Evergrande has defaulted on its debt, Fitch Ratings says
cnn.com
cnn.com
> Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy.
https://www.bloomberg.com/news/articles/2021-12-09/evergrand...
It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt.
Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing.
The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets.
This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on.
It has been called the global dollar short squeeze:
https://www.lynalden.com/global-dollar-short-squeeze/
And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy:
Man that seems like “doubling down” (I’m thinking of the gambling term) on a business bet…
This post shouldn't be construed as financial advice in any form.
GME was easy. Hold the stock, sell it to the shorts. How do you do that with US dollars?
Secondly, as crazy as this sounds, would it be one reason for the Fed to preemptively drive inflation? (I suppose a low constant multiple in devaluation wouldn't blunt a short squeeze peak entirely, but might make it less sharp?)
If you believe OP, borrow as much foreign currency as you can and exchange it for USD. Back in 2007-2008, many Canadians emptied out their savings to buy USD at incredibly favorable exchange rates. Within a year or two they made over 30% as the CAD fell and the USD recovered.
In your comment it seems that you are suggesting there was some kind of squeeze from retail holders that caused the price rise in CAD to USD... I find that tough to believe but have not considered it.
Creation of more debt is creation of more money, increasing supply, and is inflationary.
Conversely, destruction of debt destroys money, and is deflationary, in this case, deflationary to the dollar.
Also, selling of dollar-denominated assets also decreases the dollar-value of those assets and so increases the value of the dollar.
But it is inflationary for the Chinese currency.
This is why with the Fed's QE programs since the 2008 crash everyon ehas been yelling "Inflation!!" for over a decade, yet there was none-negative until this year, and even that is arguably transient. So much money was destroyed in that crisis that they have been ever since then trying to fill in the (deflationary) hole.
To the extent that that debt is denominated in dollars and is about to be destroyed, it will be dollar-deflationary, not inflationary.
Deflation, even in small amounts, can be devastating. It's a contagion that can cause a deathspiral, that if left unchecked. When businesses and people lose income, they can't keep up with debt payments, causing their assets to be liquidated, which causes the assets of others to suffer further depreciation, causing more losses and bankruptcies.
Also Inflation vs Hyper-Inflationyper is a key distinction.
Ordinary inflation is relatively harmless, and the NET returns available tend to equalize at the actual growth rate of the economy. E.g., if inflation is 5%/yr the stock market is likely growing at 7.5%/year, yielding the same returns as if it were growing at 2.5%/year in a 0-inflation environment.
Hyper-Inflation is the killer - when inflation gets out of control, people lose confidence in the currency, which leads to the vicious cycle of needing to print more, which leads to lower confidence, etc.. Obviously, this is to be avoided nearly as strongly as deflation. It's why Volker raised the Fed Funds Rate to up to 18%, to killed the '70s inflation that threatened to run away. But even in the following decade it was typically 3-4%, as low as 1.1% and as high as 6.1%. Yet we're now seeing 3-4%, likely transient, and people are squawking like it's the end of the world.
Inflation only becomes a problem when the money-printing (incl. debt creation) is so prolific that people lose confidence in the currency — that's when you get hyperinflation, which absorbs almost everyone's full attention. It's pretty wild to see live in person, but it is still survivable.
But you're right - DEflation is really dangerous, which is why the Fed, ECB, and other central banks are working so hard to avoid it.
I don't know how much debt vs assets were destroyed in Zimbabwe, but it seems that most of the inflation was due to the govt printing insane quantities of money to finance it's involvement in wars in neighboring countries -- when they are printing and distributing individual notes in denominations of 100 trillion Zimbabwe dollars, when that currency started above par with the USD, it doesn't seem like debt has much to do with it; do you have some details I'm missing?
A big part of the world economy is literally or effectively dollar-denominated, so a sale of dollar-denominated assets does not imply a sale of US stocks and bonds. You can sell just about anything for dollars.
But the issue with this is that there are only a few currencies backed by economies large enough, relative to the US economy, to be able to trade for sufficient quantities of USD without really impacting the exchange rate.
If the impact is large enough, the only good solution is for the fed to agree to a currency swap.
It’s notable that the calculation for M2 changed.
“Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000)”
“Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000)”
Does that mean savings accounts and money market accounts are no longer included in M2?
>> Consequently, [February 23 2021]'s H.6 statistical release combines release items "Savings deposits" and "Other checkable deposits" retroactively back to May 2020 and includes the resulting sum, reported as "Other liquid deposits," in the M1 monetary aggregate. This action increases the M1 monetary aggregate significantly while leaving the M2 monetary aggregate unchanged.
[0]https://www.pbs.org/newshour/economy/u-s-consumer-prices-spi...
To use this as evidence of the general "LOL PRINTER GO BRRR, SO INFLATION" argument—that, frankly, is a conspiracy theory popular today because of everyone's sudden infatuation with Austrian economics via Bitcoin obsession—is kinda myopic and missing the point.
I could be wrong, but that's a conspiracy theory? Like bigfoot or the moon landing? Come on. Your ideas can't be that fragile to have to resort to name calling like that.
That’s what inflation does over the long term, nothing nefarious there.
The entire US economy has become dependent upon asset prices going up. The easiest way to achieve that is to make dollars go down. Conveniently, there is a branch of the government (The Fed) - who answers to no one - and who has the power to print dollars.
Sure, some American companies actually do things. But a startling amount of wealth in this country is tied up in R/E and derivatives. If dollars go up and asset prices go down - this explodes spectacularly.
The Fed chairmen are all relatively wealthy. IIRC, Ben Bernanke was - by far - the poorest Chairmen ever. At the time he was elected, he had a net worth of $2.5M - inflation adjusted would be >$5M.
That's still similar to the type of wealth you read about in Jane Austen books...
No, it's not an "exact opposite". If one accepts the premise that players in the economy do not always yell out all their motivations and fears on the most public channels they can find, which when examined directly seems obvious but people seem to forget about it a few seconds later and resume acting as if the news is in fact full of everyone's private motivations and fears, then one can easily harmonize these two theories into one by wondering if the reason the Fed is printing money like crazy is that they fear horrifying deflation brought on by a dollar squeeze, so they're trying to get ahead of it. Certainly once it starts happening it's too late to react.
It's not my personal first guess as to the Fed's primary motivation, but neither is it an idea too crazy to take seriously, and I could easily accept it as a secondary motivation.
More recently? I'm less clear on that.
(Wow, 2008 was 13 years ago? And we haven't had catastrophe in that much time? That was... unexpected.)
During height of the 2008 financial crisis the Federal Resevere opened an currency swap facility with the Swiss National Bank and the ECB ultimately capped at $620 billion, with the express purpose of allowing the other central banks to bail out banks domiciled in their jurisdictions.
So with the cooperation of the Fed, it is possible for them to print dollars.
Evergrande's USD-denominated debt is 20 billion, even if they wanted to cash it all out rather than just refinance it I doubt it would be such a huge wave.
Panicing investors fleeing to the USD safe haven seems more likely to cause trouble.
[0] https://www.thebalance.com/how-much-u-s-debt-does-china-own-... [1] https://www.ft.com/content/7ac2d661-5a63-4768-91a1-182f02b2a...
Also, China can't negotiate the treasury bonds because those bonds are fixed income securities. They can't suddenly demand early payment.
The broader risk is an unwinding of Chinese holdings by foreign entities who suddenly realize that the Chinese government will have them foot the bill for bets gone bad, or simply bets that the Chinese government doesn't like. China has capital controls to manage these outflows.
Which all leads to the scenario where foreign investors in China's economy are probably going to get taken for a ride at some point. Arguably some companies like ARM are already in this situation but it's in everyone's interest to pretend they are not.
Yeah, I thought the same thing in 2008, then the haunting words "too big to fail" were used by both Obama and McCain, so it didn't care who won the presidential election, the banksters would still get a bail out. Fast forward to today, and it still doesn't matter whether a Dem or Rep sits in the oval office, the banksters will always have safety net.
That was, of course, the point of trying to do something to make them NOT too big too fail, an effort that appears to have really gone nowhere.
