It’s one of those myths that persist no matter how many times it fails to live up to itself. Perhaps that is due to the fact that it originates in simplifying assumptions that allow econometric models nothing more than avoiding disqualifying singularities (infinity) in the equations. I am thinking about the assumption that is widely used in orthodox theory that money dealers are neutral, and neutral in several fashions. In that respect, it isn’t as foundational as the root of efficient market theory, itself grounded in rational expectations that wasn’t anything other than avoiding an infinity on the expectations term so that DSGE models could become a reality. But still, in terms of interpretation and non-quantitative expectation, holding on to dealer neutrality misses a great deal of what has already transpired – and thus, potentially, what might still be coming.

Dealers are treated as if they run a matched book across multiple dimensions; from currency to net risk in positions. They are assumed to be benign processes which undertake minimal effort to match disparate market positions on any trade; nothing more than a match-maker of sorts. Even if theory might allow some risk-taking, it isn’t believed much more than fleeting. Looking at dealers in that fashion, you might get the sense that little real effort or, far more importantly, resources are required.

Viewing just the history of Swiss banking destroys that proposition. Unfortunately, economists don’t consider the Swiss bank participation in eurodollar “money” to have been money dealing at all. They just don’t consider the eurodollar; which is why all during the time Swiss banks were shouldering a great deal of eurodollar expansion, running mismatched positions up and down their system (in “dollar”, no less), Alan Greenspan and Ben Bernanke were perplexed so much they actually (and in public) proposed something so ridiculous as a “global savings glut.” As you can clearly see by the two charts below, Swiss banks were running a “dollar” expansion enterprise in all sorts of risk transformations (which is what money dealing attempts to allow for banking), including a mismatch in currency that had Swiss banks so very short the “dollar” up to the precipice of disaster (that being, in simple and related terms, a “short squeeze”).