Ask HN: Do you think this is the start of the new financial crisis? For people who lived through 2007-2008 do you think the current times feel similar to how the last financial crisis unfolded? |
Ask HN: Do you think this is the start of the new financial crisis? For people who lived through 2007-2008 do you think the current times feel similar to how the last financial crisis unfolded? |
2008 was Wall Street convincing folks to hand over cash for magical beans called mortgage backed securities. When that bad trip caused companies like AIG to vomit cash, the US govt bailed them out because they weren’t the only ones who bought magical bean securities. The entire US financial system was facing collapse. You can Wall Street a fool. But they got bailed out; private investors got squat. Who is the fool? Private profits and public bailouts is modern US capitalism. In the meantime, some will jump up and down swearing bailing out student loan borrowers is murder.
But I'm just a random non-banker on the internet, so take this with some salt...
It feels a bit more like 2006 since the real economy is still mostly flying along fine and most of the business page pronouncements from 'respected leaders' are that a soft landing is still in our future. There's a lot more unrest among average people though, back then you couldn't really find anyone in your normal life that thought it would crash.
It isn't the same though, the pandemic and the inflationary period that we hit were not anything like what happened in the build up to the housing bubble.
At the same time I think some people think we're back to the 1970s and inflation and stagflation are here to stay. That is unlikely to happen because this Fed speaks very highly of Volker and has signaled their willingness to crash the economy into a wall in order to tame inflation. This isn't the 1960s Fed that grew up during the 40s and 50s and wanted to prevent a Great Depression at all costs so was running the economy hot. There will be a recession and unemployment will rise, and the Fed has done everything other than come out and state explicitly that is what is going to happen.
Because of the increase in interest rates things are going to break. We just saw one example of that, but there's also going to be a corrosive effect on bad companies/investments as the zombie ones that required rolling over loans at low interest rates see their borrowing costs increase and that pushes them into being liquidated. The blowup that I'm expecting is in commercial real estate and CMBS. The top will likely come off the housing market, and that can't possibly go down that easy without a lot of economic pain.
At the same time I don't think anything has fundamentally changed. When unemployment starts to spike up significantly again and the system starts to lock up, then they'll drop rates back down to zero again. It'll also probably work, since with enough destruction of zombie businesses and a glut of unemployment there won't be an immediate rebound in employment or inflation.
Might not happen this year though. The Fed rate tightening cycle has still not quite ended yet, and its usually 6-12 months after the tightening cycle ends that it gets bad. We can still see a counter-trend rally into e.g. a double top in the markets. A lot of people believe that interest rates rising are what causes economy pain, not holding interest rates at a higher rate (they thing it is an "edge trigger" rather than a "level trigger") and those people are likely to try to throw a party after the Fed stops raising rates. Or this cycle might be different and the aggressive Fed actions might start to blow up more stuff quicker this time, I can't really tell you (if I could I could make a ton of money, but I have no firm idea of the near-term trajectory of the economy).
Someone said they remember 2007-8 vividly and it felt precarious. I don’t, but from what Hollywood tells me, this person must be Michael Burry. Now we have a bunch of money that has been printed, which has done nothing to improve the economy and just caused a lot of wealth disparity and inflation. The Fed trying to get that under control is one of 2 concrete reasons for SVB. It has probably caused issues at many banks (they’re bag holding) with the only difference being their depositors are less reactive. What’s the solution? Print more money. Add to that geopolitical conflict between the US - which (let’s be real) doesn’t really stand for anything anymore other than the value of a dollar - and BRICS - which doesn’t stand for anything other than devaluation of the dollar. Putin once said the US economy is based on housing prices and he’s more or less right. It’s all tech and finance - which is either exploitative or can be done anywhere. BRICS has most of the resources and most of the production capability. A globalized world is more efficient and better, but debts need to be paid.
SVB, Credit Suisse, and Signature Bank aren't outliers. These are just the first banks to get hit by the crisis. It's almost certain that most other banks have been playing exactly the same kinds of games and betting on a low interest rate environment. Now that the inflation has risen to unacceptable levels, the Fed has no choice but to raise rates. This will translate into further chaos in the banking system.
If the rates don't go up then we'll see inflation keep climbing, and this will cool investment because it's practically impossible for companies to produce any meaningful returns in high inflation environment. A company right now has to show consistent 6% growth simply not to lose money right now.
Furthermore, 64% of Americans are now living paycheck to paycheck [1]. 37% of people are working two full time jobs [2]. And typical debt is around 100k [3].
So, over half the population has no savings and can barely makes ends meet while nearly 40% of people are already working as much as humanely possible. If cost of living keeps climbing a huge chunk of population will become insolvent, we'll see large numbers of people defaulting on their debt. Banks are the ones who are holding a lot of this debt, and as people start defaulting the banks will start failing.
Meanwhile, overall economic activity will cool with people cutting discretionary spending in order to afford necessities. This will make companies go out of business creating mass unemployment, and further feeding into the debt crisis.
Incidentally, we're right on schedule for a crash in the boom/bust capitalist cycle [4].
[1] https://www.cnbc.com/2022/03/08/as-prices-rise-64-percent-of...
[2] https://www.denver7.com/news/national/more-americans-report-...
[3] https://www.firstrepublic.com/insights-education/average-ame...
[4] https://www.investopedia.com/terms/b/boom-and-bust-cycle.asp
This is much worse, in my opinion.
At least the loans were backed by real property in 2008. Homes that will have value and in fact have came back way, way more valuable than the bottom of that crash.
What we have now is a crash in financial instruments themselves.
It's about supply and demand. The USA has been printing up dollars like crazy since the beginning of the Covid pandemic. Simple supply and demand. More money created, less value money is worth.
History is littered with governments printing too much money, , and their entire civilization comes down.
Even Rome, mighty Rome, was brought down by printing up too much money. Other shit, too, but mainly printing too much money. They don't tell you this, but there ya go.
.
Will we pull out? Hope so. Just like in 2008 - we managed to pull out of it.
But 9 lives, folks. We're using them up.
