AKA On behalf of our banking customers we're going to be advising that governments get ready to do another bailout.
The amount and duration reporting has been. Originally it was $53 billion planned for a few weeks [2], and now it's over $128 billion [3], lasting into next year.
[1] https://news.ycombinator.com/item?id=21004068
[2] https://www.reuters.com/article/us-usa-fed-repo/n-y-fed-awar...
[3] https://markets.businessinsider.com/news/stocks/fed-repo-inj...
Since treasury notes are trading at normal interest rates in the overall market, it seems pretty clear it's a liquidity issue. The potential lenders in that market don't have enough dollars to lend (in part due to post-2008 regulations and post-2008 behavioral changes by those lenders).
If it were easy to become a lender in the overnight market, you would see people swooping in to make nearly risk free loans for 8% (apr) overnight. The swooping would rather rapidly lower the interest rates back to near normal. The Fed has authority and ability to swoop in, and a desire to keep the interests low, so there you go.
I have not read the report though having read the article one thing is clear all the solutions mentioned in the article are services provided by Mckinsey. So rather than being about a bailout it is positioning their services
On the most basic level, what you're suggesting doesn't make sense: "getting ready for a bailout" doesn't imply any real action any government would take.
If anything, being warned about financial instability will lead to an increase in requirements for banks: capital requirements might increase, M&A might become harder, etc.
But those are the sort of changes banks would tend to hate, because they necessarily reduce their opportunities to make money.
So I believe you're reacting to seeing "McKinsey", and it triggers you into running your conspiracy-themed sentence-generation Markov chain. In the process, it reveals that "government" and "finance" figure large as sinister agents in your belief system.
It is an excellent time to be cynical; and a great time to recognise that if anyone were ever to be tempted to conspiracy this is the sort of value that would tempt them.
The woefully uninformed I'm not going to quibble on because agree with you on that point.
I know you're being tongue-in-cheek, but in theory, are governments even capable of doing another bailout?
My understanding is that public debt in most Western countries (not sure about China/India) is through the roof. Other than printing money and risking a cataclysmic devaluation, what can be done?
Also, let's the remember the last bailout was a somewhat underrated success: " TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6% and perhaps a loss when adjusted for inflation.".
Apart from that, public debt is up considerably in the US (mostly due to tax cuts) but rather flat in the EU. Nothing would preclude another bailout of the same magnitude as the last one.
But that's a somewhat silly question. Because if there's one thing we can be sure of, it's that the next crisis will be different than the last one.
Italy going bankrupt is a far more imminent danger than private banks, and one that would be too big to contain, for example.
people don't realize how much italian debt is around, i.e. if you own an EMU sovereign bond ETF it will >30% italian debt. If you own a global government bonds fund, it will be 7-8% italian debt.
Yet, total bankruptcy seems unlikely, if anything I guess we'd see some restructuring and a loss of 10-20% which would be bad, but could be bearable for some operators.
Taxpayers didn't pay for bailouts. The Fed did. Taxpayers did make a profit form them, however, since the profits the Fed saw from the bailouts were, by law, handed over to Treasury (except for statutory operating expenses), offsetting taxes.
>those who greased the runways for the shareholders with their lost homes
Most of those those losing homes did so by taking loans they could not pay, and the ripples were felt by those not taking such loans, in their retirement funds. Those who left those funds alone recovered the value and then some after the recession. Those who did not, or could not, did lose value.
But don't just blame bankers. Also blame borrowers defaulting.
The 2+ Trillion dollar expansion of the Fed balance sheet during the crisis costs taxpayers every day that they pay interest on a loan enabled by that 2T+ expansion. Every house that used to be $200K and is now $500K is part of the price people are paying for how the crisis was managed.
> But don't just blame bankers. Also blame borrowers defaulting.
The core function of a bank is to evaluate risk. Being able to do so correctly enables the bank to make loans at a profit. Being unable to do so means that the people involved should go do something else. Debtors have been defaulting for millennia, it's a well-understood process. The financialization and securitization of housing was the creation of bankers, not borrowers.
Taxpayers don't pay interest on Fed assets. You have a fundamental misunderstanding of how monetary policy works. What makes you think your statement true? Did you read it in a explanation of how the Fed works, or did you make it up?
>The financialization and securitization of housing was the creation of bankers, not borrowers.
This is shortsighted and incorrect. If borrowers didn't default, there would be no crisis. Many were expecting housing to rise forever and were taking out second mortgages as piggy banks, then got in trouble when prices didn't increase forever. High risk borrowers could keep refinancing at higher and higher prices since house prices were climbing. When the prices stopped climbing, this process stopped.
