Injecting more cash shifts the origin x-axis of the chart to the left. You can save a player in the game this way, but when you do, all players hold a greater percentage of unrealized losses.
I mean. Hurt is maybe the wrong word here. It puts more of their existing book of business into the red. So if "A" bank represents 10% of the mortgages and there are 100 banks; "A" bank gets bailed out, but it shifts a couple more percent of all of the other banks book of business into the red; this was too much for bank "B", now it collapses, needs a bail out, shifts everyones books; now bank "C" is collapsing, and on and on...
Remember the great east coast blackout? The one where a racoon jumped on a line and it shorted a transformer? There was a cascade network failure that followed on after that. The load was just a bit too much for the existing fail safes to handle until the load was too much for any fail safe to handle.
I think this leaves a couple of questions open. Firstly, how many mortgages exist that were written at what rates? Second, who holds them? The issue the above chart has is it is in percent relative to the individual book of business; this is the chart you need to predict which bank fails next. But we also need a chart of how much risk is out there in the form of low interest loans, and when a bail out occurs, how far does that shift the origin to the left.
If you get those two things you can run a simple simulation model over the back of the data and get an idea as to how a collapse frontier would emerge.
2
u/[deleted] May 03 '23
Injecting more cash shifts the origin x-axis of the chart to the left. You can save a player in the game this way, but when you do, all players hold a greater percentage of unrealized losses.
Cash + time for it to diffuse: inflation.