Now raising intellectual capital
Going through a very dense (77 pages) Bank for International Settlements report on financial sector rescue programs, I found some nice nuggets on bank debt guarantees.
First, the authors found that the biggest investors in debt guaranteed by governments included in the study are banks – meaning that all that talk about jump-starting lending to consumers and businesses was largely just that, talk.
…the dominant role of banks among investors implies that these bonds de facto subtract resources from the interbank market and do not stimulate bank lending to the real economy, but just lending to other banks.
And second, since this debt is backed by sovereign nations, there’s essentially no credit risk associated with the debt. That kind of safety can lull investors into a habit-forming addiction that could be ugly when the supply runs dry.