Not for those of us that don't invest our money in banks/stock markets, and don't take out loans. Private businesses meeting the above criteria would have boomed under those conditions, as there competitors were wiped out. The world is addicted to banks, and it really needs to treat the source, not the symptoms.
Yes, we do indeed to need to deal with the banking system, but until that's done, if large elements within it fail, the pain is going to be felt by a lot of the little people much more than the bankers.
The stock market crashed despite the bailout. People lost their jobs and houses despite the bailout. What would have been worse if the banks had not been bailed out?
If I make money, great, if I lose, it’s someone else’s problem.
When government provides too cozy a safety net it encourages risky lending.
Federal flood insurance is another fun topic related to this.
I am saying that pulling that support during a banking crisis will generally be a disaster for the rest of us. We need to change the support for the banking industry but in a manner that doesn't screw the rest of us over with side effects.
You should know, in the fallout of that Recession, LOTS of banks lost. There were plenty of regulations on lending and capital restrictions. This forced small banks to be sold and consolidate into big banks. There were plenty of big banks who wanted to expand but couldn't because they couldn't meet the regulatory pressures. There were plenty of executives who lost their jobs.
Lots of banks lost.
There's a reason the FDIC was set up as part of the reforms triggered by the Great Depression. Bank failures tend to cascade.
But we did have the FDIC, so normal people would not have lost their deposits from a bank failure.
Also, resolution through the FDIC means that you get your money... eventually. That can still be a problem if you have to pay your bills this week, though. (And then, if you and enough other people can't pay your bills this week, that can be a problem for businesses...)
If the large banks have liquidity problems, it means they’re no longer able to give people their deposits back as cash. They simply don’t have the money to give to depositors. In this scenario government steps to cover the shortfall, but there’s a limit to how much the government can cover, so many people, in particular business, will simply take involuntary haircuts to their bank balances.
In this situation people start taking their money of banks, because trust has been destroyed, causing a bank run. Which makes the situation even worse, because then any bank that lends will have a liquidity crisis, because they operate as a fractional reserve.
In the end the government ends up effectively bailing out the banks anyway, by covering peoples deposits. Except now most banks have collapsed completely, taking huge amounts of financial infrastructure with them, plus the people needed to administrate and operate financial aspect of the economy, and nobody trusts the banks that managed to survive (assuming any did).
So worst case is bad, really bad. A cascading failure of banks means you wake up one morning and money that isn’t under your mattress has disappeared. You cash accounts, your savings accounts, your investment accounts. In addition you’ll have a line of people demanding you repay any loans you have, your car lease, your mortgage, your credit cards etc.
Banks considered “to-big-to-fail” have that label because their collapse has a significant risk of causing a cascading failure of banks across the entire economy. So bailing them out is much cheaper and safer to do, but allowing them to continue existing is just negligent.
Close, but not quite. The banks are barred from using customer deposits to fund loans. They also have a 0% reserve ratio currently so it is 100% fractional reserve.
In short the banking system is a scam, always has been. It is the greatest scam ever perpetuated on humanity. If any other industry operated on the level of fraud involved in running a fractional reserve, they would be jailed by midnight.
If banks didn’t lend the money, how would you expect them to pay internet on your savings or fund the costs associated with just storing your money for you? It costs quite a lot of money to run a bank, even a bank that only handles customer deposits and has no lending activity. Most consumers aren’t in paying the full cost of administrating their budgets, but cost has to be covered somehow.
Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis, because there would be no capital to fund any form of credit, from credit cards to mortgages. Either that or you would have to engage entirely in P2P lending, which removes the ability to aggregate and distribute risk, lowering each individual exposure. Or you would have a P2P system with someone aggregating and selling that risk, but that’s just banks in another name.
> On March 15, 2020, the Federal Reserve Board announced that reserve requirements ratios would be set to 0%, effective March 26, 2020. Prior to the change effective March 26, 2020, the reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the institution.
A reserve ratio of 0% means no customer funds are used to pay loans. The fraud is that the money is fractionalized into thin air.
> Additionally if banks didn’t operate as a factional reserve, we would have a permanent credit crisis …
Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises.
No, that means that all customer deposits can be used for loans. There’s zero requirement for banks to hold any deposits in reserve to ensure they’re able to pay out individual depositors on request.
In short, they can lend an amount of money equal to the amount deposited with them. They can’t magic money out of nowhere, only the fed can do that.
> Or there wouldn’t be as much cheap credit floating out there, forcing lenders to charge a more reasonable rate for borrowing. Cheap money creates financial crises.
Also no, poor risk management creates financial crises. Cheap credit itself doesn’t cause anything. It’s irresponsible lending, and failure to properly account for credit risk that creates a problem.
There would be pretty much no risk in lending Jeff Bezos huge amounts of money at 0%, because it would be trivial to securitise it with physical assets and stocks. But lending at similar amount of money to someone with no income or assets would be very risky.
Lenders always want to charge more interest, that’s how they make money, and they need to charge a minimum amount to cover the costs of administering the loans, and the costs of loans that default. The idea that lenders want to lend cheaply is nonsense, it like saying a shop only wants sell everything as cheap as possible. Both shops and lender sell/lend as cheap as is needed to compete, and no more. Anything else would be voluntarily giving up profit margin, find me a bank that wants to do that.
If I am mistaken please correct me with citations but respectfully, I believe your understanding is incorrect. In a fractional reserve system banks can and do fractionalize dollars into existence. The mechanism is slightly different than when the FED prints money. Instead of creating money out of nothing, banks can only create loan money out of thin air.
For example, when you are issued a new car loan from a bank, those funds do not come from another depositor. (see my comment above on 0% reserve ratio). Instead the money is literally created by the stroke of a pen when the borrower signs the loan agreement. The funds did not exist anywhere prior to the loan. The numbers were added to the customer's bank account the moment they signed the loan agreement. Money created out of thin air via fractional reserve lending.
If it were not for the free money creation feature of the banks, then banks would have to lend customer funds or their own reserves. The risk and cost of lending these real assets would greatly exceed the ultra-low interest rate environment we currently experience and the cheap credit days would be over.
The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply. This leads to credit bubbles that perpetuate the business cycle and lead to a series of booms and crashes. Fractional reserve lending is a scam and banks are technically all insolvent.
You are mistaken, citation: me working in bank on stuff related to this, and generally needing to be aware of capital requirements etc.
> For example, when you are issued a new car loan from a bank, those funds do not come from another depositor.
Sort of, depends on what level of abstraction your working at. Inside the banks ledger this is entirely true, however this doesn’t create new M1 money [1], only M2 money [2]. Just because the bank can write a number into a database, doesn’t mean they can actually materialise it. That would be money printing, also known as forgery, unless you happen to be a reserve bank with the right to print money [3].
So banks ledger might have more money in it, that ledger is banked by a reserve account at a federal reserve bank (where banks keep their money), and that account doesn't have more money in it. Which is important, because that’s the account the bank will ultimately use to settle payments such as ACH, Debit/Credit card, Fed Express etc.
So while the bank can “create” money in it ledger, it can’t be moved or spent because it can’t create money in its reserve account, so it can’t settle payments. Hence the bank can’t materialise the money it’s “created”.
However this inability to materialise the “created” money isn’t important, as long as they have customer deposits on hand to cover all of the outgoing payments. The “created” money and “real” money all sit in one big pot (the banks ledger), and as long as you don’t try to withdraw an amount larger than the “real” money, you can pretend it’s all “real” money.
The reserve ratio sets the limit on how many $ of “real” money a bank must have for each $ of money it “creates”. That ratio breaks down a little bit a 0%, because it suggests that a bank with no customer deposits can still lend. But the fact that bank with no deposits can legally issue loans doesn’t change the fact it can’t physically issue them. It literally doesn’t have the cash to give out. So they could lend you money, and you could pay interest on loan, but you would never be able to withdraw the money as cash, or spend it using a card, or transfer it elsewhere. So, yes, technically the loan can exist, and technically a bank can lend without customer deposits. But no one in their right mind would ever borrow money that couldn’t be spent or transacted with. Kinda defeats the point of borrowing the money.
