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>the comments here are cringeworthy

This is true for anything engineering-related outside of computers. There is something about programmers being overconfident about their own knowledge of technical fields outside their own which is particularly painful.

Skip the comments if the article has anything to do with something that flies.

I once failed a job interview when I started talking about radios (licensed amateur, did some RF engineering at university) with a programmer who didn't believe me.

The solution is to make some broad generalizations about programmers?

That's what it is, a generalization, a first order approximation. I'm not saying everyone who has written a line of code is exactly like this or that, that's ridiculous and doesn't need to be pointed out explicitly.

It seems to be human nature. Bring up the proper way to educate children with almost any group and you will hear no end of inflammatory opinion.

>During the 2009 crisis, “BBB-rated” companies — the lowest rung of investment-grade — faced borrowing costs almost 7 percentage points higher than higher-quality companies. Today, the difference, or “spread,” is just 1.4 percentage points.

Besides, doesn't that imply that a high spread means we're in a crisis, so that the reasonable spread we have today is a good indicator?

Yes! It means performance expectations of BBB is quite stable. There is certainly the question over whether loose monetary policy is pushing investors to riskier assets and if these risks are therefore being underpriced, but comparing them to their recessions highs when everyone is fire selling them is completely disingenuous.

> It means performance expectations of BBB is quite stable.

Given that we are in a period of disruptive innovation I find that market optimism alarming. I think it means that even the least competent accumulations of capital are expected to extract savings by removing workers and hold onto their position using IP, regulatory capture, etc despite the best competition doing it all an order of magnitude better.

In a free market, the spread should be high right now since a few large players and startups should be about to decimate energy, transport, insurance and health costs and return the majority of the savings to customers. Why is there so much confidence in bad businesses holding onto profitability?

You can't say it's too high or too low without having an idea of the right answer to compare it with. What should the spread be? 1%? 10%? Is 1.4% appropriate, optimistic, or pessimistic?

I think at least 1/10 should fail with assets at least partially insufficient to cover. So going bellow 5-10% above government bonds says something very odd about the market.

(I think in past markets most companies in this class would have to sell stock since 20% will do very well and 10% fail so no one would accept the downside at a reasonable bond rate. The market is confused by the low underlying rate which IMO means the end of expansion to new markets, hence the disruptive only nature of the current market.)

A low spread allows increased junk borrowing, resulting in more pain when we do hit a crisis and the spread goes up.

When the fed bails out the corporate bond market, then that is when it becomes unacceptable. This happened recently. The Fed/Treasury had to do that during the 2008 crisis also.

Just never bail them out, and let them deal with their problems.

The comment below yours (in my view of HN) contains one of my core criticisms of our financial system:

> Modern loans don't work the way a classic model of lending would suggest. That has implications - loans represent a redistribution of real-world resources away from people who have worked for them and towards people who the banks like.

>loans represent a redistribution of real-world resources away from people who have worked for them and towards people who the banks like.

If these people have the resources, why do they need loans? And who is forcing them to do so?

Presumably the same reason startups take VC - to invest to create even more 'resources'.

In other words - desire and greed. There is no way to talk about financial systems without at least mentioning the psychology that drives money systems the way they are now.

The time value of money is a sort of aggregated greed, I suppose, and the time value of money is the motivator for finance. But the financial system is also shaped by regulation, and the psychology driving regulation in a democracy is more complex than a hunger for money. People have a sense of fairness and practicality. Why is FDIC depositor insurance capped, for example? Why are banks required to give special treatment to loans to deployed armed service members?

Corporations take loans, issue bonds, take on debt and then use that capital to give corporate officers multi-million dollar payouts, golden parachutes and to buy back stock (which they hold) which makes the corporate officers and stockholders fabulously wealthy while the debt burden of the corporation grows. Eventually the debt burden grows higher and higher and becomes more and more of a drag on the company until the company goes bankrupt, employees laid off, pension funds insolvent and the remaining assets of the company are sold off in bankruptcy proceedings. But by then corporate officers who extracted millions and those who cashed out during the stock buy backs fueled by this debt walk away incredibly wealthy, free to repeat this same cycle of behavior at yet another company. And the Toys R Us worker (or worker at any of the thousands of other corporations where the same thing takes place) who made $35,000 a year finds himself out of a job and without the pension he thought he had coming.

How much of corporate debt should have gone to households instead? At what rates?

