The cause of current discord is not China, but rather the U.S. Federal Reserve. Not only has the Fed created the current unstable market situation by keeping dollar interest rates too low for too long, but the fact that the Fed is out of step with other major central banks is causing markets an extra degree of anxiety. Another reason that the U.S. and EU markets are reacting badly to the old-fashioned securities run underway in China is the fact that global banks cannot deploy capital to support these markets for their own account. The Volcker Rule in the United States, the Basel III Capital rules and various other regulatory and legal strictures have made it prohibitive for large ‘systemically significant’ banks to take risk. As a result, global investors are finding little liquidity available when they try to adjust positions in most major markets. The lack of liquidity in global credit and equity markets is an unintended consequence of the regulatory reaction to the 2008 financial crisis. The lack of liquidity increases the relative volatility of all debt securities even as benchmarks also suffer due to reduced turnover […]