In 2008 we had crazy financial instruments that were derivatives of bad home loans.
Now we have good loans, but a low interest rate on them so they aren't worth a lot compared to new loans at a higher rate.
The thing that seems to get missed in all the hand-wringing is that these new loans at higher rates are quite profitable.
The issue today seems to be the same as always, if there's a run on a bank, it'll be in trouble.
If not, banks should finally be able to make money in normal ways with the higher rates.
Money supply went up, up, up, therefore inflation went up, up, up.
Now bonds are paying 5%.
SVB needs to sell its 1% bonds because they have to pay their actual depositors cash for payroll or whatever.
SVB goes to sell 1% bonds, which have been fine for forever.
Since new bonds pay 5%, SVB cannot sell their 1% bond because who in their right fucking mind would pay for a 1% bond when you can get a 5%.
How does SVB sell them? It cannot.
And now, the government is going to have to print even MORE money to rescue the bank depositors, throwing even MORE supply of money into our system, increasing inflation by even MORE. We are in a vicious death spiral, boys.
Normally, to my understanding, you have a certain % of deposits in different instruments. For example, maybe 30% in bonds.
It is very well known that if interest rates go up, value of bonds goes down. No surprise.
So what you do is hedge your bet. You put 30% into a financial instrument that goes UP when inflation goes up. So while one goes down, the other goes up, and you end with a net zero. Maybe $500 billion more, or $500 million less, but at least you don't get your ass handed to you. Like SVB did because they had like 70% in bonds and fucked themselves.
SVB lost $160 billion in 24 hours.
https://www.washingtonexaminer.com/policy/economy/svb-collap...
"Many of Silicon Valley Bank's investments featured treasuries, or government debt, which have historically been viewed as safe assets."
"Easy money policies coupled with pandemic-induced supply chain snares then led to inflation, according to many economists. As a result, the Federal Reserve began jacking up interest rates, which eroded the value of many of Silicon Valley Bank's assets."
"This is because higher rates meant that new bonds and treasuries earned more for investors than older ones. As a result, the older assets that Silicon Valley Bank stockpiled became less desirable and therefore shed value."
Same exact thing happened at Signature Bank.
It is NOT limited to SVB or Signature Bank.
"Banks were sitting on $620 billion in unrealized potential losses by the end of last year, according to the FDIC." For the same reason.
It's NOT a run, it is that value has been catastrophically been erased at banks. banks cannot pay their depositors. Even if there is no run, banks won't be able to give depositors money for rent, for mortgages, for payroll, for utilities. You get the message.
At some point, new loans cannot cover massive losses on the downside. If you lose 95% of the value of treasury bonds, a 5% loan is not going to do it to it.
Also, the banks won't even have money to give people loans, even if they wanted to. They can't even give current depositors money for payroll kind of thing.
We all need some luck here and how we can pull out of the nosedive that our jet airplane is in. Hope you are all puckered up in the sphincters.
Also, as I wrote, the risk manager went away, so there was no one to balance the risk. Nobody to say "No" we only can invest 30% into bonds and 30% into real property that goes up if inflation goes up, for example, so you get a wash. I don't know if it is 30%, I think I read that somewhere, but it doesn't really matter, that is the gist of it. Balancing different risks against each other to minimize risk and staying smooth and steady with assets.
> It's about supply and demand. The USA has been printing up dollars like crazy since the beginning of the Covid pandemic.
Indeed it's about supply and demand. The inflation is largely caused by a physical supply shortage.
The current banking problems are separate from that and because some (smaller) banks didn't have to comply with Basel III and all.
Of course that is the case. That is almost always the case. Too much money means people have more money to buy physical stuff, and there is always a shortage of stuff, supply chain or not. Even if all the computer chips and everything was manufactured in the USA for cars, there would still be a shortage of cars.
The physical supply shortage is caused by too much money in the system, not by supply chains or anything else.
If people didn't have as much money, then there would not be as much demand for physical supplies, and everything would adjust. "Sorry, I don't have money to buy a car." That means one less car is needed for total inventory. It adds up when 1 million people don't buy cars that would have if they had the money.
But there is so much money supply that people are bidding up the price of goods. The homeless are not contributing to the physical supply shortage, because they have no money. More money = more demand.
Read about any crash and you will see the same exact situation. Read about the Spanish Price Revolution - the Spanish hauled so much gold and silver in from the New World that it massively increased money supply, and the value of gold and silver went way down. Prices then go up relative to the money. Not only did Spain suffer, but it spread across Western Europe. Too many people with too much money chased too few goods.
So, banks were very vulnerable on the one hand due to over leverage, and they all owned a lot of an asset class that became unpriceable once people realized what had happened.
There is nothing like that now. The big issue is unrealized losses on 2020-1 vintage Treasury and government-mortgage securities because of rising rates. The Fed backstopped that by letting banks borrow against the full value of the bonds, not the depreciated value. If those bonds go to expiration, they are paid back in full, and the unrealized losses never become realized.
This is a tempest in a teapot caused by a few babies on Sand Hill Road who decided to destroy SVB, and then whine all weekend to the government to save them. They are libertarians until it hurts the bottom line.
Nowhere close to the hit everyone was taking from income declines across all income groups except (well, at least the bottom 95%) in the 2001-2007 “expansion” leading into the 2007 Great Recession. (And, also, the much longer period of much higher interest rates, with much higher consumer debt load, leading into the 2007-2009 Great Recession.)
The bank failures going on right now are due to still large, but smaller banks courting customers that most banks don't deal with. Other banks still have to deal with the rise in interest rates impacting the value of bonds they hold as capital, but they aren't so uniformly exposed/overexposed as was the case in 2008.
Familiar with the "dead internet theory"?
Also why do we like HN? Because here I can interact with some thought leaders: this would be exactly the place I'd point my bots at :)
Sorry for the paranoia spread. Take it with a grain of salt.
If the Fed hadn't stepped up to insure the SVB deposits, we might be in a much worse situation, but as it is this feels like it could possibly maybe get out of control if a whole series of other bad things happen, but probably very unlikely.