We can also show this must be true, because if it wasn’t, it means that every bank in the US issuing loans effectively an unregulated licence to print money. If that was true, why bother lending it? Banks lend money in the hopes of making money. If they can legally print money, then why don’t they just print their own money and profit margin. No need to mess around find people to lend to, then having do credit checks and collections. They could cut the middle man out, and print cash straight into their pockets.
> If it were not for the free money creation feature of the banks, then banks would have to lend customer funds or their own reserves.
They do lend out of their customer deposits.
> The risk and cost of lending these real assets would greatly exceed the ultra-low interest rate environment we currently experience and the cheap credit days would be over.
I think you grossly over estimate the risk of lending money, even at low interest rates. Most of the extremely low interest lending is securitised, so if the borrower goes bust, the bank can claim a physical asset (like a house, or an office or a factory) to recover borrowed money. In these situations the biggest loss a bank suffers is that the loan is paid back quicker, and thus they earn less interest, and selling a factory is a pain in the arse to manage.
For most consumer lending, like credit cards etc, the interest rates are stupidly high, and the products are designed to milk consumers over many years. Keeping them stuck in a cycle of debt they struggle to escape from, and ensuring a steady supply of payments to the bank. Also ask yourself, if lending is risk free to the banks, why isn’t everyone offering 0% interest loans, and why do credit agencies exist?
> The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply.
Again, if this was true, why would any of the banks bother lending to anyone? They could just issue themselves a trillion dollar loan at 0% to be paid back in 1000 years, the buy a yacht and retire. Why the hell would they voluntarily subject themselves to the of actually lending money to other people, then have to try and chase them down for repayment?
[1]: https://www.investopedia.com/terms/m/m1.asp [2]: https://www.investopedia.com/terms/m/m2.asp [3]: https://www.investopedia.com/ask/answers/082515/who-decides-...
So your citation is yourself and your claim that you work in the field and therefore we should trust you blindly? I don’t buy it. It seems you have a vested interest in preventing others from learning about the fractional lending scam.
As for your claim that a 0% reserve ratio means banks CAN lend depositor funds, that is either a huge misunderstanding on your part or an outright lie. Show me any documentation anywhere that supports your novel interpretation, and I’ll back down.
> The fraud involved in fractional reserve lending is that the lender has no cost of funds. They are not risking their own assets and are therefore more willing to lend cheaply.
>> Again, if this was true, why would any of the banks bother lending to anyone? They could just issue themselves a trillion dollar loan at 0% to be paid back in 1000 years, the buy a yacht and retire. Why the hell would they voluntarily subject themselves to the of actually lending money to other people, then have to try and chase them down for repayment?
The rules require that a real flesh and blood borrower, signs a loan agreement obligating that they repay the loan with interest. Only a signed loan agreement creates the fractionalized funds in the borrower’s bank account.
This is what prevents a bank from borrowing an unlimited amount. They can create money to issue loans but they cannot create money without a loan agreement with a borrower.
This isn’t a huge conspiracy, I’m no where near important enough to benefit from such a conspiracy even if it did exist.
> As for your claim that a 0% reserve ratio means banks CAN lend depositor funds, that is either a huge misunderstanding on your part or an outright lie. Show me any documentation anywhere that supports your novel interpretation, and I’ll back down.
I’m not sure how many I can say this. Unless you’re the fed you can’t magic money out of thin air. If the banks aren’t lending depositor funds, then what are they lending? Where does the money come from?
You seem to be basing your understanding of fractional banking upon an old blog post, which talked about an interest quirk of how banks worked. But that quirk only exists if, and only if, you ignore the abstraction that supports it.
It’s not different to over allocating disk storage using ZFS. I can build a volume that capable proving 10TB quota to 100 people, using only a 1TB drive. When I create those quotas I “make” storage, by writing their available storage into a storage quota journal. But the only works if we ignore the fact that the storage quota journal itself is an abstract, and leaky one at that. If people actually tried to use their 100TB quota, they would quickly discover that writes beyond 1TB just don’t work, because I only have 1TB of actual physical storage.
Same applies to banks and their ledgers. The reserve ratio just determine how much cash the banks has to hold in reserve at a reserve bank, that’s all. That cash is customer deposits. If you want to assert that isn’t the fact, then you need to explain where the money is actually coming from, and why a billionaire hasn’t bought a bank, and lent themselves a few billion more dollars out of thin air.
Now I had a whole thing written out here with sources from the Federal Reserve etc explaining via tiny little steps what a reserve requirement is, then what a reserve requirement ratio is, and how that all links to net-transaction accounts, which basically account the hold depositor funds etc etc
But then I realised I don’t give shit if you remain uneducated and ignorant while wearing a tin foil hat, so whatever. Have good life, goodbye.
Here is an article explaining how banks create money for loans, search for “The money creation process”: http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-1...
> banks create money when doing their normal business of accepting deposits and making loans. When banks make loans they create money. remember from chapter 12 that money (M1) is currency (coins and bills) AND checkable deposits. When I got a loan for my boat the bank called me up and said that they deposited the loan in my checking account. This new deposit is NEW MONEY created by the bank. they just turned on their computer, logged into my account, and changed the amount that I had. They created money.
So you are paid in cash, by a company that also does all its business in cash?
Protection of systemic banks is not about investors and loans, it's about the liquidity/working capital of companies and the people's salaries.
These two sentences contradict each other. You see, the competitors that get wiped out have employees who would lose their jobs regardless of how their money was stored.
The world is addicted to banks, and more specifically lending because that's how you convert future, uncertain payouts into steady, predictable capital that can be used to buy inventory, pay employees, make repairs, etc. To kick our bank addiction would be ruinous.
> We're tracking where taxpayer money has gone in the ongoing bailout of the financial system. Our database accounts for both the broader $700 billion bill and the separate bailout of Fannie Mae and Freddie Mac.
> Altogether, accounting for both the TARP and the Fannie and Freddie bailout, $635B has gone out the door. Money has been coming back in two ways: $390B of principal has been repaid, and the Treasury has collected revenue from its investments of $353B.
> In total, the government has realized a $109B profit as of August 30, 2021.
I'm sure there are a lot of other hidden costs with the bailouts that aren't accounted for here, but it seems the companies that were specifically loaned money generally paid back more than what was given?
If not, what else is missing here?
>$109B profit as of August 30, 2021
That's less than 1.5% average yearly ROI. That's a joke. An index fund, the least risky type of investment, has an average yearly interest rate of 10%. The stock market averages 8%. The irresponsible mortgages that got the banks into this situation had rates between twice and quadruple that. Hell, even inflation outpaces that on average.
Accounting for inflation, that's not even an interest rate of 0%, that's a real interest rate in the negatives.
The taxpayers paid for the bailout. Socialism for the rich, rugged capitalism for the poor.
For a random example, JPMorgan Chase got funding of $25B and returned it only some 8 months later (https://projects.propublica.org/bailout/entities/282-jpmorga... the gov't earned some 1.7B on it which comes out to an annualized interest rate of approximately 10%.
JPMorgan was actively buying up assets in 2008 and were one of the banks that was well capitalized.
“JPMorgan Chase did not want or need TARP money, but we recognized that if the healthy banks did not take it, no one else could — out of fear that the market would lose confidence in them.”
https://www.usatoday.com/story/money/economy/2018/09/14/jami...
Taxpayers realized significant profits on the loans, since by law Fed profits past a small amount return to Treasury, which offsets taxes.
And they were loans, as well documented in this thread. Paid back with interest.
Do you know the difference between the Fed and Treasury?
I don't believe those words were spoken by Obama in 2008, except possibly to criticize the idea.
This is in stark contrast to the private houses I know of the US which may be even hauled from A to B and in my perception are more of cardboard-quality.
There is nothing inherently wrong with stick built houses using drywall.
You could also argue that this type of construction allows more room for generational upgrades than those expected to last 500 years.
Integrating PV solar into the roof might be a more reasonable proposition if you know you're planning to replace the roof in a few years. If you don't expect to have to replace it for several more decades, you're less likely to make that investment.
This also applies to insulation, air sealing, electrical upgrades, etc.
