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Comment by micv | Hacker News Reader

The Great Depression II was on the cards in 2007/2008 before governments took on gargantuan debts to brush it under the carpet. We're all paying for that with governments straining under comically heavy debt loads and interest rates held stupidly low long-term to avoid bankrupting the banks. The last thing we should be doing is allowing the same corrupt institutions which created the crisis loose to do it all over again. It will all just happen again with no room for manoeuvre left.

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1) The 700B in assets distributed via the Troubled Asset Relief Program (TARP) have all been sold by the government, earning 15.3B in profit in the process [0].

2) The federal funds overnight rate has been raised 4 times in the last year with more raises planned [1].

3) While the federal debt load is high, the actual annual interest paid by the government in servicing the debt is in-line with historic norms [2].

[0] https://projects.propublica.org/bailout/

[1] https://fred.stlouisfed.org/series/EFFR

[2] https://fred.stlouisfed.org/series/FYOIGDA188S

#3 provides little comfort, given we're not showing any signs of reducing it and rates will likely rise due to, e.g. #2.

#1 doesn't seem like a compelling argument, there were probably far better investment opportunities than +2% ROI, so this was likely still a subsidy, even if there were nominal gains. Not that we shouldn't have done it, but that argument isn't convincing to me.

Rates will rise, but that doesn't affect the interest rate for bonds already issued, of course.

No disagreement on opportunity cost - I was responding to the prior posters assertion that the government "took on gargantuan debts to brush [the financial crisis] under the carpet".

I guess you could say that some of the debt incurred during the crisis was attributable to a loss in tax revenue as well as the cost of the approximately 1T in stimulus funds between the Economic Stimulus Act and the American Recovery and Reinvestment Act. That's still a relatively small portion of the total debt of ~16T which is probably mostly due to a mixture of the Bush tax cuts and growing Social Security/Medicare outlays.

Bonds already issued were bought by people like you and me and pension funds who will now be paid many years of below-market interest. It's also embedded into the inflated pricing of every other asset that will have low expected returns going forward. No matter how you seem to want to do funny accounting, you're still paying that cost.

Yields (rates) are pretty much directly correlated with inflation. Low rates, low inflation. The real return is probably the same.

Which is not true at all. US real yield has gone from less than -1.5% on the short end [1] to around 1% recently across the yield curve. Historically it was around 2%. Not only that, the term premium is still likely negative [2]. The financial repression was real.

[1] https://www.treasury.gov/resource-center/data-chart-center/i... (Note that there was a further 80 basis point spread between nominal overnight rates and the nominal 5 year rate, so real overnight rates were really really negative.)

[2] https://fred.stlouisfed.org/series/THREEFYTP10

This does not mean that without low interest rates things would be better. (And I'm not saying Greenspan et al. handled the early 2000s well. But I'm also not convinced that the economy's set point is the federal funds rate. I think it's just an aspect, and business fundamentals - like real aggregate demand, which is much more sensitive to disposable income than to interest rates - are much more important for growth.)

The government does not have opportunity cost for money that it prints out of thin air.

The Fed can do that. Congress not so much. (Sure, technically Congress can legislate money into being, but there are good reasons why it uses bond auctions to fund its accounts.)

1) yes, but was TARP worth the governments risk? Given the riskiness of the debt, perhaps the government should have taken a lot more profit. A dime less in profit given the massive risk profile is de-facto a subsidy for the bank.

2) The 'big whale' you didn't mention is the trillion dollars in crap mortgages that are sitting on the Fed's balance sheet at face value. That more than doubled the Fed's assets, and those assets were way overvalued ... basically making the USD backed by crap. Which is a 'cost' to anyone using USD, esp. those issuing debt in USD, like the Government, i.e. taxpayer.

So while it's fine and good some of the bailouts were above board, there's too much of it that wasn't.

The government should have eaten all those banks, turfed the execs, and the sold them later for a massive profit a few years later basically wiping out most shareholder value and taking the profit into public coffers. That would actually be closer to capitalism than the bailout program.

> The government should have eaten all those banks, turfed the execs, and the sold them later for a massive profit a few years later basically wiping out most shareholder value and taking the profit into public coffers. That would actually be closer to capitalism than the bailout program.

The closest thing to capitalism that would have also massively benefited people - not major corporations - would be to let capitalism do its thing, aka punish those who overleveraged via market-based mechanisms.... like bankruptcy and liquidation. Those who didn't do stupid shit would benefit from the flood of assets.

We controlled variance - how well we did this is arguable - at a massive cost. Maybe it was worth it, but let's not act like there wasn't a huge cost to bear.