This! People on hacker news have called 45 of the last 1 recessions! Having a finance background I can't stand finance related discussions on HN anymore. Any attempt at science immediately goes out the window and it just gets me so tilted. Too many armchair economist, not enough people willing to admit what they don't know and learn.

> Too many armchair economist

Isn't that the beauty of economy and meteorology? That everyone is an expert?

Obviously the markets can’t go up forever without a correction, and overleveraging will happen and add up in the financial system. Negative interest rates are a sign of this insane stimulus.

The difference in the US this time around is that the public will have no say in bailouts of banks. It will be done all hush-hush with the world dollar reserves and demand for the greenback as the final backstop:

https://m.youtube.com/watch?v=XRQecD-Gopg

Not sure what the other federations would do though.

To many nay-sayers and short sighted in here.

Yeah and even the 'experts' can't often see the cliff until they've fallen off it.

It amuses me when relatively new branches of study with poor to non-existent predictive modeling capability criticize "arm-chair" experts on accuracy/predictive aspects. Criticize methodology, data, or conclusions, not authority. This should be applied even in very well established domains.

The fact is, there really are no good predictive models yet. There are a lot of very good and legitimate reasons why there are no good predictive models dealing with complexity, scale, and an inherent connection to human behavior.

Now, this doesn't mean we throw our hands up and anything goes: we should still provide rationale and people should continue to study these systems methodically as they can. At this point, much of professional economics vs armchair economics isn't too far separated from chemistry:alchemy or astronomy:astrology hundreds of years ago. Obviously, there was great merit in the work early chemists, astronomers, etc. took on since we can now stand on their shoulders. Economics shouldn't be belittled, yet at the same time, it should be recognized for what it is: still not very predictive.

Not sure your fact is correct. I saw this linked on HN recently:

"We find that financial cycle measures have significant forecasting power both in and out of sample, even for a three-year horizon. Moreover, they outperform the term spread in nearly all specifications. These results are robust to different recession specifications."

https://www.bis.org/publ/work818.pdf

The authors of that paper are not nearly as convinced in overall applicable recession predictability using their proxy measures as the abstract excerpt that lures the reader in:

"These results suggest that financial cycle proxies may be another indicator that could be useful to policymakers, professional forecasters and market participants more generally."

Emphasis added is mine. That's double the coverage of uncertainty propogation.

Unfortunately, I suspect, like most working in modern research and academic settings, papers have to inflate success as much as possible or the researchers lose future funding even though this type of work is high risk of failure. This is partly to blame for the reproducibility crisis we're encountering across the board.

I don't blame the authors (I feel their pain), but I do blame the poorly structured incentive/disincentive system creeping ever-further into academic research.

Even 'experts' aren't experts. In fact, it's a running joke in my city that the top senior meteorologist has made the exact wrong prediction every year for the last decade on winter weather. That's very hard to do. Flip a coin and guess the right (or wrong) side back to back nearly 10 times. Mind blowing. It is very good pay as a glorified fortune teller. It is too complex a problem right now.

I feel the same whenever the article relates to neuroscience...its just not the discipline of many in the HN crowd, but because everyone has a brain, people frequently think they have something insightful to contribute about how the brain works.

Contrast this with computer related ropics and the HN expertise shines.

Not my field, but perhaps fear of embarrassment is important? Feynman's snark that (something vaguely like) good cocktail party topics are those where no one present has expertise.

I've seen a biology professor, writing a biology children's picture book, with unusual care, who seemed in part motivated by not being seen by their peers as having gotten it wrong.

I've recently seen comments that since it's HN, voluminous uninformed conversation is fine, and without harm.

So absent ego threat, or clear social norms, the next line of defense for quality is... comment votes? Which seems more a mechanism for norm enforcement than creation.

The HN comment guidelines don't actually recommend "thoughtful and substantive", only that that should increase as topics get divisive. The emphasis seems respectful and curious discussion. That combination might tend towards quality, but perhaps has failure modes. Like concentrations of poorly informed discussion, perhaps less than ideally respectful and curious, either discouraging quality, or taking too long to shift towards it?

One argument for discussion fora supporting personalized filtering, is the speculation that virtual subpopulations might create and sustain norms more easily than an unfiltered population can filter comments.

Brainstorming, perhaps highly upvoted comments might be darkened or otherwise highlighted, analogous to how the downvoted are lightened? Upvotes moving a comment upward, within its parent's node, is a quality signal that is weakened when there are few siblings. So outside of root and big nodes, it's hard to scan/skim for high-quality outliers. Which incentivizes making bulk judgments about whether chunks of the hierarchy, or even entire article discussions, are of a quality to be worth reading. And reduces the incentive for creating quality outliers in parts of the hierarchy where they will remain low visibility.