> e.g., you can realistically restore a stone farmhouse that's gone to ruin more easily than a stick+drywall house that has), no? My sense is that the 500-year TCO is many times higher (maybe as much as an order of magnitude) for US-style homes.
No, labor for masonry related work is insanely expensive, and rightfully so. Even at its most basic, more mass needs more force to move around.
It is so cheap and easy to cut some wood and drywall and install new things and patch it up rather than deal with masonry that will last 500 years.
Older houses tend to be much higher quality. You can obviously find custom homes or more expensive homes built with better materials, but according to my contacts in the home building business, ~90% of homes being built right now are the bare minimum required to get the customer to buy, and most of them wouldn't meet regulatory requirements because the inspections just weren't done.
My home was built in the 1970s, at the same time as most of the others in the neighborhood. There was a fire that gutted about half of the home in ~2008, and as a result the entire electrical system, internal plumbing, insulation, and most of the windows were replaced.
Because of this the home was priced like others from the 70s, but I'm very confident that I won't have any major and unexpected structural, electrical, or plumbing issues in the near future.
The only real downsides are that there isn't a basement (I have a dirt crawlspace, with a ~10x10 area dug out enough to stand up for the water heaters and such), and I own one of the few homes inside city limits with a septic tank.
City code prevents me from making major repairs on the septic system, so within the next few years I'll need to connect the home to the sewer. That's going to cost between ~$500 (if I do the work myself, which will probably take about a week of full-time, dirty work) and ~$10k (if I just pay someone to do it all). I'll likely end up hiring someone to dig the trench needed in the front yard and in the crawlspace but do the rest myself.
There are some things wrong, just to list a few:
- Stick+drywall building have terrible sound isolation, that drives people away from more efficient high density housing options, everybody wants a fully detached house so the air between the houses may help isolate you from the neighbor's noises. - Stick+drywall needs more diligent maintenance (a simple leak may destroy a house), so again it drives people towards fully detached houses, otherwise your neighbor's bad maintenance may cause troubles for you.
Good walls make good neighbors. I'm convinced that big part of the American aversion to urban living comes from their use of sticks+drywall.
I agree with you that stick built is not desirable for multifamily housing or any housing that shared walls with other families.
I disagree that people dislike shared and more dense housing because of their conceptions about what what noise insulation could be. Shared maintenance would be more of a concern, but shared and dense housing has a ton of other drawbacks (on an individual family level), even though the society wide level benefits are positive.
Who would not want space to park their individual cars and store their skis and beach gear and have a backyard to throw parties in? Not to mention the use of zoning only for detached single family housing on larger plots of land to be able to keep out people who cannot afford as much from the local schools. But that is a separate conversation.
Have you ever lived in apartments? Because It's the reason I bought a house instead of a condo or townhouse. Not everybody has families, in fact single person households are on the rise in the US and this style of living would be ideal for them.
However, I feel like the cost for building concrete shared housing unit must be high enough such that the people willing to pay that much for shared housing units would rather just pay a little more and buy a detached stick house.
But it's not accounted for when building at all. It feels like this thing that gets hand waived away at every step of the process. It's personally why I feel like that style of living is off the table for me.
… and their fires. I don't want my property burned because Aunt Sally went to sleep with a lit cigarette hanging out of her mouth.
I would also argue that old houses are not built better. The materials that you consider "better" where cheaper back when it was built. So it's not like someone back then sat around and said, like some people like to imagine, "I could use cheaper material but I like to do things right. Let's spend twice as much as we need to and future generations will thank us."
Old houses have problems as people have pointed out. Have you seen the windows on a 100 year old house, the insulation, the wiring, plumbing. I think there's also a lot of survivorship bias. You know what kind of house makes it 100 years? One that had a certain construction. What happened to all the crappy houses? They were razed or they fell apart. I also see people looking at what was a mansion, probably owned by some turn of the century robber Barron, and is now just some quirky fixer upper and saying, "They just don't build them like they used to" but that would be like moving into Jeff Bezos's mansion in 100 years and saying, "wow they just don't build them like they used it". They never built them like that. You're just looking at what's left or was worth saving.
this is critical to keep in mind every time somebody is wanking about how old things are better.
you only see the old things that happened to make it. the cast iron pan that happened not to have any voids near the surface, the cheap wooden furniture that happened not to have any sapwood in the pieces used for it. or whatever.
But the underlying fact remains that the structure and infrastructure (electrical, plumbing, gas, air ventilation) of a 2021 house are likely going to be much better than those of a home from a previous era.
In most of these places with insane house price to income ratio, it’s the land, not building costs that contribute most of the price.
But my 1920s house – built very sturdily – scored a 19.5 ACH50 when we moved in, and after a not-insignificant amount of weekend work is now at a 10.33, well off from modern code even in lax areas.
Secondly, exposed masonry does often warrant being air sealed:
https://www.greenbuildingadvisor.com/article/insulating-old-...
https://www.jlconline.com/how-to/insulation/air-sealing-a-br...
Newer homes in the US often have a hole in the basement explicitly to make them not airtight. This is presumably to avoid CO2 buildup.
Below about 3.0ACH50, you generally explore active ventilation, which is why 3ACH50 is code, since it doesn't require that extra machinery.
I like how you say this like it's undoubtedly a good thing.
In Japan, old houses are rightfully considered depreciated as things like "severe regulations" and "low energy consumption" change over time as technology improves. Having a house built in the 1700s sure isn't going to be easy to solarize or insulate. So paying for 300+ years of that upfront seems pretty dumb.
In Austria, are there severe regulations on the safety of building and energy consumption of cars? I take it that it's very common to see 60, 70, 80 year old cars on the road there and they're not just disposable cardboard quality things, right?
Even newer buildings in Japan are made in cardboard, with no/little isolation, and everything is made to be destroyed 30 years down the road anyway. Disposable houses/apartments that cost an arm and a leg anyway.
> Having a house built in the 1700s sure isn't going to be easy to solarize or insulate.
You have no idea what you are talking about. In Europe, stuff built in the 1700s and still standing today were built with thick walls and will last several other centuries without any issue, and have excellent isolation (sound and heat).
And if you are confident that the house will still stand in 60 years, then an investment in solar+insulation that takes 20 years to pay for itself is quite attractive (and something your local bank will probably give you a loan for).
- At a rough estimate such a building costs 600.000 € - 1.000.000 € nowadays.
- Costs for insulating the exterior walls, the roof and ground floor against the basement is approx. 30.000 - 60.000 €.
- New, insulated windows: approx. 10.000 – 30.000 €.
You'pre good then on energy saving.
And yes, they usually just put plates of foam on the outside. Somehow the mold issue appears to be solved by now as a house-painter told me recently.
I'm not persuaded that the issue of mold simply disappeared. It might be the type of foam they use nowadays, or the way they insulate the houses. For example, I've seen houses insulated from the front and not from the back. At first, I thought it was a cost cutting measure, i.e. "look good, be cheap," but it's actually so common that I don't think that's the answer.
Molds can become toxic in extreme cases, and once they appear, it's amazingly difficult to get rid of them. It's possible that in a town that's highly historic, there are companies that specialize in insulating historical buildings (though I assumed that the vast majority of historical buildings in Germany was destroyed during the wars).
As a side note, I'm not saying it cannot be done. My point was that it was far from "slap some foam around the house". I'd love my building to be insulated.
Not only does this mean that it's more likely overall for a house to simply fall down, it means that the codes attempting to make that less likely are still evolving, as we improve both our understanding of what works well and our building methods and materials.
Attempting to generalize the situation in Japan to the rest of the world is therefore going to be somewhat unhelpful.
As for cars, they are also not particularly comparable, for similar reasons: we've been building houses for literally thousands of years, and while we certainly have more options than we used to, some of which are unquestionably improvements on the old, the fundamentals of what it takes to build a sturdy, safe house haven't changed much. Meanwhile, it's only been just over 100 years since the car was invented, they're much more fundamentally a piece of technology than a house is, and we're currently in a period of rapid improvement in various kinds of safety technologies within them. Again, attempting to compare is unhelpful.