There was one day in 2008 where it really felt like 'this is it, it really actually is all going to come crashing down, unless...'.
But at least we have Uber and WFH.
I feel like higher interest rates are going to be here for a while, and a lot of tech companies are absolutely blowing through cash, about to be caught with their pants down. Anything that isn't profitable will die.
"Prof. Richard Wolff: The Economics of the US-China Cold War & Ukraine War"
Certainly not much point in asking on HN. If your question isn’t tech related then you aren’t going to get better answers here than you would on Reddit, Quora, Facebook, or your local pub.
Ever seen Lawrence Welk?
That’s true of most recessions, because by definition a recession is the period after a business cycle peak, and the peak of business cycles is when inflationary pressures are high and monetary policy tends to be tight to constrain inflation. It is definitely not a difference between today the 2007-2009 Great Recession where interest rates were at 5.25 for an extended period leading into it to fight inflation, a much tighter than they are today significantly tighter than today, and for significantly longer.
And we’ve had nothing like the expansion-with-no-gains-for-the-bottom-95% of 2001-2007 leading up to today, which was a major source of the magnitude of the 2007-2009 Great Recession.
Yes, car loan delinquencies are up and mortgage delinquencies are trending up but mortgage delinquencies are still at some of the lowest levels (~1%) in the past 15 years.
Housing was returning 20% YoY - I wouldn’t be surprised to learn some investors are holding 10% mortgages which they may not be able to carry.
Let them crash and put the houses back on the market.
Energy component of CPI has been trending down (in absolute terms, so a negative inflation rate) since June.
An "investor" is also someone who saved up enough money for a down payment on a house in their neighborhood that they Airbnb and go over and clean and wash dishes to try to supplement their income.
It was doing pretty similar to today in unemployment % terms until 2007, when that started getting worse too, with 6 years prior to that of declining incomes for virtually the entirety of the income distribution; if you call that “well”, then right now is doing great.
The local minimum of unemploymwnt before the 2007-2009 Great Recession waa 4.40%, reached several times between October 2006 and May 2007, with oscillations up to 4.5-4.6% in between. By the beginning of 2008 it was up to 5.0%. Yes, in general terms these are all “low”, but they are also all significantly higher than unemployment has recently been (last month it ticked up to 3.6% from 3.4%, that 3.4% tying the low reached in 1968-1969 and not seen in between.)
Saying that the “high” effective Fed Funds Rate of 4.58% is “causing unemployment” today with unemployment at 3.6% is somehow more true, and therefore distinguishing the current situation as worse, than, say, the 5.21%-5.28% effective rate over May 2007 causing unemployment when that was at 4.4% requires very slippery standards.
How many crises do we have to go through before we admit the fed and banks either have no idea what they are doing or they know exactly what they're doing and it's malevolent?
The number of people here defending the system and saying this isn't inflation is mind boggling. Where do you think the money comes from when the government rescues banks? No matter how you slice it, the taxpayer pays through higher fees, higher rates or inflation.
This system of rescuing banks with no prosecution of the people responsible and printing a mountain of money is unsustainable. It's clear that humans will never implement an equitable system and it makes the case for Bitcoin every day...unless you profit from the financial system and then I'm sure you'd be thrilled to kick the can down the road.
You have to ask: what drives someone in this position.
And this is a question that only the 200k ultra high net individuals (30mm+) in the world can answer.
I think people stop chasing material possessions and start chasing prestige and power. These people don’t interact with the average joe much so they don’t really care about their opinion, unless you are a populist like Trump for eg. They care about their family friends and peers. So I think it creates a broey kind of culture where you want your peers to be happy with the job you are doing. If you are in finance you want the bankers to be happy. Your political party to be happy etc.
I think it becomes more about making and keeping friends. This stage for life without need for material possessions is all about people and relationships and power.
You just have to imagine yourself with infinite wealth but no friends. You would quickly run out of things to spend it on, and you would just want people to love and respect you.
False dichotomy. The Fed can have good intentions, and a good-but-not-perfect idea what they're doing, and things can be working out, not perfectly, but better than they would in the absence of the Fed.
Is there any evidence for that? Yeah, look at the world before the Fed. Look at the "Panic/Depression of 18xx". There's several to choose from. They're 2008-or-worse events, over and over and over.
The economy is a really complicated system, with lots of humans (and their emotions!) as part of the system. It's really hard to tune it perfectly. That doesn't mean that the Fed is either malicious or incompetent.
Considering how bad things were before the Fed, quite a lot before there is support for the idea that it isn’t making things better.
Angsty posting like this probably sounded really cool to people in high school, but I'm not sure why we should be impressed with your fact-free faux-radical grifterism.
What you call "angsty" is what I call "rational". I see you're happy to continue experiencing these crises which are, in fact, happening.
Also, I don't think you know what grifterism means, if that's even a word.
That's not to say that this isn't the start of some kind of a financial crisis. But it could be very different from 2008. In this case I think the risk is more towards high inflation - for example, if enough banks were to fail (hypothetically - I doubt this will happen) and bunch of money essentially has to be printed up to make everyone whole, that's going to devalue money hence more inflation.
Although, strictly speaking the answer should be no, this is not the start of a new financial crisis, it is a continuation of the 2008 crisis.
I remember about a year back reading a thread here about the UN FAO food price index showing inflation and most of the responses were about how wrong it was to say that there was inflation, how it won't correlate with that index, etc, etc. The funniest thing about that thread, IMHO, was the surety and confidence of all the responses.
If someone is answering this prompt with confidence, chances are they have no idea what they are talking about.
Finance Twitter is likely a better source.
In many ways, SVB was a perfect storm of many factors. High uninsured deposits. Few, tech-savvy despositors. Bad investment choices w.r.t. interest rates. Makes sense why a run was possible.
Other smaller banks - while they may even have similar investment choices - are likely to have many depositors who are under the FDIC limit. So... rationally... they shouldn't call in their money. But also practically, it seems unlikely the masses will be able to effectively coordinate.