Yes but if you let the banks go down, they would have taken each other down, and the entire economy would have gone down a black hole.

That's why I said 'closest thing' to capitalism, because capitalism would have eaten itself in 2008.

A better bailout would have been to wipe out bank shareholders and nationalize the banks for a few years.

To the points;

2) Rates are on the rise, though its only fair if its also recognised the absolute level is historically low. And most likely these rates have been a significant variable creating share market and property asset bubble many markets and sectors are in right now. And this bubble has reasonable odds of creating another serious debt problem. Time will tell.

3) Repayments are at historic levels relative to the economy. This doesn't make it OK IMOP as the total load is dangerous in that what happens if interest rates rise? And I'm sure here many people will believe 'US controls the rates' but then this comes with additional flow on problems including but not limited to; 1) Monetary policy is now weakened as one of the more influential economic management tools for future use 2) Risk is through the roof should the appetite for US treasuries drop 3) The cost of servicing and repaying this is getting dumped on future generations, which will limit future opportunity of the economy.

And to be clear, I'm not proclaiming US doom. The US has an amazingly strong and diverse economy. But to focus points that post-2008 has not changed the playing field, and not recognise the high risk game the US are playing with their economy seems unfair.

> market and property asset bubble many markets and sectors are in right now. And this bubble has reasonable odds of creating another serious debt problem. Time will tell.

Trillion dollar companies have me concerned this will ruin 401ks of our parents/grandparents.

Historically Politics will cause economic issues to be postponed on future generations/elections. These interest rates and growing debt are candy, and we will soon be having a stomech ache. The USD is sick.

My interest in Bitcoin is due to my mistrust of the leaders in political and economic sectors.

> earning 15.3B in profit in the process

As compared with the trillion dollars worth of cheap real estate the public would have gotten had the banks been forced to liquidate all their holdings at the same time at massive losses.

"the public" tend to not have much cash on hand, especially in times of crisis. Those that would have benefitted from a massive real estate firesale would have been savvy 0.1 percenters.

On the monetary side it's hard to say which would have been better. There were people in debt, so keeping deflation at bay was important. Then again, even if 0.1 percenters bought these, overall cost of living and consumables would be cheaper, and debt is generally dischargeable, so you could argue keeping deflation at bay wasn't really to protect the debtors but the debt holders.

All said, well considered fiscal stimulus years ago would have been most directly beneficial to "the public" among all measures.

> debt is generally dischargeable

How stressful is the process of discharging debt and what is the difference in suicide rate between baseline and those going through this process?

Do you mean for individuals or for countries?

Compared to?

If a good chunk of the population is doing it it becomes less stressful. It's not like the alternate route (the one we took) has been stress free either.

>> Those that would have benefitted from a massive real estate firesale would have been savvy 0.1 percenters.

And many of those buildings would flood the rental market, driving down consumer pricing and enabling affordable rents.

...or just sit idle in a portfolio until the market bounced back, which is what happens in large real estate investments.

That’s not true at all. I worked at one of the big pe firms that made lots of money from 2008. Their goal was to move things to profitability asap. Either get a loan to performing (via getting holder to repay or rent), sell the note, or foreclose and sell the property (sometimes to a sister company). Same goes for anyone holding a property. Empty properties are targets for squatting and quickly fall into disrepair. The last thing a savvy investor wants is a nonperforming property.

I think parent's comment was about large real estate investments. Which can often sit idly for years before being sold/reinvested for a profit.

...and a massive plunge in real estate values would probably cause a lot of existing property owners to be upside-down on their holdings, forcing many to sell and/or default on their mortgage/debt repayments, which is sort of how this got started in the first place

Speak for yourself. My 10%er friends did buy up property, I only imagine them being able to buy more.

$15.3B is, what, 2.19% ROI? Do you know what else could have been done with an investment of $700B in government outlay in the same period?

The Fed funds rate is being raised on the backs of long-term investors who are forced to suffer interest-rate risk, bar the ones who got out in time of course with sufficient inside information -- guess who those are. This is just the flip side of the Fed funds rate being kept low on the backs of short-term investors in prior years. If you were in short-term investment until recently and began investing as the economy got better -- all very rational, risk-averse behavior -- or were just beginning to accumulate savings, you just got screwed twice. You'll get screwed a third time when the next financial crisis hits. We're all literally still paying for the banks' last mistakes, and will continue to do so for many years to come.

And yeah, your chart [2] conveniently ends at 2017-01-01 just after the time when interest rates troughed. This is also with the backdrop of a relatively strong GDP and not considering the increasing fiscal load being shunted to the state and local levels. The fiscal situation is not good and the only thing propping it up is dollar seigniorage, which, let's be honest, is necessarily going to end at the worst moment when you most need it.