[1] https://www.scmp.com/magazines/style/news-trends/article/309... [2] https://money.cnn.com/magazines/fortune/fortune_archive/1990...
Not having to deal with earthquakes helps keeping buildings up for longer.
> Having a house built in the 1700s sure isn't going to be easy to solarize or insulate.
In terms of environmental impact, there is a compromise somewhere between using houses for 3 centuries and a decade. Rebuilding all the time is worse than the gains from better insulation and higher environmental standards. It is more expensive as well.
> So paying for 300+ years of that upfront seems pretty dumb.
It’s a good thing we don’t do that, then. Nobody in Europe expect a newly-built house to last for 300 years. However, plenty of them are more than 100 years old and perfectly fine. You can improve insulation both on the inside and the outside of the building, double or triple glazing and some rock wool under the roof go a long way.
> In Austria, are there severe regulations on the safety of building and energy consumption of cars?
Yes, there are.
> I take it that it's very common to see 60, 70, 80 year old cars on the road there and they're not just disposable cardboard quality things, right?
No, 60 years old cars are not common, and for several reasons: there were fewer of them initially, because they were more expensive; cars decay faster than houses due to things like accidents and corrosion; cars get more expensive to insure with time and older cars need more fuel, which makes them less economical to run. Again, there is a sweet spot somewhere between 3 and 30 years.
Not sure whether you are deliberately exaggerating, but you don’t really make any good point. They did not say that we should keep using the same things for millennia, just that re-using to some extent is better than re-building.
The minimum code built house will not get you that, but it is easily achievable with stick built.
Concrete and steel are still superior of course, and I opt for those in commercial construction. But I have never seen a need for concrete and/or steel in suburban home construction just for noise.
Otherwise you'd be telling me that if I suddenly put a concrete wall between us I should hear you better, not worse, right? /s
What if I put 2 sheets of dry wall with an air core in between us? Are you telling me that would give better sound transmission than a solid concrete wall?
And that the original posters tale of "superior sound insulation" in a house with concrete walls is likely due to factors other than the concrete walls?
That's why I think that this is just an excuse for a low quality, cheap work.
In central Europe, usually the center is made out of concrete and then bricks on the outside.
Lumber is easy to produce, easy to transport, easy to form into structures, has excellent tensile strength and flexibility. It is an ideal construction material. There is a reason even the wealthiest in North America still live in stick frame buildings.
My house is over 90 years old and has had two remodels, with a third being done now. It will easily last 100 more barring some disaster.
Cheaper does not always mean better. I’d be fascinated to see what your house does in an 8.0 earthquake, but for your sake not while you’re inside of it.
I would also prefer a house of sticks than no house ;)
For earthquakes, "sticks" and steel are the most durable materials so Americans build with them.
The UK perspective on old vs. new: newer houses tend to be tiny and feel less comfy even if built to stricter standards. Old houses come with more problems. In Edinburgh "New" Town (late 1700s), it's common to see cabling being run up the outside for things like broadband, because the building is of stone and there's no other sensible way to do it. Retrofitting all the old housing stock is going to be difficult-to-impossible.
Don't forget planning regulations. Gutting a building and effectively building a new one inside incurs far less paperwork (and possible objections!) than demolishing it and building a new one. The UK loves declaring anything and everything to be historic.
I am sure there are parts of the Midwest that work the same way, but that's by and large not how the majority of the US works. Your heritage is refreshingly irrelevant, and therefore you can move freely from one place to another. Most people realize that big cities offer better career opportunities, and also that big cities suck for retirement. So you essentially see the following migration pattern:
1. [some place where you were born]
2. [your college town]
3. [career-related move to a bigger city]
(this part can repeat itself many times)
4. [retirement somewhere warm and/or affordable]
So if you're going to move somewhere in the range of 5+ times, why would you invest in a multi-generational home?
Finally, as an aside, interesting to note the correlation between the geographic and economic mobility: the American Dream may or may not be alive anymore, but I've seen so many kids from my college come from nothing and make a fortune (and shockingly, kids from good families end up as failures, mostly due to some sort of conflict with their family). I think the society in the US has accepted that there's a lot of uncertainty when it comes to predicting a kid's future.
That stuff simply doesn't happen in Austria on that scale - if you're poor, you'll stay poor, and vice versa. So a good family name leads to a good standing in the society, and the loop repeats itself (this is where your residence can also serve as a signal for your wealth to reinforce that loop). Why risk leaving all that and moving to a new city where you'd be starting from scratch?
That being said, what's important about a house is the foundation and the roof. The foundation of mine is as good as any in Europe. The roof, well, asphalt shingles on top of 5/8" plywood on top of roof trusses. Ho hum. But such a roof and attic can be properly maintained, which means keeping it vented even when there are 3 feet of snow on the roof - the modern pagoda style vents go a long way to solving that problem - to avoid ice dam issues, and of course replacing the shingles every 20-30 years.
It is possible to get European style masonry roofs here. Perhaps such a roof over a properly insulated and vented (i.e. cold!) attic would work here. I see them here and there but don't know anyone personally who has one.
I have encountered the occasional North American house owned by traditional Europeans. And they looked just as nice and impeccably maintained as any in Europe. And while maintained this well, will last for centuries. Unmaintained, they certainly deteriorate more quickly.
Moving up a step is American style 2"x4" framed houses. These are typically built on a concrete foundation, but the structure is formed by inexpensive lumber. This system was designed to go up fast and cheaply, substituting more cheap lumber rather than any sophisticated carpentry [$]. This cheapness offers a home to more people, at the expense of craftsmanship and (probably) longevity. The cheap construction allows people to build enormous homes if they have the means, displaying wealth through sheer size rather than higher quality construction (the resulting homes are mockingly called a "McMansion", a joke pointing out that a big McDonalds hamburger is still... McDonalds quality. A blog making fun of these McMansions can be found here: https://mcmansionhell.com/
However, if you don't want a cheaply constructed home, you don't have to have one! You can find a builder that will build a home to your specifications. This will of course be more expensive, as you aren't tying into the continent sized supply chain for the cheaper construction, but if you prefer quality work, you can certainly make that tradeoff.[-]
In any event, it is usually the land under the home that truly appreciates, not the structure itself. This dynamic broadens the wealth divide between mobile home owners and owners of the second and third type of house. Mobile homes are often placed in "trailer parks", where the owner of the home rents a space to park their trailer, meaning they don't participate in any land value appreciation (and in fact will see their rent go up if the land appreciates).
Still, the focus on cost, and the several levels of price-point allow more people to be housed. The fundamental question is "is it better for a person to have a low quality house, or no house at all?" It seems that Austria has chosen the second, while the US chooses the first.
[&] When I loaded this page searching Montana (a remote, low population, low income state), I see some listings between $20-30 thousand USD. This is incredibly inexpensive, and affordable by basically anyone with a job in the US. https://www.zillow.com/mt/mobile/?searchQueryState=%7B%22pag...
[$] Notice all the focus on cost and speed on this technical manual for the system https://www.civilengineeringx.com/bdac/Stud-Wall-Constructio...
[-] This reference specifies a ~$300,000 USD cost for a timber framed house, quite a bit more than the mobile home variety!
My house was built in 1916 and will easily last another 100+ years. Almost all the houses in my neighborhood were built around the same time and are still standing in good condition. Yes it's a wood house and yes wood houses can last a long time.
I thought we all had it really bad. Apparently not.
It's also a simple measure of income to property price, and not indicative of how long it takes to be pay off a mortgage.
[1]: https://www.lincolninst.edu/sites/default/files/pubfiles/sun... see page 11
If the majority of population lives in rural areas, the prices of big cities have a major impact on the average, skewing it.
But actually people living in the big cities can afford housing more than a person with "rural area" salary can afford the average price, even though they are most likely able to afford the much lower prices in their area.
To match the growth expansion of prices? Absolutely not.
An apartment not even within main cities or rather 2nd or 3rd tier cities will still cost 300-500k USD, is made of questionable design and safety, isn't much more than a concrete box, and you don't even full own the land but rent it from the builders who actually purchased the right from the CCP for 70 years.