I think, however, that this will start a slow long-term erosion of many community banks. How it affects a short-term recession that's looming is hard for anyone to predict. If you're in the camp that the Fed is being too aggressive, maybe this actually slows down interest rate hikes... which might end up being a good thing!
All in all, fundamentals of banks just aren't as bad as '08.
Are there that many under-15s here?
As someone who lived through the S&L crisis of the Middle Ages, the current agitation doesn't even rise to that level; so far there hasn't been an indication of widespread outright fraud perpetrated by bank execs. This seems more like a less favorable (i.e. less free money from the Fed) environment exposing a few banks with very poor/incompetent management.
Albeit it's better than talking to ChatGPT.
1986 is not the Middle Ages. This one fraction suggests to me I'm responding to a hallucinating bot.
That being said, easy to see weakness. Commercial real estate is a big one. I'm somewhat concerned about non-bank Financials. Some large foreign banks (CS(dead) , DB, HSBC) I'm skeptical of.
And a recession feels imminent (felt to me this way even before SVB).
To sum up, I don't think this is over. There's no telling how bad it might get - we might get off fairly easily, might be bad.
One thing that concerns me is that there is much less room for fiscal/monetary action given where inflation is.
This one is no different. It's possible we recover from it very quickly, but it's also possible that the bank run that we saw earlier this month introduce a new type of failures that no one thought was possible. I'm of a curious nature, so I really wonder what's coming.
We saw this problem at the opposite end too - central banks around the world were trying for more than a decade to stimulate economies by dropping rates, many even to the point of taking them negative - and inflation remained stubbornly below the target…
So dropping rates hasn’t worked to stimulate, raising rates hasn’t worked to slow inflation… Why persist with the charade that adjusting rates is an effective policy?
the US central bank has a dual mandate, price stability and close to full employment. having just one it could be much more aggressive.
This isn’t just cynicism. It’s based on how markets work. If lots of people think there’s a possibility of major doom then (1) they are preparing now and (2) it’s likely at least somewhat priced into the market already.
And TBH... market needs a little cooldown. I am no expert, but I dont like where P/E ratios and such are even after the last mini downturn.
Same here - there are bubble signs everywhere (SPACs, startup valuations, joke money called Dogecoin with market cap of 10B$ !), banks are sitting at >600B$ of unrealized losses - this is all public knowledge.
A 166 years old Swiss bank was bailed out this weekend.
So yeah, it definitely feels like a big crisis ahead. Gradually then suddenly !
Bailouts, by 2008 standards, would have been giving money to Credit Suisse so they could continue operating and avoid the fallout of their bad choices.
Shareholders still got some money (~3B$). If it wasn't for government intervention, the bank would be dead very soon.
The thing with banking and finance is that incentives are very bad - you play with other's people money, on thin margins - you're de facto encouraged to take risks. If they pay off, you get big bonuses, if they don't - you just change the bank you work for.
I think the housing market will correct (crash) and tech jobs will be harder to come by for junior folks and people who aren't that great at it. Not a great time to job hop. It won't be horrible like 2008 but it won't be great. Should be over by the 2024 election.
2008 when the crunch came it was super bad. Tech companies just froze their product plans. Stopped spending money. Lots of good startups failed through very little fault of their own, when they couldn't ride out the year or two before their customers would spend again.
In 2001 I founded a VC funded startup, and while it was a shit time to be raising money, it was a great time to be hiring. I think we could get to that position again this year. Right now it doesn't feel like good engineers are really struggling to find work though, while in 2001 that was definitely the case, and VCs are definitely getting more cautious.
In 2008 I had the sale of that business fall through as a major SV tech company's CFO said "Nope, we're just not spending any money on anything" after lots of work and terms being sorted out etc. People (CEOs & CFOs) were really scared about contagion and problems well beyond just "tech share are prices falling". I hope we don't get to that point again this time.
I agree. This is a good video on it from Frontline.
https://www.youtube.com/watch?v=EpMLAQbSYAw
They argue the free money has been going on since 2008, but I would argue it's been going on since 2001. Lowering interest rates is what the Fed did to combat the dot bomb.
https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
China reopening trade has been softer than expected so far, but could still put pressure on commodities. Honestly the market is very confused right now. The bond market is saying recession(see rates dropping/curve steepening). The stock market is saying everything is more or less fine. Gold is up, but maybe because of dollar weakness and lack of faith in the fed to maintain a strong dollar.
The upper half of Americans really haven't felt enough pain yet. They still have plenty of money and are keeping demand high. I fully expect us to crash, but I don't think the bank crisis is more than a waypoint on a journey that started with the first rate hike(and, arguably, 2008).
Re: BTFP. It seems like QE-lite to me because banks were sitting on underwater assets that can now be used as collateral at full PAR value meaning the banks can reanimate these dead investments and put that money to work. I would love to be proven wrong but after going back and forth this is my current understanding.
Also, this is HN. Don't expect a high degree of accuracy on economic predictions here. Economics is hard. Even the fed and all of their PhDs can't get it right.
I think there are a lot of unknown risks out there now. Banks at least have the FDIC, the treasury and the fed(at least if you're big enough to present a systemic risk). There are non-bank lenders and other parties in our grossly complex financial system that are also under stress and could be the catalyst for major reversion soon.
This 100%.
The biggest difference is that this will hit everything that was (knowingly or not) built for a near-zero-interest-rate environment, not just financial companies but speculative tech startups that need lots of VC patience, etc. So probably not as focused on just financial companies.
There will still be a fair amount of pain to go around, but it won't be across the board like 2008.
First, I think looking only at the economy is shortsighted: worldwide politics is broken: discussions that are not moving "civilization" forwards with the knowledge we have. For example, I see in the medical sector a lot of mala-praxis that is not connected with the state of art.
Now, returning to economics: I see more a shift than a big crisis. Politicians and regulator cannot put the dirt under the sofa and than needs a change.
I think power is a little bit more distributed and there could be someone with enough imagination somewhere.
In 2008, I just learned about stock market and investing right as the market crashed. I sent about $250 a month towards a variety of stocks every month. In 2023, I took out all my money from the stock market, having lost a bit, but still over $100k, and I bought a condo outright with a mountain view across the street from a hospital which has now become popular with travel nurses. Since it doesn't carry a mortgage, I'm able to completely profit from it and make a way better return than if I were to have left my money in the stock market or even put it in a CD again.