Investors invest in both good and bad times. It's not like they are just sitting on money when it rains, but of course risk adjusted returns are lower in a pessimistic economic climate, and a lot of project gets put back into the drawer, the economy ('s growth rate) contracts.

That 700B was essential to stagger that contraction, and it was too small, because Congress is retarded, so the Fed tried its best with QE and other ZIRP compatible tools.

It's of course not a secret that there are possible things to do on the federal level that would generate more ROI than what Congress currently spends on. (For example health care reform, criminal justice reform, public transport and urban planning reform.)

The rate rise is to keep inflation at the 2.0 mark, which is the Fed's target. Like it or not, they are doing what they have to do to meet that target. Investors might be negatively affected by this, but the general population very much favors this.

Also, (both long and short term) investors have options to hedge interest rate changes, if they want.

There are many, many problems with regulations (SEC, CFTC, FinCEN are not proactive, the CFPB is currently being dismantled, and the market is at the same time too oligopolistic and too heterogeneous, too many layers of laws, only the big players can afford to navigate the legal maze), with banks (only the ruthless remains, the sane ones were long priced out of the market), and with the Fed policies of the past (Greenspan et al.'s handling of early 2000s), and even the financial news media is to blame (as they are very biased, either for or against the establishment, detached rational analysis is simply not bringing in the clicks).

Interest rate hedges are not free. There is no free lunch. Anyway I am not suggesting that there is a way to avoid paying the cost one way or the other, once the horse has left the barn when the banks put junk on their books with depositors' money. Unless you can unwind those or claw back years of executive compensation the damage is done.

Agreed, but long term rates are and always were (to my knowledge) higher exactly because of the larger uncertainty.

That said, "mark to market" is better than some magical nominal pricing. Of course creative accounting is the name of the game, that's why regulators need proper authority to request reports that help clarify things (so that helps them to stay ahead).

I wonder how many of those TARP assets were bought either directly or indirectly via the FED via QE?

You would also wonder, why not apply this government intervention to all other industries and businesses that are in trouble? Why does Banking get bailed out and others don't?

Over 90% of the monetary supply consists of credit as opposed to money. If companies and people can't borrow money, the world economy freezes and banks control credit unfortunately.

Certainly, you would think they ought to be regulated or constructed in such a fashion where taking down the entire world economy through their own greed should be impossible?

As it stands, they reap the profit in the good times, they get bailed out in the bad (and still make a profit I expect).

Essentially the taxpayer subsidises and protects one of the richest industries in the world from their own mistakes and greed.

That's the spirit of the current system, and it mostly works. The 2008 crisis was crazy because nobody anticipated the magnitude of moral hazard between insurers <=> (banks <=> rating agencies <=> pension funds) <=> mortgage lenders <=> homebuyers. Homebuyers thought they were in great financial shape because lenders kept pushing them easier loans, lenders were writing mortgages with their eyes closed because the banks buying the mortgages were making so much money packaging them into MBSes and selling them to pension funds, the pension funds were enjoying great returns on these products rated AAA by rating agencies asleep at the wheel, and meanwhile the banks offloaded their MBS risk by purchasing CDSes from insurers who were blindly making lots of money selling them. The whole thing was a self-reinforcing feedback loop that burst violently.

I definitely blame the banks for being overly creative in coming up with perverse, complicated multi-party incentive structures that are hard to regulate while lobbying for deregulation. But at the same time, the mortgage lenders, insurers and rating agencies deserve some blame for being negligent at their jobs.

Bingo, and to this point, GE had to go to a government program despite great credit ratings to fund short-term debt in 2008, because the financial lending market had seized up that badly:

https://www.propublica.org/article/general-electric-tapped-f...

because without banks to act as facilitators you would not be able to finance a house or car. Small businesses lending would dry up as would most lending for equipment and commercial real estate.

Banks did a lot to earn their terrible reputations over the past 15 years but it is also true that they provide necessary liquidity to a vast number of markets.

You forgot the most important point, Moral Hazard.

Everyone knows that the govt will bail them out during the next crisis so no need to check the reckless behaviour.

Capitalism for profits, Socialism for losses.

> no room for manoeuvre left

no room for manoeuvre within the current system. So we'll have to change the system. Unfortunately, I have not yet seen dissent proposals of what the new system should look like (I don't consider crypto a feasible alternative). Nevertheless, I am optimistic.

Care to explain how historically low interest is bad for governments in debt? Because that is completely the opposite of how it actually works for lenders (high interest destroys them).