>Debtors have been defaulting for millennia, it's a well-understood process.
And bubbles from irrational people have been happening for millennia too. Does this simplistic tautology allow me to assign all blame to borrowers?
> 'Taxpayers don't pay interest on Fed assets.'
with what I said; 'they pay interest on a loan enabled by that 2T+ expansion' (of Fed assets.) The Fed bought ~1.5-2T of MBS, turning bad loans that would never be repaid - credit that simply never should have been issued - into bank reserves. Those reserves both inflate asset prices and enable the banks to make loans on which interest is paid.
> When the prices stopped climbing, this process stopped.
The price climb - and the influx of less able borrowers - was primarily enabled by securitization.
> And bubbles from irrational people have been happening for millennia too. Does this simplistic tautology allow me to assign all blame to borrowers?
Borrowers can only exist if they've borrowed from lenders. Hence my point about lenders needing to evaluate risk to continue to be lenders.
Banks don't need those assets to make loans. Banks can make loans whenever and where ever they want, and can simply borrow from the Fed. This is the point of short-term interest rates - banks can lend past reserve requirements whenever they find a decent loan to make. It's the difference between exogenous and endogenous theories of money, and modern economies with central banks usually work this way to allow the market to decide how much money is needed, not how much reserves a bank can obtain because a central bank absorbed assets.
And most loans rate people get are tied pretty directly to Fed rates, not bank reserves. This is again due to endogenous money creation - demand creates money, not reserves. So the Fed and banks having 0 reserves or having 100 trillion reserves is nearly irrelevant - it is interest rates that matter, and those are set directly by the Fed board.
Also, if you recall, the banks were famously not giving loans after the bailouts, despite having the capital to do so [4]. I guess that also doesn't help your claims.
>they pay interest on a loan enabled by that 2T+ expansion
If you're going that far afield, then it's simple to point out what financial trouble they would be in if the Fed didn't make those loans. People would likely be far worse, in which case it makes the argument for those loans even stronger.
It would be interesting to check even correlation between Fed balance and interest rates.
Here's [1] an IGM Forum economist poll of most of the country's top economists on whether or not the bailouts improved unemployment. I'd guess being unemployed is worse than claimed interest rate hikes.
Here's [2] their answer to the question: "the benefits of bailing out U.S. banks in 2008 will end up exceeding the costs" - resulting in strong support with certainty (especially considering the types of questions these polls ask - check other questions).
So there's not much real argument on the bailouts being beneficial.
Now that the Fed is selling off MBS [3], shouldn't that cause the reverse of what you claim absorbing them did? Because those effects are not see in the markets. Maybe your effects did not happen?
[1] http://www.igmchicago.org/surveys/bank-bailouts
[2] http://www.igmchicago.org/surveys/bailouts-banks-and-automak...
[3] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
[4] https://research.stlouisfed.org/publications/economic-synops...
> Banks don't need those assets to make loans.
I agree with you on the endogenous theory of money (cf. Steve Keen), and understand that banks aren't constrained by 'loanable funds.' I was meaning capital and regulatory reserves, and mentioneing them only to acknowledge that not every dollar of the Fed's money creation went to asset price inflation. Just most of them.
> So the Fed and banks having 0 reserves or having 100 trillion reserves is nearly irrelevant - it is interest rates that matter, and those are set directly by the Fed board.
This is where I think you err. Once a bank's minimum capital requirements are met, its managers are going to look for maximizing returns on the capital available to them. To say that that will not have effects on the economy at large doesn't make sense to me.
> Also, if you recall, the banks were famously not giving loans after the bailouts, despite having the capital to do so [4]. I guess that also doesn't help your claims.
How so? Here are the chief claims I've made: > The 2+ Trillion dollar expansion of the Fed balance sheet during the crisis costs taxpayers every day that they pay interest on a loan enabled by that 2T+ expansion. > The core function of a bank is to evaluate risk. > Debtors have been defaulting for millennia, it's a well-understood process. > The financialization and securitization of housing was the creation of bankers, not borrowers.
I don't see how any of these are contradicted by the data in the St. Louis Fed 'Bank Lending During Recessions' article you linked. The entire investment world recognised that they'd underpriced risk for years, and there was a correction.
> If you're going that far afield,
I don't think this is far afield at all; I think it's critical to consider the effects of additional capital, in the form of debt, on the real economy.
> then it's simple to point out what financial trouble they would be in if the Fed didn't make those loans. People would likely be far worse, in which case it makes the argument for those loans even stronger.