Two seconds on Zillow you can see tons of properties for $300k that are neither 250sf or plastered with bullet holes.
One of many examples:
https://www.zillow.com/homedetails/205-E-63rd-St-APT-10H-New...
What you've said is true, but that doesn't mean the problem in big Chinese city is anywhere easier - the housing price is beyond afforable even for the affluent salaries. In my experience, large cities in China are more like Hong Kong where people have to work over 50 years to afford a house rather than 27 years.
I live in Beijing, and the rent I pay is around $1100 per month, but the valuation of the house is conveniently around $1.1m - it's 1k months or 83 years. As a senior software engineer, I earn a pretty decent income but it would still cost me to work several decades to buy that.
As another example for your reference, a colleague of mine - he saved money for quite some years by renting basement and spend nothing other than necessities, bought an 60m² old khrushchyovka (that old poor commie block the western world always laughing at) for around $1m. His story is very typical in China: even though he is that hardworking, he didn't afford it on it's own, but also plus his wife and 4 of their in-laws (it's so common that in China we call it "drain 6 pockets").
Ghana prices are completely bonkers. You have to work 100+ years to own property. Despite a expected life span of ~62 years and a population density somewhere in the middle grounds.
Something went utterly wrong I'd say.
It seems to assume everyone is married, for one. Can someone tell me why such a trivially-calculated and easily-cooked example is useful here? Is there a source for their numbers?
Also, why are they saying “disposable income” when what they mean is _all their income_?
From their info page:
“Note that there is no standard formula to calculate property price indices. Our formulas differs from Case-Shiller Index, UK Housing Price Index, etc.
Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Our formula assumes and uses:
- net disposable family income, as defined as 1.5 * the average net salary (50% is assumed percentage of women in the workforce) - median apartment size is 90 square meters price per square meter (the formula uses) is the average price of square meter in the city center and outside of the city center
...”
There is no equity market (that you can trust), bonds pay nothing so property is what you invest in (or you just sit on cash that is rapidly losing value during to inflation). Ownership is recognized even by corrupt bureaucrats and courts. Ownership papers are next to sacred documents. And no property tax so zero holding costs. The perfect investment.
No legally defined ownership? No problem! The developer is working on it. They just need $30,000 USD down to secure a plot. Ownership papers will follow.
So you pile your savings into real estate. You dump every single dollar you have into speculative real estate developments.. A single family home 10 km from a major city costs more than it does in California (~$1.5M USD) and local median wages are 1/10th that of the US. You can visit developments that are nothing more than 100 homes that are concrete shells with rusting window frames. Maybe 1% occupied.
But don’t get me wrong, some developments fill up super quick. But some just die.
Want to rent a place? Fuck you. Owners aren’t banking on rent, so pay them $3k per month. It’s all about appreciation. They would be happy to leave it empty. Less hassle that way.
Seems like a recipe for a major housing crash.
The pattern is that an investor (Chinese) starts a project, gets a bunch of people to buy into it, a shell of a building is created and then all the work stops and is left for dead. Usually stops because someone in the chain of command didn't get enough coffee money.
Nha Trang and Da Nang are popular beach areas and rife with these sorts of things, but you also see it all up and down the coast as well as in the big cities.
Da Lat has been completely ruined over the last few years. People post before/after pictures and whole valleys that were filled with trees or farmland are now replaced with houses. It is a short enough drive from Saigon that it makes for a great weekend escape. Except there is really only one mountain road into the place...
But why would houses appreciate if lots of them stay empty?
They aren't buying these for the rental income. They are buying it because they hope the next person is going to want to pay even more for it.
You can't by a tear down in Toronto, Vancouver, Montreal, etc for under a million. Houses rise in value at a rate of about $$1500-2000 a week (for years) while wages have been stagnant for decades. You could have bought a house for 450k-500k in 2005 and sold today for 2 million. I've seen condos that were 175k in 2006 sell for 850k today. You can't even buy a shack out side the city for less than 500k and most are going for over a million or two.
Average price of a house in Toronto will be over 4-5 million in the next decade while the average wage will still be 45-65k.
https://www.realtor.ca/real-estate/23885137/80-49e-avenue-mo...
Anyway, give it another year or two, it will get there.
Granted, the extenstion is pretty much targeted at Desktop and it really only works in Firefox without a nag screen, but yeah, its whatr I was on my own rig and I can't remember the last paywall I came across.
I think the mortgage squeeze in china is far worse than the pandemic and they have done a good job of masking it. We will know in few months or years when the shock waves ripples thru here.
Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.
China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]:
> Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers.
> Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time.
So this is a much different reaction than the US government who protected the investors and banks.
[0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7...
[1]: archive.is link of [0] https://archive.ph/GKWmv
It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
Absent intervention, the consequences of 2008 would have been Great Depression 2. With intervention, we get to deal with a different set of problems (most of which could to be fair about it, be resolved by clamping down on tax avoidance in the financial sector.)
What systemic collapse ?
When a tree is rotten to its core, you need to either let it collapse on it own, or if it risks damaging other things when crashing, you cut it down.
One thing you do not do is prop it up and pretend that all is well.
Caterpillar, which has nothing to do with the housing market had no market for its commercial paper which financed day to day operations.
I agree 100% that the banks and housing industry should have been allowed to collapse but it had gone so far beyond that there was no choice but to bail out banks or suffer from decade long depression like the 1930’s.
... at the lowball prices they felt entitled to. Did they try offering bonds with real interest rates, say 7-10% ? I'm reminded of this recent narrative about the so-called "labor shortage".
Millions of people were buying houses by lying on their mortgage applications about their incomes and assets, getting interest-only mortgages they could barely pay, and hoping to sell the house for a profit before their fraud was discovered.
When the market moved against the fraudsters and they got caught with houses they couldn't pay for that were worth less than they owed, which is why they started defaulting on their payments. The victims weren't the people who quit paying their fraudulent mortgages, the victims were the people who were deceived into loaning them money.
At least with a central approach, regulators could come in and monitor. There wouldn’t really be a way for regulators to check home prices / the free market at such a massive scale.
To pretend that people committing fraud lost out "through no fault of their own" makes no sense, it's entirely their own fault. Legitimate buyers wouldn't be impacted- if a person buys a house to live in it, and pays for instance $3,000 per month, then the market price after purchase doesn't matter. They still live in their house and they still pay $3,000 per month.
Maybe you weren't around at that time, but there were a dozen different wildly popular TV shows about people flipping houses, people were buying houses with zero down payments, buying houses they couldn't afford because "real estate always goes up" and advice to "buy now and refinance in 6 months when the price has gone up" and all sorts of other greedy, speculative behavior. Houses in 2007 were the cryptocoins of the day, but with massive leverage by lying on mortgage applications.
Nope, nobody along the chain had any responsibility for enforcing any kind of professional standards. I mean, it's not like we have systems in place to check things like "lying".
The initial fraud happened at the level of people lying on mortgage applications.
I'm not suggesting there weren't all sorts of failures of regulators and credit rating agencies, nor that many of the financial institutions involved in trading these assets weren't complicit in perpetuating the fraud. I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do. I'm not trying to let anyone else off the hook for their roles in the systemic problem.
Ok, and bailing out the financial institutions and traders that perpetuated that fraud "isn't a good thing" either, AND you said that what the home buyers did was "worse" for "reasons".
Except all of the reasons you listed are exactly what those traders and financial institutions also did, and arguably they have professional duties not to do those things and to in fact report them. You're also neglecting that home buyers aren't professionals in this, they're supposed to be guided by the professionals, but the mortgage lenders were encouraging people to inflate their assets as standard practice.
Where you lay the most of the blame on this issue honestly blows my mind.
Not sure what side effects this could cause but it seems possible in principle.
Alternatively, you could just give all homeowners a loan instead - but this doesn't change the fundamental issue of subprime mortgages, so it would really just be pumping up the bubble further.
Yeah, I guess there's definitely a ton of side effects depending on which way you go.
However, the optics of giving banks more "free" money at the expense of "the people" is not good regardless. I wonder what would happen if the government extends almost-free loans to whoever has a mortgage.