His point is that we are at risk of high interest rates causing exactly that, and we are getting used to low interest as if it is normal while piling up more and more debt.

The entire economy has been debt-based since at least the 1970s.

Or even sooner. Money is the story of wealth, but the real working and growing economy was almost always about debt. The moment someone invented writing someone wrote a letter of credit. Kings used it, and countries got built on next year's harvests, and of course went bankrupt when that harvest turned out bad.

It was in 1971 that US got off the gold standard, but yea even in the 1960s there was signs of trouble I think.

That’s already guaranteed, you can see bubbles everywhere you look today and all of these institutions have grown bigger

... and th biggest bubble of them all might be in early stage startups..

Naked short selling [1] and short and distort [2][3] were also a big part of the pump and dump then the crash, they nearly broke the entire market.

> During the takeover of The Bear Stearns Companies by J.P. Morgan Chase in March 2008, reports swirled that short sellers were spreading rumors to drive down Bear Stearns' share price. Democratic Senator Christopher Dodd felt this was more than rumors and said, "This is about collusion." Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with Enron.

Naked short selling rules went into effect Thursday, Sept. 18, 2008 three days after the Sept. 15, 2008 Great Recession cliff that dropped Lehman and kicked it off [3]. Much cheaper to buy value and extract it when it is cheaper from a crash, the worst kind of players in the market extracted the value from the value creators.

Lots of the games played then are back with hedge funds creating movement to skim, short and distort and in some cases try to shakeup companies [3][4]. Amazon, Tesla, Apple, and many more are getting these attacks currently, we aren't ready for another big game, they might truly break public markets next time.

[1] https://www.sec.gov/news/press/2008/2008-204.htm

[2] https://en.wikipedia.org/wiki/Short_and_distort

[3] https://www.sec.gov/news/press-release/2018-190

[4] https://corpgov.law.harvard.edu/2017/11/27/short-activism-th...

Lehman was insolvant, short sellers didn't create the crash nor the recession. 2008 isn't the story of a malicious rumor that went wrong.

Naked short selling and pump and dump was in effect which is indisputable by the facts, Lehman was just a trigger point. Making it all about Lehman is disingenuous to the full statement and event.

The Great Recession was a value extraction event plain and simple, a banking squeeze in the end. Naked short selling, short and distort and pump and dump were the fuel, the value extractors took from the value creators.

The Great Recession wasn't an typical market correction but engineered, many banks and funds paid fines for their part [1][2].

Short and distort is back in full force, gearing up for another round [3].

People will not be ok with 'too big to fail' this time around, and if another Great Recession happens, it may permanently harm public markets for good.

[1] https://www.nytimes.com/2016/01/15/business/dealbook/goldman...

[2] https://www.cnbc.com/2015/04/30/7-years-on-from-crisis-150-b...

[3] https://corpgov.law.harvard.edu/2017/11/27/short-activism-th...

This post reads like Elon Musk trying to justify why he hates short sellers.

> Naked short selling rules went into effect Thursday, Sept. 18, 2008 three days after the Sept. 15, 2008 Great Recession cliff

How you twisted that into your hate on Musk seems biased.

Clearly the facts are short selling and naked short selling exacerbated the Great Recession. Your Musk hate is outshining the facts.

The Great Recession wasn't an typical market correction but engineered, many banks and funds paid fines for their part on the fraudulent ramp up pump [1][2].

And naked short selling rules were reigned in 3 days after the Great Recession cliff [3].

Though little has been done to reign in securities fraud using short and distort besides this SEC warning shot on a smaller fish this year [4]. Short and distort is illegal and needs to be a major regulatory push to avert another crisis, especially since the market is more automated and HFT run now.

The SEC short and distort warning shot this year happened almost a decade later almost to the day of the Great Recession cliff (Sept. 15, 2008 - Sept. 12, 2018) putting the big fish on notice [4].

> “While short-sellers are free to express their opinions about particular companies, they may not bolster those opinions with false statements, which is what we allege Lemelson did here,” said David Becker, an Assistant Director in the SEC’s Division of Enforcement. [4]

People will not be ok with 'too big to fail' this time around, and if another Great Recession happens, it may permanently harm public markets for good.

[1] https://www.nytimes.com/2016/01/15/business/dealbook/goldman...

[2] https://www.cnbc.com/2015/04/30/7-years-on-from-crisis-150-b...

[3] https://www.sec.gov/news/press/2008/2008-204.htm

[4] https://www.sec.gov/news/press-release/2018-190

> How you twisted that into your hate on Musk seems biased.

I'm actually a pretty big Musk defender here. Good read, though.

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