All the old paintings on the tomb
They do the sand dance, don't cha know?
If they move too fast
They're falling down like a domino
--The Bangles
On top of hypothecation and re-hypothecation, there is also hyper-hypothecation. Hyper-hypothecation is basically the re-hypothecation process done multiple times between various trading partners.
HH creates systemic counter-party risk in a leveraged system. If one trading partner in a chain fails to make good on a contract, then the entire system freezes up because there is not enough capital to meet all the margin calls.
Conceivably, prices may be in error if participants fail to understand the counterparty risks that cascade thru a market system. Once those risks are understood, prices are likely to drop...significantly.
This pretty much describes our ponzi-esque condition...
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2 comments:
Abbott: You throw the ball to first base.
Costello: Then who gets it?
Abbott: Naturally.
Costello: Naturally.
Abbott: Now you've got it.
Costello: I throw the ball to Naturally.
Abbott: You don't! You throw it to Who!
Costello: Naturally.
Abbott: Well, that's it—say it that way.
Costello: That's what I said.
Abbott: You did not.
Costello: I said I throw the ball to Naturally.
Abbott: You don't! You throw it to Who!
Costello: Naturally.
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