Interesting comments, sorry I never responded. It is certainly a difficult problem!

No worries. Thanks for the follow up.

Amen.

One of my pet peeves is talking about debt without corresponding asset levels. Corporate America has a net worth of ~$35 trillion.

Real or intangible assets?

This isn't calling the recession; it's calling out the main area of rot in our economy that is likely to cause the most trouble / ripple effects whenever the next recession hits.

>Having a finance background I can't stand finance related discussions on HN anymore. Any attempt at science immediately goes out the window and it just gets me so tilted. Too many armchair economist, not enough people willing to admit what they don't know and learn.

I would wager that finance is not the only topic subject this effect. E.g. Everyone in every Tesla thread is an expert in every component that goes into an automobile.

The media is like this about almost any field you know about. Pharmaceuticals for example.

And I say no. It's called social economics. The social aspecr is forgotten all to often. You can model markets to whatever complex formula you want and predict market behavior to your harts content. In the end it's people making decisions. And people at times do not behave according to mathematical models.

Hence the entire field of behavioral finance.

According to your own source that rapid increase in borrowing cost happened in a very short amount of time coinciding with the period things began to go to shit. Prior to that, when most of the bad stuff leading up the crisis was happening, it retained a fairly normal level.

Relatively "normal" cost of borrowing is one thing, but over-leveraging is another. Especially when there isn't a whole lot of room for the cost of borrowing to go down. Feds move to make.

>Prior to that, when most of the bad stuff leading up the crisis was happening, it retained a fairly normal level.

People aren't good at predicting the future.

But the beauty of the free market is, if at any point you feel like things are going "to shit", you can position yourself accordingly.

Right - I guess my point is why harp on one statistic as if that is supposed to make us feel good about what's going, when the reality is we don't know and the article is more of a "heads up". I think the article tries to head off most of the doom and gloom early on saying:

The danger isn’t immediate. But some regulators and investors say the borrowing has gone on too long and could send financial markets plunging when the next recession hits, dealing the real economy a blow at a time when it already would be wobbling.

Shorting bonds is actually not so easy for a retail investor.

To be clear, my source is showing the spread, not the absolute cost to borrow.

I didn't say we are over, under or properly levered. If you are implying we are over-levered, go ahead, just provide some evidence. The evidence Washington Post provided is meaningless under closer examination.

Although I think we are in agreement that a normal spread does not imply future stability.

Yes - I understand the chart. But maybe I'm missing something - you've said the article is lacking substance but haven't really substantiated that yourself? The only statistic pointed out is one you initially mentioned. If you have more data (I saw a neat SA link below), I'd like to take a look myself.

The author in two consecutive paragraphs states that a number of government and private orgs are sounding alarms, and then proceeds to say the danger isn't immediate. He echoes this sentiment throughout.

I think the over-leveraging has to be considered on a case by case basis, as it's hard to make that assertion across the board, especially given how much of a borrowers market its been for years.

The article to me reads as a warning that this is unprecedented so we should probably be careful, but only time will tell.

Companies are borrowing because rates are low and Treasury curves are flat. Why not borrow? It's much better to lock in long-term financing now so if/when liquidity dries up you aren't forced to roll over short-dated debt.

Yes the article touches on this. But goes on to also say that this could be really bad in a crisis or this could be no so bad in a crisis depending on who you talk to and why.

If you think the financial system is evil or incompetent, please suggest a better way of doing things or go into the specifics about what is wrong.

Ok, I'll give it a shot, but bare with me as I am just a developer and don't really know much about economics.

As I understand it, new money is created by banks loaning out more money than they have, which is called leverage. They do this by borrowing against the federal reserve, and the bank makes their money by charging their borrower a higher interest rate than the bank has to pay to the federal reserve. The banks assume the risk of a borrower not paying them back, and therefore get to be picky about who they lend money to.

If I am correct in how the system works, I see two specific problems.

1. Banks are the only ones who get to decide who benefits from the creation of new money

2. Business's and individuals who are chosen to receive loans are now under pressure to not only pay it back, but also pay the interest, as well as taxes on whatever income they make to pay their debt.

If we agree that the ability to create new money is necessary for a growing population, then the question is if this is the most efficient and fair way to go about it.