Which people? The banks, yes. A creditor's assets are someone else's debts, so larger debts are good for banks. Generally borrower's situations are improved by brrowing less, at lower interest rates for a given asset.
> Here's [1] an IGM Forum economist poll of most of the country's top economists on whether or not the bailouts improved unemployment. I'd guess being unemployed is worse than claimed interest rate hikes.
Here are my favorite comments from the economists in that poll:
> There were much better policies, but what was done was better than nothing, give the bad policies that preceded.
> The question presumes Paulson’s forced alternative. If the only choice is between evil and Armageddon, evil might look ok.
From experience, being unemployed is terrible. Avoiding it on a mass scale is crucial. But avoiding unemployment is a pretty narrow question compared to the entire picture. Wages (real, median) have pretty much stagnated while housing (both a necessity and an asset) has inflated above historical norms (see Robert Shiller's chart from 1890-2005, and the Case-Shiller indexes.) That puts pressure on employed people that the poll question leaves out of consideration.
> Here's [2] their answer to the question: "the benefits of bailing out U.S. banks in 2008 will end up exceeding the costs" - resulting in strong support with certainty (especially considering the types of questions these polls ask - check other questions).
First, I note that the number of economists who strongly agree is outnumbered by the group who are uncertain or disagree.
> Now that the Fed is selling off MBS [3], shouldn't that cause the reverse of what you claim absorbing them did? Because those effects are not see in the markets. Maybe your effects did not happen?
There's been a ~10% decline after a ~400% increase. How much of an effect would you expect to see?
Lastly, my favorite comment from the second pol:
> Not compared to an ideal policy of an orderly reorganization imposing losses on creditors according to seniority. But better than chaotic.
He sort of sounds like Bagehot, "“Lend without limit, to solvent firms, against good collateral, at 'high rates". The choice that was made was to lend without limit to the largest firms against all collateral at low rates. That choice has consequences as well as benefits, and I would urge you to seriously consider both.
How did I err? Banks have unlimited capital available, borrowable at Fed rates. It does have an effect on the economy - it lets the economy grow at rates demanded by commerce instead of being constrained by too little capital or by being overflooded with capital.
But the fact remains banks getting assets bought by the Fed has almost zero effect on loans, which was your claim. This is empirically true as I demonstrated, and have given the theoretical reasons for.
>Here are my favorite comments from the economists in that poll:
Yes, you can post-select the side you want to be true. Now take the entire post instead of cherry-picking the answer you believe. It's not worth providing evidence of complex things with nuance to someone who has chosen their side and post selects the parts they like. So stop being dishonest with the evidence.
>Wages (real, median) have pretty much stagnated
Wages are a tiny part of total remunereation or of cost to employ. Fortunately BLS tracks both those variables - then the fact is that total remuneration has increased due to perks and legal requirements (go check the data), and cost to employ has gone up (due again to legislation requireing more cost per employee that is now paid by employers yet benefits the employee). BLS tracks all these - wages is far too simplistic.
Also, demographics have changed - a younger workforce is earlier in a career, and gets paid less, yet can still make more at each point in a career than previously. This is also a true effect and can be teased out of Census data.
Also, median wages now includes women and minorities, who have seen tremendous growth in their median wages for decades. The only class that has lost some is white men, and even there the losses are not very large.
So the "flat wages" is far from the truth on the quality of life gains people have seen. I doubt many would like to live at the equivalent wage in 1980 compared to now.
>while housing (both a necessity and an asset) has inflated above historical norms (see Robert Shiller's chart from 1890-2005, and the Case-Shiller indexes.)
Case-Schiller ignores (among other things) that the size of houses has increased. Not even factoring in quality increases like better insulated, lower cost to maintain, safer, when you simply factor in cost per square foot the values are remarkably flat for decades. [1]
The increase in size is mostly because people want and can afford bigger houses than in the past.
In short, your wage and housing views are too simplistic and ignore important nuances that reverse the evidence for the position you're taking. In both cases you're moving too many variables to make the claims you're making, and by holding important variables constant you get the opposite conclusions, ones which are the correct measurement regarding quality of life improvements.
>Lastly, my favorite comment from the second pol:
If you've chosen your answer the the point of not reading all new data with equivalent belief, then I see how you've reached your current world view. The comments you pick from so many while ignoring the totality or central points of the polls shows tremendous bias in your ability to absorb well sourced data. As such it's not worth it to continue if you treat this like climate deniers. Every complex system will have uncertainty - but the uncertainty is not the central feature of this one.
