US Government Debt Different - Finance Department - University of ...

Zoltan Pozsartions, forming an integral cog of Asia’s mercantilist policies, shiftedtheir manufacturing activities to low-cost economies. Meanwhiletheir consumer base in developed markets embarked on a debt-fueledconsumption boom. These dynamics drove a secular expansionin corporate profits, and led to the emergence of large, global corporationsas net funding providers in the financial ecosystem. Third,given the problem of underfunded pensions and paltry returns beforethe crisis, real money accounts allocated an ever larger share oftheir portfolios to levered investment strategies. This drove the secularexpansion of the hedge fund complex as providers of levered investmentreturns. Hedge funds’ long-short equity, fixed income arbitrageand derivatives-based investment strategies drove an expansionin securities lending, securities financing and risk intermediation,respectively, each of which raised the cash intensity of the systemfor collateral and liquidity management purposes (see Pozsar, 2010).37Institutional cash investors’ cash balances—or institutional cashpools—are very large. Just before the financial crisis, they averaged$400 billion for official accounts, over $75 billion for securities lenders,$50 billion for asset managers, and $25 billion for the most cashrichof global corporations. These average sizes were far above precrisisdeposit insurance limits of $100,000.Institutional cash investors were challenged in trying to place theirfunds into safe, short-term liquid instruments or in instruments thatoffer guaranteed liquidity on demand and at par. They had three basictypes of instruments to choose from: (1) government guaranteedinstruments; (2) secured, privately guaranteed instruments; and (3)unsecured, unguaranteed instruments. These instruments representthe liabilities of the sovereign, the shadow banking system and traditionalbanks. Government guaranteed instruments include U.S.Treasury bills, Agency discount notes (or short-term paper issuedby the housing GSEs) and insured deposits. Secured, privately guaranteedinstruments include repurchase agreements and asset-backedcommercial paper issued by broker-dealers and the now defunct SIVsand conduits, respectively. Unsecured instruments were uninsureddeposits and commercial paper issued mainly by banks. Institutionalcash investors held these instruments either directly or indirectly viamoney funds.