For now, it is what it is: https://www.cnn.com/2022/11/07/investing/stock-market-biden/...
Once there is more confidence / new leadership in our economy, I'll start putting my money back into the stock market. For now, I'm working on obtaining a third property for additional passive income though these interest rates are still insane. My latest quote was around 6% - 7%. Everyone and everything just seems to affect the stock market though it's still got a history of decent returns if you invest in the right places and even more slowly over time, as I had done.
I lived through GFC and 2023 is nothing like that. Sure, some banks will go bust, especially the ones who have duration/liability mismatch. They are systematically unimportant (by definition, else they would have had stricter regulation).
Fed is also doing what common people would prefer to happen - letting equity holders go bust (aka rich people) and protecting deposits (esp 100% of the poor are helped because, again by definition, they have <250K in deposits and those are 100% guaranteed). While protecting deposits may also end up helping the rich, that should not be a big deal in practice because the rich are already savvy enough (like Thiel) to pull out their at-risk deposits and move those to SIBs. So by guaranteeing 100% deposits, Fed encourages rich to continue parking money at smaller regional banks which is again something a lot of common people want - avoiding concentration into 5 big banks.
Not even slightly. Largely, because it wasn’t preceded by anything like the hollow post-2001 expansion, which, despite being an expansion (the period of aggregate growth between recessions), saw the upper income limit of the four lowest quintiles, and the low limit of the top 5%, all decline in real terms, with all of the gains concentrated in a very narrow segment at the top. It took the top of the bottom quintile until 2018 to bounce back to the 2001 level, for the second quintile that was 2016, for the third 2015, for the fourth quintile and the bottom end of the top 5%, 2013. For most of society, despite the gains at the top between recessions, the crisis was really 2001-2009, not just the “Great Recession” years of 2007-2009.
History doesn't repeat, but it sure does rhyme.
[1] https://www.youtube.com/watch?v=EpMLAQbSYAw
[2] https://www.businesstoday.in/latest/world/story/dont-buy-tv-...
The identity is MV=PY where M is money, V is velocity, P is the price level and Y is real income. [2]. A precautionary demand has a lower V.
While a rise in narrow money may be expected, there may be a fall in in broader money, typically much larger than M1, driven by a reduction in sought exposure to non bank financial companies.
[1] https://www.rba.gov.au/publications/bulletin/2021/mar/cash-d...
[2] https://en.m.wikipedia.org/wiki/Quantity_theory_of_money
https://marginalrevolution.com/marginalrevolution/2023/03/ba...
Any bailout that is large enough, and isn't done in tandem with major deflationary events, would certainly impact inflation.
I think 2008 was spectacularly smooth with respect to inflation/deflation because they allowed enough banks to fail.
Prices clearly peaked, and the YoY price increase in some places had gotten a bit silly. But don't a lot of cities still just have a lot less housing than they should because of decades of not building enough? And even the decline in prices is mostly about the higher mortgage rates?
The crisis this time is going to be to bank shareholders. Probably some pensions and retirement funds. And then consolidation, and fewer choices for the consumer. Eventually we will all bank at MorganChaseGoldmanWitterWellsSchwabFargoHamiltonMellonMerrillLynchPierceFennerReynoldsSmithSachs.
https://en.wikipedia.org/wiki/2008%E2%80%932011_Icelandic_fi...
> In this case I think the risk is more towards high inflation - for example, if enough banks were to fail (hypothetically - I doubt this will happen) and bunch of money essentially has to be printed up to make everyone whole, that's going to devalue money hence more inflation.
I disagree on this point. Why do you have to print money to make everybody whole? Because a bunch of money disappeared when the bank went down. You're printing a bunch of money to try to get to net zero. That's not inflationary. In the same way, the Fed's moves in 2008 to create $4 trillion were to replace the $4 trillion that vaporized in the crash, and were not inflationary. (And before anybody raises the point, no, inflation showing up a decade later does not mean that the Fed's actions in 2008 were inflationary.)
I understand the 2008 bailouts were actually giving money to the banks that were/are deemed “too big to fail” and allowing them to more or less operate as if nothing had happened (outside of regulation changes), which seems on its face inflationary. But that’s not happened in this case, correct?
Again, honest question if I seem to be missing something.
If people could get bailed out of their credit card debt, how reckless would peoples spending be?
The system is designed (fractional banking + government bonds) such that the money supply must continue to increase.
Counterintuitive, sure, but less counterintuitively, it is also false.
> A rise in rates means more bond coupon and more bonds sold (new money)
No, it doesn’t mean more bonds sold.
(Purchasing bonds is lending; the idea that lending increases with both rate increases and rate decreases is…wrong. Borrowing, whether via banks or via bonds, is more common when it is cheaper because of low rates, and less common when it is expensive because of high rates.)
And exchange of equity instead of interest for money follows the same patterns, because those with capital will trade it for less valuable (in expected future value) equity when they’d make less money in its alternate use (lending), and demand more valuable equity for it when they’d make more lending. So, equity financing (which, despite the structural difference, also gets the money moving in the economy) is also more active with lower rates and less with higher rates.
That said I think there’s reason to be skeptical about the link between rising rates implying more bonds sold - particularly as you consider other factors like creditworthiness.
I guess maybe it could look like even more inflation? If inflation goes up enough and wages mostly keep up, housing could become relatively reasonably priced again.
It’s not inherently a bubble because it’s driven by demand far outstripping supply. It may prove to be bubble-like if:
A) Some significant % of homeowners see salaries reduced enough they can’t keep up on payments.
B) We suddenly start building massive amounts of additional housing units so a larger % of the population can own/rent a home and the price drops to match the lowest income that still outcompetes the rest of the non-homeowners / non-renters / uncomfortably sharing renters.
I suspect if things do go, it will be in CMBS. I don’t think office assets are being fairly marked-to-market right now and I want to better understand mortgage performance on office real estate. Subsequent derivatives likely explode this risk and how they are intertwined across private money is unclear.
