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Two points raised by this Sober Look post:
1. Banks are just front-running the Fed’s MBS purchases as part of QE.
This ultimately hurts middle market companies, as US legislators seem to prefer to see the dealers front run the Fed on MBS rather than holding middle market corporate bonds.
Golly, who out there knew this would be the main effect and said something about “front-running a neverending QE-crack-dealer Fed” way back when? Dunno.
The second point has to do with the Volcker Rule. I mean after all, if the banks are just Buying Bonds To Sell To The Fed For Profit, isn’t that, like, ‘trading for their own account’, which is the econ-101-textbook definition of ‘prop trading’ that you cite if you’re a pop-econ-blogger? Of course it is, and yet it isn’t, because the Volcker implementers have set up a bunch of exceptions for Some Reason and buying MBS happens to be one of them. So wait, who told you about a zillion times that ‘prop trading’ has no consistent definition?
Moving on, we come to the second point of the post:
2. “With banks getting out of corporate bonds, private equity firms expand their lending business (a form of “shadow banking”), charging much higher rates.”
Now gee willickers, who told you that the Volcker Rule would push a lot of activity into shadow banking?
Nope, can’t remember that either. Drawing a blank here.
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