I think a better answer is something close to basic income, but not quite. Instead of allowing banks to choose how much new money is created, and who benefits from it, I think there should be a governing body that decides how much new money needs to be introduced every year. Then that money gets evenly distributed to every citizen.

Under this system businesses would not be able to grow as fast, unless they have private investors, or provide something people actually want to pay for. However the influx of money should create more investors, and make people more willing to spend money. The biggest problem I can think of with this approach is deciding how much money should be created.

>Banks are the only ones who get to decide who benefits from the creation of new money

How about we use the term "financial system" rather than banks. And in that sense, how is that different than:

"a governing body that decides how much new money needs to be introduced every year.

Except that it's mostly private (though heavily regulated), dynamic and market driven. You trust the legislators to figure out how much money is needed annually? Yikes.

Also, I'm not sure why you focus on "new money". Money is fungible and the world is awash in it. We have negative rates through most of Europe, for crying out loud! "New money" goes to where it is demanded.

You answer that for the US where the fed system is indeed is indeed mostly private. Not so in most parts of the rest of the civilized world.

It is a commonly believed myth that the Fed is mostly private. The people in charge of monetary policy are appointed by government.

>Not so in most parts of the rest of the civilized world.

We must live in totally different places if you'd prefer monetary policy be established by politicians. I'll take the academics, for better or worse.

> The banks assume the risk of a borrower not paying them back, and therefore get to be picky about who they lend money to.

This used to be the case but is not so common anymore today. A lot of debt issued by corporations or households (mostly mortgages) nowadays is securitized and sold directly to investors. The bank doesn't have the risk on their books and gets paid for their service (creating packages of debt with attractive risk / return ratios) but doesn't receive interest payments.

> I think a better answer is something close to basic income, but not quite. Instead of allowing banks to choose how much new money is created, and who benefits from it, I think there should be a governing body that decides how much new money needs to be introduced every year.

How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit from a loan and be able to pay it back.

How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit and pay back from a loan.

The governing body would only decide how much is created not who it goes to. Every citizen would get an equal share of all newly created money. Banks would still be able to lend money as they see fit, but they would not be allowed to use leverage.

Ah, I see you are talking about helicopter money with leverage restrictions for banks. The money distribution part is being discussed as a potential successor to QE. I don't think restricting leverage for banks is in anyone's interest - assuming banks adhere to their capital requirements, don't take up unsustainable amounts of risk and need a bailout. Fractional reserve banking allows banks to offer their services for free and pay you for your money on their savings accounts. If you take that away you will simply have to pay for keeping an account or do your own research on how to invest the money, which will probably cause you more work and a worse risk / return ratio. Or take banks entirely out of the equation and allow everyone to simply keep their money at the central bank.

I have a store. People buy food from my store and I use that money to buy food from farmers. Ever since everybody started receiving an equal share of any new money created, farmers have been less interested in selling food to me. After all, they already have plenty of money.

That's great. I also have plenty of money, and there are plenty of wealthy, starving people who would like to give me money. But I just haven't been able to figure out what I could possibly offer the farmers to get them to go out into their fields and do farming. They say they "need" fertilizer. What the heck do I know about fertilizer? If there were something of universal value that I could give to the farmers, they could use it to go buy fertilizer. We used to have something for that. It was called money.

If the bank creates "new money" and lends it to a business who pays it back with interest, isn't it in fact the business who has "created" the money? From this perspective, the banks are really just making bets on who they think can create value.

In reality I don't think new money benefits anyone in particular. If anything, inflation is detrimental to money holders. As alluded to in a sibling comment, this new money is distributed holistically and is for the benefit of the system itself (or a byproduct of the system, if you prefer).

Question is... are banks the best intermediary for determining who is capable of creating value? Perhaps in traditional established commercial lending, but would challenge its efficiency on newer orgs.

One benefit of basic income would be that consumption is about as close to market driven as it gets. So naturally the money would flow to companies providing value to individuals based on their needs.

I don't see the relation to basic income. You could just say income and be correct.

I'm not sure how free money makes consumers a better judge of value, when the did nothing of value to get the free money.

In fact, behavioral finance studies have show that people use "mental accounting" and free money is seen as having little value.

I've been considering this very concept as well, and while don't claim to understand all of the ramifications behind it, I would love to hear experts discuss SWOT.

My mental model always breaks down when considering international impacts to such a strategy. Currency, trade, and capital investment shifts.