I am also generally worried about normcore middle market, the diesel engine repair franchise, regional fast casual chain, etc…they are really getting squeezed from several angles. Best guess, the rapid reduction in fuel prices bought a temporary reprieve but that things are coming.
As others have said here, the failure mode will probably be novel but seek leverage to find the arming switch.
Banks are holding $600+ billion in currently worthless bonds.
https://www.google.com/search?q=620+billion+dollar+bonds+ban...
There is no $600B of worthless bonds. There is $600B of unrealized losses. The bonds are worth something.
Moreover, unrealized losses are not leverage. Banks in 2008 were levered 30-to-1. No such thing now.
[0] https://www.wsj.com/livecoverage/stock-market-news-today-03-...
But the people are, consumer debt is out the wazoo
No, its not, compared to 2007, when the all time peak of consumer debt (as a share of GDP) was reached, at 98.4%. The recent local peak was 80% in early 2021, and by September 2022 (the most recent number I can find) it had dropped to 75.2%.
When banks lend, they create a deposit (or credit an existing one) in the name of the customer (liability), and create a corresponding loan (asset) on their balance sheet. Banks don't _need_ reserves, like warehoused cash, to lend. They just need a capital buffer to absorb any credit losses on their loan portfolios.
The M2 money supply only increases if banks lend. In theory, they are more ready to lend when they have a better capital and liquidity position, which an injection of reserves is intended to achieve. But if no-one wants loans then M2 money supply doesn't increase as a result of a higher M1 money supply.
Also, "fractional reserve banking" is not a concept that relates to modern banking. Banks can lend as much as they like within reason. They are no different to any other business which can leverage their balance sheet by adding debt to increase return on equity. Loan creation is limited by:
1) Capital requirements - whereby loan creation is a function of how much capital they have, how risky their existing assets/loans are and how risky incremental loans are
2) Demand for loans from customers, which is a function of the macro environment e.g. interest rates
> they allowed enough banks to fail.
There really were not a lot of "bank fails and depositors lose money" events. Ones I can think of were Kaupthing (for some reason a lot of UK local government were keeping their money in an Icelandic bank), and Cyprus (deemed too dodgy to bailout).
There was a lot of fiscal policy tightening ("austerity"), the other lever which people forget about.
They also started paying interest on excess reserves held at the Fed as they printed up a bunch of money to recapitalize the banks so as to not end up creating trillions of dollars of new money.
This time they injected trillions of dollars directly into the economy (hello, Helicopter Ben) and are now dealing with the effects. All that cash caused a huge bubble in Silicon Valley because people had nothing to do for quite a while except buy and consume stuff off the interwebs.
Now we have the correction for the Covid stimulus spending.
I mean there's Milton Friedman's 2005 paper [1] that provides a visual argument. Then I'd recommend reading this interview [2] with an empirical macroeconomist, and I think it's pretty clear that nowadays any serious economic argument has to be data driven [3] with a corresponding statistical treatment. (At worst low-complexity simulated data. And in the linked paper they are basically using a regression model to estimate the treatment effect. And on page 23 of the document [26 in PDF pages] you can see the "interest rate to GDP and inflation" response curves, and then later they present an absurd amount of additional graphs too.)
Aaand of course the picture that seems to present itself is that "it's not that simple". In this [4] 2022 paper the argument is that it makes sense to consider low- and high-inflation states, because their behavior seems to be significantly different, hence it's important to apply different monetary interventions. (The many graphs paper has a whole chapter on state dependence.) That said, on page 61 they also include a response curve that might interest you on empirical effectiveness of interest rate based monetary policy.
[1] https://www.aeaweb.org/articles?id=10.1257/08953300577519678...
[2] https://noahpinion.substack.com/p/interview-emi-nakamura-mac...
[3] https://www.frbsf.org/wp-content/uploads/sites/4/wp2017-02.p...
[4] https://www.imf.org/en/Publications/fandd/issues/2023/03/POV...
On top of that, a lot of older people are realizing the equity in their homes or their stocks, and they can buy in cash.
In that environment, you expect high home prices and high debt (as people assume their income will keep rising).
I think having a shot at solving problems involves less lobbying and more criminal prosecution and loss of operating licenses.
I think we can all agree this pretty much sums it up. Basically every major problem we face in America is the result of lobbying and gerrymandering.
One look at Norway tells me this is malarky.
If Norway can have such a stable economy and society, why can't the rest of the world?
What have they figured out that has eluded everyone else?
It also looks like Norway's economy is also having some trouble during this time [0], like many other nations. And finally, we need to be careful comparing specific economies like Norway to other nation's economies. Each country's economy is different, and prescribing something that works in an oil-rich, northern European country will probably not work in other parts of the world.
[0]: https://www.ssb.no/en/nasjonalregnskap-og-konjunkturer/konju...
Interesting podcast about copying Nordic countries to make ourselves happier: https://freakonomics.com/podcast/season-10-episode-25/
Anecdotal but I cannot afford to move back to the lower middle class regional town I grew up in, as there are 0 rentals and buying is minimum $800,000
My mother's place has gone from: 1990 - $100,000 AUD 2006 - $600,000 AUD 2021 - $1,200,000 AUD
The local council estimates we can only add 0.29% to the population YoY
Most suburbs would have gone up in 2021 and down in 2022 and not be that much higher.
I think the bubble is due to extremely high home prices. In my metro area, prices are up 70% since 2020. So a drop of 40% to correct to 2020 levels isn’t unheard of.
Personally, I think the price is structural adjustments as people shift to remote work and that makes different houses more valuable (suburbs and exurbs have really increased quite a bit).
To back up the idea that the price changes are mostly just about mortgage rates changing:
- In California, Redfin data shows that the peak for median sale price was in April 2022, at $839,100, and now we're at $706,000 for Feb 2023. Ooh, that looks like a >15% drop in less than a year!