I imagine a lot of people would use it to pay it, but probably a ton more would just use it to get a bigger TV, a car or something similar.
No way to win either way it seems.
Simple three step process:
- Be the leader of the CCP
- Declare that the homeowners will be bailed out
- Sit back and watch while your entire society restructures itself to bail out homeowners
I'm only half-kidding; this kind of stuff has been done time and time again, side effects be damned.
The first is that the us mortgage market is 10Tn. So it would have been required a 10x bigger bailout to do it directly.
The second is that someone has to decide who get a mortgage and one what property and at what rate etc. The government would need to do that too. And it seems cheaper and easier to use the existing companies that get the fed (?) To hire 1m real estate people and managers etc.
Reason 3 is that that would have been fine for mortgage holders. But what about everyone else who used those banks? Commercial loans, bon mortgage debt, insurance services, a whole bunch of very important economic processes would have suddenly ground to a halt. Mortgage holders were the main thing bailee out. But not the only thing.
But then house prices will fall, the economy will falter and interest rates on loans will go up.
And when that happens people who were previously fine will suddenly start defaulting too.
This is the problem with contagiousness, moral risk etc. If you don't bail out the first (worst) group to default, you rapidly find that people who were fine before are now no longer creditworthy.
To be clear, I'm not arguing this is fair or right or "should" be. I'm just explaining the decision that a theoretical politician would face.
Does not follow. Whether house prices fall and/or the economy falters is not out of your control, nor are they certain. It depends entirely on the choices made in the size of payout, the payout schedule, and enumerable other factors that can be managed to some extent.
Home buyers weren't innocent in all of this, but the worst predators were the ones that were bailed out, so the moral risk argument doesn't justify the choices made IMO.
So then what?
You either bail out so many people that fewer than 1% of people default. That's basically a 100% bailout right?
Or you don't and then prices fall.
And as soon as prices fall, suddenly construction stops and more people lose their jobs and people are underwater and consider defaulting strategically even if they don't "have" to.
I really agree about buyers not being innocent. I really do. It's by far the least reformed group in the 2008 shit show of fraud.
But this isn't a moral position. It's a practical one. And you can't punish those people or they'll take their neighbours (and elected officials) down with them...
Falling prices are fine because homes were overvalued virtually by definition of the circumstances at the time. Your argument assumes this would lead to a run away effect rather than it all reaching a fixed point, but this claim isn't justified.
My position isn't that home owners were the worst actors here, but that the bailout should have gone to home owners rather than the banks; the moral hazard argument applies to both, but at least in one arguably most people get to keep their homes and you're not rewarding the people whose professional responsibilities were to assess risk and properly manage financial instruments.
I'm just claiming that this wouldn't have required a full/100% bailout, just like we didn't fully bail out the banks and let some fail.
If you take the same amount of money and just give it to the banks and they foreclose on the homeowners the banks are also OK. But the homeowners are fucked.
Guess which of those two options we chose following the 2008 financial crisis.
Just paying off loans for homeowners with bad mortgages would also have been horrible - you're essentially rewarding bad quality loans. And how else would you bailout homeowners?
And also it’s telling that you don’t even consider the idea that the homeowners could have gotten similar treatment, ie a favorable loan that enabled them to eventually pay the principal back.
Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.
>Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.
It is, to an extent, but a loan is much less of a reward than someone paying off your debt. That's also why new regulations were introduced so that future behavior likes this from banks wasn't incentivized.
The people defaulting on their mortgages were people who had committed fraud by lying about their incomes and assets in order to take out massive loans they could never repay, because they thought they could flip the house for a profit before paying any principal. Foreclosing on those people is the good and right thing to do, they were criminal fraudsters not victims.
Of course, the ripple effect when half the market turns out to be fraudulent is that prices go down when the bubble bursts which also hurts legitimate buyers who bought at inflated prices, but that's secondary to what caused the wave of defaults.
Yeah no. Pretty sure that there were a few things happening inside the banks that helped create the problem.
I choose to assign blame to the parties with the most power and knowledge to have prevented the disaster.
No, why would they do that? They're saying that they'll pump money into the economy to prevent a price slump from causing other defaults, there's no expectation whatsoever that there will be any compensation to bondholders; losing money if the company defaults is part of the bond investment business. China might offer some assistance (e.g. subsidized loans) to some affected local companies for domestic policy reasons, but they're very unlikely to gift money to foreign investors in this case.
In other words, there's probably far less spillover into the rest of the world because the rest of the world simply couldn't lend evergrande that much money in the first place.
This results in private pensions funds being devalued, meaning alot of "early out" pensioners might return to working, if the investment collapse spreads. It will also continue to drive the market value of flats in western cities even more upwards, as they become a AAA-haven for china fleeing capital.
Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out.
Now that too big to fail is dead in China, expect more failures, basically.
Of course one can create two companies, make the first borrow from the second, make the second hide the money and default, get the first bailed out and pocket the hidden stash.
But they'll be easier to go after.
Iif you think of companies as “agents”. But they are not, the agent causing the default is the human in charge. And those aren't often suffering a lot from their mistakes…
edit: apparently littlestymaar and I are operating on the same wavelength this morning.
Sometimes that’s what you want to do and you trigger a lehman.
No one really knows where the trigger line for systemic with these things is. Hence the weird financial regulations like Dodd-frank in US, MiFID in EU etc
I wouldn't be surprised if this would only cover domestic bond owners.
Beijing controls its banks. If it tells them to lend, they will lend, something the U.S. doesn’t have the power to do. There is zero risk of contagion within China’s borders because that is not a failure mode in a monolithic banking system.
To the degree contagion exists, it is at the sovereign level, in foreign investors decamping from China wholesale. China is less reliant on those than before. And there is no sign of that happening.
About 20%-30% of the sector is now pricing in default.
Yes the local banks matter, but as we just saw, international dollar bonds can and will default these cos
This is tame compared to contagion in market economies. It’s limited to a sector, and it’s limited to their dollar bonds. The banks are unscathed. There is no systemic credit crunch, nor any signs such a thing is imminent.
So if those bonds fails, they won't pull down other sectors or cause cross-party defaults - at least not directly. The potential for a recession in china causing recession elsewhere is non-zero though.
Other than that, yes the pain can in principle be contained to the dollar bond market, but even that price signal is now enough to let people start doing the (pretty ugly) math on if we're talking $100bn or $10tr of losses.
If anyone sees estimates, would love to take a look!
A nation that overproduces manufactured goods but has to import food from foreign nations to feed it's own people and braces with power cuts even it's most industrial areas is in trouble. Put in a toxic debt scenario, reliance on foreign states for energy, worsening foreign relations and a pandemic and you have a recipe for cascading effects. This is the same path that the Soviet Union took and at one time they had taken lead in many areas such as space exploration. The Soviets also had the advantages of energy independence and plentiful natural resources. China has no such advantages and doesn't nearly have the overwhelming global power that the Soviet's did at their height. The Soviet Union could have been described as a global empire something that China hasn't yet achieved.
What makes the impending China collapse worse is the magnitude of debt levels and the impact on the global economy due to China's deep integration with it. They won't just go down but will take all other industrialized nations with them.
There's no government functions in China that have any ability for transparency, accountability or self-criticism. China's current militant "wolf-warrior" stance in world affairs telegraphs it's own insecurity. They internally know they're failing and the risk is increasing but can never admit it or take corrective actions because that would mean admitting their top leadership have made mistakes.
Or alternately, order strategic companies to not fail and in fact be successful.
I'm not saying that's necessarily the best option but with that fine grained control over their economy, plus statistically some of the smartest humans who ever lived on the planet playing on their team, I'd be surprised if China's current power structure doesn't ride this out.
that's a bailout, and that is what the CCP wants to avoid being seen as doing.
I could imagine that Evergrande bonds become worthless so that many investors will realize losses. But surely no one, or very few, will have invested mostly into Evergrande bonds, right? So presumably, everyone will realize a relatively small loss, no?
Who's next? Get out of that as fast as possible
Enough people think like that, hey presto
A firm in the real estate business defaults. That makes people think other firms in that business will also default. So then all real estate businesses find it a a bit harder to borrow.
