Not Raising the Debt Ceiling: A Crisis, If We’re Lucky, a Historical Calamity If We’re Not

Now let’s translate that into English. All sorts of financial institutions fund their day-to-day operations with ultra-short-term borrowing. Repurchase agreements (or “repo”) are the most common type. Here’s how it works. A bank “sells” something for cash, but agrees to buy it back at the end of the day — hence, repurchase — for a little more than it got. So, for example, say a bank sells a Treasury bond for 95 cents on the dollar, and buys it back for 96 cents at the end of the day. Again, notice the difference between what it gets and what it pays for the collateral. That’s the interest rate on what is really a secured loan. Okay, but what does this have to do with the debt ceiling? Well, the repo market isn’t set up to tell if a Treasury bond has defaulted

What Good is Wall Street?

However, the mere fact that a certain trade is client-driven doesn’t mean it is socially useful. Banks often design complicated trading strategies that help a customer, such as a pension fund or a wealthy individual, circumvent regulatory requirements or reduce tax liabilities. From the client’s viewpoint, these types of financial products can create value, but from society’s perspective they merely shift money around. “The usual economists’ argument for financial innovation is that it adds to the size of the pie,” Gerald Epstein, an economist at the University of Massachusetts, said. “But these types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.”

.. The recent crisis cost about ten per cent of G.D.P. It made tackling climate change look cheap.”