- But FreddieMac shows that the average 30y fixed was 5% in mid April '22, and was 6.32% mid last month. The median home with an average mortgage was signing up to pay $4504/mo vs $4379/mo last month. That's a decline of roughly 2.8%
So it seems like home buyers today are willing to pay almost as much per month as they were at the price peak, which has drawn prices down.
https://www.redfin.com/state/California/housing-market https://www.freddiemac.com/pmms
https://www.cnbc.com/2022/05/11/adjustable-rate-mortgage-dem...
> “More borrowers continue to utilize ARMs to combat higher rates. The share of ARMs increased to 11% of overall loans and to 19% by dollar volume.” At the start of this year, when rates were still hovering near record lows, the ARM share was just 3% of all purchase applications. At 11% that is the highest share since March 2008.
https://www.mba.org/news-and-research/newsroom/news/2022/07/...
> The adjustable-rate mortgage (ARM) share of activity decreased to 9.5 percent of total applications.
https://newslink.mba.org/mba-newslinks/2022/november/mba-new...
> The ARM share of activity increased to 12.0 percent of total applications.
Now, my wife and I bought our current house on a 5/1 ARM that was capped at +-1%/year and I think 10% total. We then refi'd in April 2020 and got on a 30 year fixed. I'm not sure if new rules after 2008 require ARMs to have total/yearly caps or not, if they do then a bubble pop will likely hurt a lot less. If they don't, then we're likely 4-5 years out from another crash.
And I think is a pretty decent reference to average US home prices going up by 45% [0] since 2020.
[0] https://www.ceicdata.com/en/indicator/united-states/house-pr...
Some MMT theorists suspect rising rates is at least not price deflationary as is assumed by Keynesian monetary theory. And the basis is simple: An increase in debt interest has to be serviced by money creation. So the tool used to reduce bank lending creates money, and increasing bank lending creates money. Both roads lead to the money printer.
The following points are taken from https://www.reddit.com/r/mmt_economics/comments/wchq55/raisi...
1. When central banks raise interest rates, this means governments spend more on their interest payments. This translates into increased income for bondholders. Higher incomes lead to more consumer demand, pushing up prices. Similarly, banks benefit from higher interest payments from the Federal Reserve. In other words, the interest from the higher interest rates goes to someone in the economy, and their demand increases rather than decreasing.
2. Interest rates are a cost for businesses. When central banks raise interest rates, businesses pass this new cost on to consumers in the form of higher prices, which is inflation by definition.
3. Higher interest rates make it harder to start a business and harder to hold inventory. This reduces supply, leading to higher prices aka inflation.
4. Finally, MMT economists point to the fact that there is no empirical research at all showing that higher interest rates decrease inflation. In fact, the correlation runs in the opposite direction.
An increase in interest rates is not an increase in interest, because it decreases borrowing. (And even if it did mean an increase in interest, that’s a delayed effect, the impact on borrowing is immediate.)
To increase the federal funds rate the fed has to sell treasuries (pushing up coupon rate, which is government interest payments), or pay banks interest on reserves (give banks money), or buy assets from banks (give banks money). So from every angle, the government is creating money when it increases funds rate. https://www.stlouisfed.org/open-vault/2020/august/how-does-f...
If we zoom out, the two ways the Fed increases the rate is by giving banks free money, or pushing up bond prices (and the interest on bonds comes from new money).
Despite the enormous complexity of monetary policy, the only actual tool the Fed has underlying everything is the ability to print money.
Millions of us think in sound bites provided by propaganda.
Our universities teach flawed unsustainable economic theory as reality.
Our politicians are at the forefront of the science of dividing voters into two equal parts attacking each other and voting on non-essential issues.
Please see the work of George Lakoff on framing - it is crucial.
I've been part of campaigns where the leader actually had the brains to act right. Power, sometimes, can be tricky to handle. BUt NOtfor ALL.
There are times, when those in power, acting with not so complete picture of this situation - or the information, are prone to look stupid with hindsight. NOT the case with all, but a minority of leaders!
Hopefully down the road the millennials and gen-z become a large enough collective that they finally push out the garbage...although the establishment wont go down without a massive fight.
How do you feel about his three houses?
The truth is people with the money don't want to change things and those with the power stop caring as much once they too get more.
1. 221 Van Patten Parkway, Burlington Vermont: purchased for ? in 1981 currently valued ~$405k
2. 311 4th St NE, Washington, D.C.: purchased for ~$490k in 07 valued at ~$736k
3. 310 Stone Gate Lane, North Hero, Vermont: purchased for ~575k in 2016
I'd like to think that a senator that is 81 years old could have done much better given this is the bulk of his worth. In fact many developers here working for FAANG will probably exceed how he turned out if they haven't already.
imagining it will change for an entire economy ... is quite irrational.
no magic will make a constantly shifting ice floe into boring bedrock.
I can take crypto (and I'm talking about BTC/ETH, but can be others) and lend it out (generally for a positive APY). I can then borrow (typically USD*, but can be many other tokens) against that collateral (sometimes even for a positive APY!).
No permission needed and happens in the scope of transactions that cost pennies.
This is a massively important aspect of finance that goes beyond daily price swings. It is a relatively new aspect in crypto that has only been around for the last ~3 years or so.
Example: https://aave.com/ ($8.2b locked up right now)
I wouldn't think so. Many of our "crisis" are due to the value of "cash" or liquidity to fluctuate significantly. This is the case in the recent banking crisis. In the case of Bitcoin, this will be a deep dive in price. Now which one is better? I don't know.
https://commons.wikimedia.org/wiki/File:Norway_Exports_Treem...
https://commons.wikimedia.org/wiki/File:Sweden_Export_Treema...
Sweden has twice the population and what? Three times the landmass?
Sweden also does not have an oil fund where it invested much of the dino profits from the last 60 years. The Norwegian one won't last forever, but I'd bet it'll last longer than any of us.
Don't get me wrong; Sweden has a decent economy and the standard of living is still amongst top-20 on the planet. Norway just struck black gold and scored higher.
Do Gen-Z have enough brains to understand that any sensible college loan relief must be accompanied by stringent control how colleges raise tuition? As it stands now loan relief is an invitation to the universities to keep raising tuition without limits.
