[byecomputer]

> TerraUSD (UST) is pegged to the price of a dollar and is secured by Terra (LUNA). LUNA is an asset reserve that ensures the stability and security of the UST through the seigniorage process (income received from an emission of money).

Sounds like the peg was more-or-less a perpetual motion device that relied on a strong wind

[trhway]

Basically the same way how they made AAA bonds "secured" by garbage bonds, and that resulted in the crash of 2008.

[FabHK]

Sort of.

The mechanism by which they turned garbage mortgages into AAA was 1) tranching, ie having junior and senior tranches, and 2) the assumption of low correlation (not all borrowers will run into trouble simultaneously).

Arguably, here we have something equivalent to the assumption of low correlation: if a few people here or there dump UST, you can indeed maintain the peg by issuing LUNA against it. But if many people simultaneously do it, then the whole edifice collapses.

[JumpCrisscross]

> they turned garbage mortgages into AAA was 1) tranching, ie having junior and senior tranches, and 2) the assumption of low correlation (not all borrowers will run into trouble simultaneously)

Even the junior tranches eventually paid. They just weren’t liquid like other AAA assets (namely, Treasuries) in a crisis. The ratings described the tranches mostly accurately in terms of payout probabilities. Not in terms of liquidity.

The correlation assumption is common to these two. But…

> we have something equivalent to the assumption of low correlation: if a few people here or there dump UST, you can indeed maintain the peg by issuing LUNA against it

LUNA and UST were simultaneously issued by the same system. They are fundamentally correlated in a way even American mortgages are not. If the bandwidth of arbitrageurs is broken, the peg fundamentally fails. While one mortgage not paying increases the risk of another not paying, it doesn’t directly cause it in the way we see here.

Also, holders of junk mortgages still got a deed of real property against their loan. What will most Terra/Luna holders get?

[FabHK]

> They just weren’t liquid like other AAA assets (namely, Treasuries) in a crisis.

Yes. I think that a big contributor to the crisis was that everyone knew that there was some loss on under-water-real-estate, but due to the complicated nature of the traded products nobody knew where those losses would manifest, and thus trust collapsed across the board.

[neonnoodle]

‘Garbitrage’

[qeternity]

No, absolutely not what caused the crash.

Loose monetary policy caused the crash.

[arcticbull]

Sure, if you put on your tinfoil hat.

What caused the 2008 crash was nothing to do with loose monetary policy. If you recall, that began in earnest after, and in response to, the crash.

It was loose regulatory policy. In no small part that Clinton rolled back Glass-Steagall in 1999. [1] Toxic mortgage-backed CDOs didn't have to become a systemic risk in the first place. There were a lot of contributing factors, but low interest rates weren't really top 10.

[1] https://en.wikipedia.org/wiki/Aftermath_of_the_repeal_of_the...

[qeternity]

> Toxic mortgage-backed CDOs didn't have to become a systemic risk in the first place.

The problem had nothing to do with CDOs. No matter how you slice and dice risk, you never increase/decrease it. Someone would have owned the underlying MBS.

The issue was that the Blue Dog Democrats in the 90s decided with Alan Greenspan that homeownership should be incentivized. This created a housing bubble which ultimately is what caused the GFC.

[pjc50]

Loose banking policy, and not just in the US - Anglo-Irish and Kaupthing were major contributors, and RBS destroyed themselves and had to be rescued by the government. If I remember rightly it was an old fashioned physical bank run on Northern Bank which triggered the UK side of the collapse.

[sgt101]

Interesting - could you give a bit more detail and insight on your position?