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The Null Hypothesis's avatar

This is the best explanation of the repo market i've ever read or hear and i've been reading/listening on this topic for over a decade. Thanks Arnold.

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MikeDC's avatar

Are the problems posed by financial innovation due to the lack of a free market or due to the nature of the market?

In a purely free financial market with no regulation, a financial innovation could that takes hold and becomes ubiquitous (like the repo example) creates a systemic risk because if a significant number of banks fail, then you have a contagion that spills out to people who had nothing to do with it. Basically, a big, negative externality. The regulation seems like it should be about reducing that externality (but financial innovators find their way around it and keep recreating it).

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