Humans being social animals makes me worried that its going to be a fighting retreat by those aware of the manipulation against these technologies being used to manipulate.
I'm not a fan of the fed and I think some sort of decentralized currency would be great. Bitcoin was a good idea and I'm glad we're experimenting along those lines, but it's a failed experiment. It's never going to work as a mainstream currency. Maybe some future iteration of the cryptocurrency idea will be the solution, but Bitcoin ain't it.
Maybe you're thinking of Ethereum, which just moved off GPUs last year and as a result, destroyed the economics around mining with GPUs. So, that whole wasted cycles argument doesn't really hold up any longer.
Bitcoin is a store of value. I can borrow against it as collateral, which gives it real value in finance.
The point being… it’s not a given that the current rejection/resistance to the normative cultural pressures will remain strong enough to prevent these younger generations from slowly bending towards conservatism the way the previous three/four generations have. And I was just highlighting the fact that we can’t yet tell if the component of this drive towards conservatism that’s powered by technological manipulation by the powerful (newspapers, then radio, then television, then cable tv (in America), then the internet, now social media) will continue to be ineffective of these people or if they will slowly be sway over time.
Uhh...okay? My point is obviously that it's a waste of energy. If someone manages to mine it using vacuum tubes powered by an ox on a treadmill, do I have to mention that too?
> Bitcoin is a store of value. I can borrow against it as collateral, which gives it real value in finance.
I'm not disputing that some people are foolish enough to agree to park their money in it. That doesn't make it a stable place to do so, which is, you know, a slightly important quality in a currency.
No, it isn't. We could get into why it isn't, but we both know your mind is made up because you haven't really dived into that yourself. Or if you do really care, start reading a bit of what Dan Held has to say.
https://danhedl.medium.com/pow-is-efficient-aa3d442754d3
> That doesn't make it a stable place to do so, which is, you know, a slightly important quality in a currency.
You're missing the entire point of bitcoin. There can only be 21m. It is something that no government can compete with.
Jack Mallers had an entertaining rant recently... https://twitter.com/DocumentingBTC/status/163788645657097832...
As we are seeing right now, banks aren't a stable place. Literally, hundreds of companies were on the verge of losing everything a week ago, until the government bailed them out. USD isn't a stable place either. You probably earn dollars (ie: you buy dollars as a result of working) and those dollars are consistently worth less due to inflation every second of the day. How is that a better model?
Okay, I read the article. And it's an exemplar of the comical reasoning that characterizes cryptocurrency.
First he compares it to Ford's and Edison's idea of using "units of energy" as currency, which didn't work because it was hard to transfer and store. Except that Bitcoin doesn't store energy, it expends it as waste heat. A true energy currency has inherent value because the energy can be used at will to do something useful. Bitcoin can't be converted back into energy. It derives its value from the amount of energy that it has already irreversibly wasted.
Then he argues that wasting energy will "produce more efficient worldwide energy markets with Bitcoin miners performing an arbitrage of electricity between global centers"...by making energy more expensive in places where it's currently cheap. He also apparently thinks that flared methane is a form of renewable energy.
Then he adds a few non-sequiturs about "thermodynamics" to sound sciency. "Doing stuff requires energy, therefore there's no such thing as waste". LMAO. Okay.
Then he tops this steaming pile off with the argument that wasting energy will incentivize the development of nuclear fusion by making energy so expensive that we'll have no choice. And sprinkles on some bullshit about the "Kardashev Scale", as if that's a real thing that has any meaning, to hook the uber-nerds.
I'm sorry, but...give me a fucking break. The fact that this guy passes for a thinker in the Bitcoin community is why people have a hard time taking it seriously. All this nonsense about the Kardashev Scale and "efficient arbitrage" and absurd use of "incentives" makes him sound like a character on Silicon Valley.
> There can only be 21m. It is something that no government can compete with.
I'm well aware of that, I just don't see why it's a good thing. Let's say all or nearly all the Bitcoins are mined someday, and it's the world's primary currency, and it doesn't behave erratically. Economic development continues so there's an ever-increasing amount of real stuff that's worth something, but that ever-increasing value has to be represented by a constant number of coins. So every coin becomes more valuable over time. As with any deflationary scenario, if I already have money I'm going to spend as little as possible because I know it'll have more buying power the longer I wait, and that will suppress economic growth and investment. But this is even worse than typical deflation--there is zero new money being created. If I'm a young person trying to establish my career and finances, how do I ever get a piece of this pie? Not only are there few jobs because people are disincentivized from paying for anything that isn't strictly necessary, but every piece of the pie is already owned by someone and there will never be any new pie. If anything there will be less because some people will take their keys to the grave with them.
> USD isn't a stable place either.
No currency is completely stable, but USD is a hell of a lot safer than BTC. I keep my personal savings in USD. Yes, it'll have less buying power a year from now. But I know its value won't be cut in half by next week. I have no such guarantee with Bitcoin. BTC enthusiasts love to make the argument that because the dollar isn't 100% safe, you should park your money in something that's completely unsafe. It's like saying that because I might get hit by a car tomorrow, I might as well take up recreational Russian roulette.
If you want to create an alternative currency that has mainstream adoption, you have to make something that's demonstrably better for the average person. You can't just say, "well the dollar isn't perfect, so you might as well use $CRYPTO_OF_THE_WEEK". And for the love of god, don't let the idiot who wrote that article do the talking for you.
If you don't like Bitcoin's energy usage, then there are alternatives, like Ethereum, which now consume tiny bits of energy and secure similar amounts of value.
I also don't see Bitcoin as a currency. It is a commodity, like gold. You're looking at the price of BTC against USD, I'm looking at it like "How much can I borrow against it?" You don't go into the store with a nugget of gold and plop it on the counter, you buy gold because you feel like it will maintain its value over time. I can also leverage that gold by borrowing against it, the same with Bitcoin. That is how I can use it on a daily basis.
> But I know its value won't be cut in half by next week.
In the US. Other countries are not so lucky, should they just be stuck holding the short stick?
