File this under Economics is Not a Morality Play

I’ve reading and writing most of today, but I opened my browser a few minutes ago to see the following headline


Who was the first person I contacted, a friend in Japan, loved ones who might live in earthquake prone regions. Nope. My mortgage broker.

“If Japan goes nuclear” I said, “the Ten will cross well into the 2s. We need to be ready to pull the trigger.”

What does that mean?

That means that an escalating crisis in Japan will cause fear in the world to rise. Heightened fear causes people to buy US Treasury bonds. More buyers of US Treasury Bonds means lower yields on those bonds. Lower yields send full time bond investors out of Treasuries and into Agencies. Agencies are the bonds that are used to back mortgages. This in turn means that mortgage yields could drop.

However, because this is fear driven sometimes you have hours – sometimes less than that – to lock.

What you need are triggers: pre-determined agreements that if at any moment someone is offering a particular mortgage product you will buy.

I point this out not simply to encourage you to be a cold hearted profit maximizer. I do it to point out that when there is actual cash on the line people don’t think about things like about matching patterns of trade, the roundaboutness of investment or the long term fiscal irresponsibility.


I just saw this from Tyler Cowen

Quick quiz: does this mean our federal government should:

a) spend more money, because there are even fewer bond market vigilantes than before, or

b) spend less money, because there is a general signal that everyone should pull back on excess commitments and risky projects, governments included.

Sadly, we are allowed only one guess at this problem.

The extra credit question is a) vs. b) when the lower yields are instead caused by a global financial crisis.

Tyler is a smart guy but there is just some major disconnect we are having here.

You don’t necessarily want to go into commitments and projects but you definitely want to monetize any decline in yield. From the government’s perspective, it could buy short and sell long or it could simply sell long and cut a check to the taxpayers.

In either case the government’s decision to leave money on the table simply facilitates some else’s taking it. I don’t have major leveraging opportunities, but I will take what I can get. The guys Goldman on the other hand. . .