>First, I note that the number of economists who strongly agree is outnumbered by the group who are uncertain or disagree.
This precisely shows me you're dishonest. Why pick those categories while ignoring the "agree" one? To make the result not be what it is? For anyone reading this far, here are the results: Strongly agree 10%, Agree 49%, uncertain 13%, disagree 13%, strongly disagree 0%, no opinion 0%.
That you cite those two cases while ignoring so many counter to what you want to be true is dishonest and misleading at best.
With this level of intellectual dishonesty there is no reason to continue. It's not worth trying to deliver good evidence when you're clearly going to misread and selectively cite it.
[1] https://www.aei.org/carpe-diem/todays-new-homes-are-1000-squ...
Because it shows evidence of dissent in the community of economists polled. I am happy to admit all of the specifics into the discussion. I am adamantly opposed to painting over the real disagreements in the economics community, because I think it's important.
> That you cite those two cases while ignoring so many counter to what you want to be true is dishonest and misleading at best.
On the other hand, you seem to think that I should accept the top-level conclusion you want me to accept without any reference on your part to the real disagreement present in the polls.
I don't think 'dishonest' is a fair characterization of my attempt to point out that you are presenting your favorite side of the argument without considering the dissent.
> How did I err? Banks have unlimited capital available, borrowable at Fed rates. It does have an effect on the economy - it lets the economy grow at rates demanded by commerce instead of being constrained by too little capital or by being overflooded with capital.
Please clarify here: what would 'over-flooded with capital' look like?
Not true.
From the Case Shiller methodology[0]:
The main variable used for index calculation is the price change between two arms-length sales of the same single-family home.
I'd love to see the methodology page from the AEI article you linked, but I suspect it's not there.
[0] https://us.spindices.com/documents/methodologies/methodology...
While I do think borrowers are partly responsible, I also think there was a strong incentive for lenders to spread loans like candy and they probably de-emphasized the risks.
So the correct strategy would have been to take even larger loans and probably bury the money somewhere.
Some perspective:
Under 40% of people get any college at all. Of those, 30% of students graduate with no debt. The remaining average $30k in debt. This is not much debt compared to other things they will buy in life.
Avg starting salary for a college grad is $50k.
Avg new car price is $35k. Some people buy many cars in a lifetime. Median home listing is $279k. ~65% of US is homeowners.
Forgive my ignorance, but wasn't the subprime crisis so scandalous precisely because bankers were recklessly pushing mortgages on people who couldn't pay?
There is actually a good business in providing mortgages to people who have income, jobs or assets, but who can't/won't provide documentation because of their legal status or the nature of their job/assets. They are actually good credit risks because they don't want any of the attention caused by debt collection and/or bankruptcy proceedings.
But some mortgage brokers took it way to far to people who simply did not have those things.
But can you explain why practically all Central Banks are recently worried about high asset prices? Are high asset prices the sign of a stubbornly low inflation, in your opinion?
The US government would need to print an insane amount of money to have a tangible devaluation impact. Even more so when the money creation is intended to offset deflationary pressures due to a economic contraction.
Considering the GDP of the US is ~$20 trillion, I bet we're probably talking about $2-4 trillion of printed money, in addition to deflation offsets, over the course of a year before the noticeable market inflation occurs. That would be like spending the entire annual budget of the US military five times over.
https://markets.businessinsider.com/news/stocks/fed-repo-inj...
Granted, overnight loans are not permanent injections of money. But it serves as a reminder that there is no speed limit on the virtual printing press of the fed.
The speed of porting everything to arbitrary precision programs limits inflation, unless the gov start cutting zeroes of the bills.
I live in a boring small city with awful schools and mediocre economy. My house value went up in real dollars about 3x from 1999-2018z The apartment complex that I rented from in 1998 is about 2x more expensive in real terms since that time.
The supply of capital is inflating real property values even without growth in demand. Given that most consumer product manufacturing has completed its move offshore, I’d expect increasing consumer prices as there isn’t much room left to shrink by lowering labor costs.
In fact what people are generally surprised about is how little inflation is has occurred in the USA compared to how much money has been pumped into the system via QE.
There's a general consensus that a small amount of inflation is useful, although the reasons are pretty cynical (i.e. wage flexibility -> "it's easier to give someone a 0% raise under conditions of 2% inflation than it is to give someone of -2% pay cut under conditions of 0% inflation").
You might make the argument that making it psychologically easier for employers to hand out small 'in-real-terms' pay cuts is wrong in itself, of course, but that's another discussion.
"backed by surveillance" simply does not mean anything. At least not in the sense of "backed by" as used in those other cases.