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Comment by lettergram | Hacker News Reader

Just my 2 cents - Take your assets out of the market.

Until we (in the US) see a few senators, a justice or two and / or the VP/president/etc succumb to the disease we haven’t hit peak panic.

~50% of the workforce is about to be out of a job for a few weeks. A large portion of Restaurants are about to go bankrupt, daycares are about to go bankrupt. Houses are about to drop in price (no money, and elderly dying).

The reality is, this could be worse than the Great Depression. At least if we keep this up for any length of time. What we are doing right now is seizing the economy and if we close down everything, it’s going to be hard to start back up.

Governments are going to crumble because of this.

Long term (a year out) things should be improving. But IMO we have a long way to fall. I wouldn’t be surprised if banks start folding.

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Looking through Wikipedia, only one congress person was known to die of Spanish flu (https://en.wikipedia.org/wiki/Jacob_Edwin_Meeker), so I don’t think the numbers will get up enough in this pandemic to effect someone high profile in government.

Spanish flu didn’t impact elderly nearly as much nor, at the time, was the government so elderly on average. The death rates for those in their 60s and above seem to be much greater than those younger

I'm pretty sure banks aren't going to start folding. The Fed is ahead of the curve this time (or at least not nearly as far behind it as in 2008). They seem to be pretty serious about doing whatever is needed to keep things from falling apart.

I said I wouldn't be surprised, not I think they will.

For reference, I work at a bank. The opinion is my own. The problem has to do with a run on the bank.

All banks are currently reporting negative earnings. Most banks rely on credit, and revenue from said credit. If that breaks down (because people can’t pay). They collapse.

I think the fed can bail them out. I also think that requires printing money so inflation will be high.

> I said I wouldn't be surprised, not I think they will.

Fair enough.

> I think the fed can bail them out. I also think that requires printing money so inflation will be high.

If things go that way, I don't think it has to result in inflation. The thing is that, when a bank collapses, some money disappears (because of fractional reserve banking). If the Fed prints exactly the right amount of money to counterbalance that, it doesn't have to be inflationary. (The Fed could mess it up, of course...)

> when a bank collapses, some money disappears (because of fractional reserve banking)

The money doesn't disappear when the bank collapses. It disappears if the loans that defaulted and caused the bank to collapse are written off instead of being assumed by some other party. If the borrower's inability to pay is only temporary, the loan probably won't be written off; it will just be restructured, and the money won't disappear.

OK. But those loan defaults are what lettergram feared would cause the banks to collapse. So they're not independent. The bank can collapse from other reasons, and loans can default without the bank collapsing, but in the scenario lettergram was talking about, loan defaults cause the bank failures.

So, you're right, but I think my overall point still stands.

> those loan defaults are what lettergram feared would cause the banks to collapse. So they're not independent.

You're missing my point. I'm not arguing that the loan defaults are independent of the bank failures; obviously they're not.

I'm arguing that the loan defaults, and the consequent bank failures, by themselves don't cause money to disappear. For money to disappear, the defaulted loans have to be written off, instead of restructured. If they're only restructured--i.e., the borrower negotiates a new payment plan with the new lender (whoever takes over the bank's assets when the bank fails)--then the money doesn't disappear. And, as I said, since the borrower's inability to pay is only temporary, caused by an external event, I expect most of the loans to be restructured, not written off.

But if they're going to be restructured - if they're solid enough for that to be possible - would the bank fail? If I understand correctly, the bank becomes insolvent when the loans are written off. (Note well: I am not a banker.)

> if they're going to be restructured - if they're solid enough for that to be possible - would the bank fail?

That depends on the bank's cash flow position and their reserve assets. It's quite possible that the bank might not be able to sustain, say, a couple of months of loans not being repaid even if the loans are ultimately going to be restructured.

Of course, one obvious way to forestall this would be to extend short-term credit to the bank itself. IIRC this was done during the 2008 crisis. I have not seen talk yet of that being done now, but I would not be surprised if it were.

> The problem has to do with a run on the bank.

That's not what you're describing:

> All banks are currently reporting negative earnings. Most banks rely on credit, and revenue from said credit. If that breaks down (because people can’t pay). They collapse.

That isn't a bank run; it's not having a hedge against credit default risk.

A bank run would be all of the depositors trying to withdraw cash at the same time. But there's no reason for them to do that because their deposits are insured; even if the bank fails, their money won't go away.

> I think the fed can bail them out. I also think that requires printing money so inflation will be high.

The Fed is already printing money; they restarted quantitative easing along with the latest rate cut. I agree that this will cause inflation--in fact, if the printed money ends up, in effect, guaranteeing people's insured deposits, it will most likely cause more inflation than the previous rounds of QE did, since that money will likely be spent (whereas in those previous rounds of QE most of the printed money just sat in the banks' accounts at the Fed, since the banks were unwilling to lend it out).

Serious question: what tools do they have left to try and shore things up? They've reduced interest rates to 0. They've injected 1.5T of liquidity. Mitt Romney today just announced they're giving $1000 of helicopter money to every American.

If all of this doesn't work, whats left?

Currency devaluation. That only goes so far though. You can't really print your way out of this easily.

Quantitative easing.

Do we know what assets increase with quantitative easing?

But if you sit on cash, you will miss the day where it has a huge gain due to some news like a vaccine announced.

Most of the people betting on this becoming a recession/depression think that the coronavirus is just the pin to pop the (ETF) bubble. Most of the companies that have announced that they're working on vaccines have pumped already, but feel free to invest.

Coronavirus and oil crash are huge catalysts. A vaccine won’t help much, as investors become risk-averse. When majority of investors become risk-averse, risk premium goes high, thereby reducing stock prices.

To me that's fine. The S&P 500 isn't going to instantly spike back up to 3000. There is real damage being done to corporate bottom lines. The negative growth experienced by companies during a recession compounds into all future earnings -- for the rest of time. So the way I look at it is that the market is pricing all future earnings of companies, and once the volatility has settled it will reach some new baseline that's much lower than the peak, and then continue to grow at a nominal rate, only forward-looking, with no memory of what just happened. It took 4 years for the S&P to reach its previous peak after it bottomed out in 2009. So if you've been holding onto cash, or sold near the 2020 peak, you probably have a lot of time to get back into the market and still end up better off than if you'd bought in a month ago. You don't need to time it perfectly. I can make a lot of money if I do time it correctly, but if I fail to I'm not going to count it a loss.

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