default Swaps, and Printing Press Irrelevance
A dark scenario I elaborate in this chapter is less about derivatives than it is about default. A prime dealer default will have massive effects on everything, and a big part of the channel will be derivatives. Here is an attempt to grasp what the world is really like—evolving, unpredictable, full of data that require constant translation and change context instantaneously. There are three possible scenarios.
1. The current playbook holds things together. A side effect is that the Fed’s zero interest rate policy (ZIRP) will kill money-market mutual funds (MMMFs), and ultimately, the shadow banking system will “dehydrate.” Death will be slow enough that ...
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