LIQUIDITY TALK. ON THE NEW BRETTON WOODS, Mr. TRICHET & FINANCIAL INNOVATION

Brad Setser & the New Bretton Woods.
. Brad Setser: Latin America joins Bretton Woods 2 (Big Time)

Brad Setser detects a renewed willingness, within Latin American economic policy circles, to avoid sharp episodes of currency appreciation. (See my post on this issue here). The thing to keep in mind is that these countries are not ... Scandinavian countries. If Denmark can compete in the global economy despite the high cost of its labor force, it's because its top-quality governance leads to stable property rights and therefore to a low cost of capital. Meanwhile, the quality of governance in Latin America is deteriorating day by day — the "domestic" cost of capital is definitely not falling. Therefore, these countries need to stick to the New Bretton Woods proposition.
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Mr. Trichet & Financial Innovation.
. Keynote address by Jean-Claude Trichet, President of the ECB at the 22nd Annual General Meeting of the International Swaps and Derivatives Association

Interesting speech by the ECB president on the impact of Credit Default Swaps on liquidity conditions. I am preparing a more detailed post on this issue. Here are some quotes:

... technological innovations have significantly enhanced the ability of banks to grant credit ... Credit derivatives could therefore make the economy, and thus monetary policy, increasingly sensitive to credit market movements ... Price discovery in the credit derivatives market reduces the risk of mispricing loans ... Banks are moving from the traditional “buy-and-hold” model to the “originate-and-distribute” model, whereby they distribute portfolios of credit risks and assets to other market players ... Indeed, some evidence from the United States, based on individual loan data, supports the idea that banks are increasing the supply of credit as they obtain additional credit protection through credit derivatives.