Add leverage. I buy a loan from a number RE businesses, but I don't just use the money in my pocket. I borrow it from the bank at a lower rate than what I receive from Evergrande. They go bust, bank asks me for money, I need to sell my other loans in the RE firms. Those loans will go down in value, reflecting higher rates and making it harder for the firms. This credit cycle is described by Soros in his books. Works both ways actually, when things are good it's the reverse.
There's a lot more to it than that. You have to take into account 1) We have a fractional reserve banking system. When banks start individually calling in loans, there isn't enough "money" in the system for everyone to repay them. 2) Asset market prices (e.g., equities) reflect the present discounted values of expected future earnings. When everyone suddenly expects those future earnings to be less, the prices of those assets fall precipitously. That's not an issue in and of itself, except that those assets may have been purchased on margin (a loan) which depends on the value of those assets and may suddenly be called in for payment, forcing a liquidation of the underlying assets and further price falls. 3) As businesses scramble to pay loans that have been called and to adjust to a market where credit is difficult to come by (and businesses run on credit not cash) they reduce costs and often do so by laying off workers. This causes a reduction in aggregate demand (worker income) across the economy which further exacerbates the problem.
There is inherent instability in the system and all sorts of positive feedback loops that can amplify an initial shock. Suggest reading Irving Fisher and Hyman Minsky to understand more.
And when banks are illiquid like they were in 2008, the central bank creates liquidity through QE which isn't a bad thing unless you are questioning these banks' ability to repay the money they "borrowed" from the central bank.
The RE companies that have good balance sheets will have great opportunities in the coming years.
[0] Evergrande is the largest real estate developer and largest user of this type of financing in China, and is reasonably mid tens of percent or higher of some wealth management portfolios.
[1] These are investment products which aren't generally sold as such; they're effectively shadow banking. Most users do not understand that they actually are running material capital risk in return for their e.g. 8% annually.
There are first-party WMPs and non-first-party WMPs which bundle and resell either bonds or first-party WMPs, etc etc. For more generally, see https://www.reuters.com/world/china/what-are-chinas-wealth-m...
I'm not a financial advisor, I can't detail with any educated accuracy what specifically has transpired, but generally, the CCP has changed it's position and policies on lending to real estate companies and speculation in the real estate market. This is a policy shift in response to negative patterns in the market, namely but not limited to: supposedly large chunks of the real estate properties in china are sitting empty as people are buying them as part of their investment portfolios, artificially inflating pricing and perpetuating development far beyond practical demand, leading to a potential speculative bubble. As a result real estate developers were taking on debt to build new projects to expand their portfolios of real estate that were largely sitting empty and being used to borrow against to build more projects, artificially inflating price in response to their own demand to borrow against it... You can see how that can become an issue when the entire industry starts perpetuating that trend. It's an issue not isolated to Evergrande, they're just the biggest, and thus highest profile.
As a result, the "contagion" depends how bad things get with Evergrande, because they're not the only one in this difficult position. The issue is more-or-less systemic, and Evergrande is just the bellweather of sorts by virtue of them being the biggest. Of course there's lots of nuance here, as each individual corporations exact situation differs from each other, as does how the party might choose to deal with them, a number of other factors in play as well. But this should give a glimpse into why this isn't just Evergrande sinking or swimming.
Or more accurately, what the rest of the market believes to be true about these companies.
or fears is true because they don't have enough evidence to believe, and their prior beliefs just unravelled.
I'm not terribly familiar with US oversight into structured finance, but I'm all ears.
I saw this play out at several businesses at the start of the COVID-19 pandemic, until their business was deemed essential and they (along with their customers) were allowed to resume operations
The subprime crisis got triggered, by one-to-many defaults, which triggered a downgrade in the rating of the securities that the single loans were packaged into, which _forced_ institutional investors (think pension funds) to sell those, which depressed prices, which made the securities even more risky, which let to further downgrades and so on.
But there is also the point that the investors of Evergrande may have planned these payments for their obligations. Which, depending on their current stability, may make them unable to honour their obligations, which makes them go into default. Which can then trigger a downgrade of their rating and we are back to the setting above.
Unless you know about the exact structure and timing of all payments of all investors and how they cover their payments. There is really no way to be sure that it doesn't lead to a cascade. There is also no reason that it _has_ to lead to a cascade of course.
(1) The rating downgrade that Fitch gave Evergrande to the default on one series of bonds may trigger accelerated repayment covenants in other bonds (source: https://www.aljazeera.com/amp/economy/2021/12/9/bb-chinas-ev...)
(2) The default is reflective of the concern that Evergrande has no money, and although they've been able to stave off defaulting on other series of bonds so far, holders of all series of bonds should expect more defaults later unless Evergrande's debt is restructured. (source: https://www.nytimes.com/2021/12/09/business/china-evergrande...)
The 2010 movie "Inside Job"[1] about financial crisis in US presents real-life examples, starting with the Icelandic financial crisis.
There is also this Warren Buffet interview[2] which presents his unique viewpoint on what happened in the US around the time Lehman Brothers defaulted in 2008. You probably won't gain any knowledge from it other(edit) than how the financial sector assigns blame.
edit: word "other" added in previous paragraph
[1] https://www.youtube.com/watch?v=T2IaJwkqgPk "Inside Job (2010 Full Documentary Movie)"
[2] https://www.youtube.com/watch?v=k2VSSNECLTQ "Warren Buffett Explains the 2008 Financial Crisis"
1 persons income is another person's spending. Why would evergrande default anyway? Did they over lever? Definitely, but also their underlying revenues dried up. The war with china is feeling it's effects now.
Now that evergrande has defaulted, it means others who needed their money to pay their debts also can't. Afterall, many of them also will be feeling the pain that evergrande is feeling. The war with china didn't target evergrande, they are just the most levered and large enough to realize the pain.
The irony of it all, this is capitalist china that's hurting, but China needs capitalist china. If you excluded taiwan, HK, and the other capitalist china zones, china is far worse than greece. They'd have to cut so much that the peasants suddenly are living much worse. Peasant revolt incoming.
Cash is cash and when they don’t get paid their Evergrande bond repayment they can’t repay their debt obligations.
1) For Evergrande itself, if it defaults on foreign debts, domestic lenders (banks, funds, individual investors) see this as a big crack on its promise to return investment. This might push them to ask for early repayment of previous loans, which only gets things worse for Evergrande.
2) Since Evergrande is one of the biggest realtors, investors naturally will reassess the risk factors for the whole industry. This will probably stop some funding from flowing into it plus higher interest rate. Again, this is bad for all players in the industry.
3) Realtors tend to delay payments to suppliers to enjoy some sort of "free loan". When things go bad, those payments are not going to be the first to be paid, if paid at all. Now the contagion moves to other industries and 1) and 2) are repeated there.
4) Now consider the banks/insurance companies/funds. People invest their money in these financial companies because they believe they can make money. Now that they actually lose money, investors are going to sell shares or/and withdraw money. This is actually the most vicious part of the cycle because financial corporations will have no choice but to fire sale some of their most precious/liquid assets (think US Treasury Bonds, stocks of favored companies such as AAPL/MSFT/GOOG, etc.) to cover the money withdrawn.
At step 4, if government doesn't step in, this will quickly (in maybe a few days) turn into a global financial crisis.
Even towards the end the CEO was taking out personal loans secured on his Enron shares... in order to buy more Enron shares. This was a big contributor to the snowball effect when the share price started falling. I think the top people at Enron honestly believed in the stock and were probably mostly pushing it for employees on this basis. That was pure hubris, thinking they were smarter than everyone else. They should have known better and some were rightfully prosecuted for their part, but it's a bit more complicated than saying the employees were "tricked".
Of course, there was a corporate pension as well that failed and was was also largely in Enron stock. So now those liabilities are owned by the PBGC.
OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.
Edit: I don't know why am I being downvoted. The Chinese real estate bubble has been rather well-documented, see e.g. this YouTube video: https://youtu.be/EgVXRtq5EIg
Unless it were made clear that only foreign creditors are going to get screwed, they will all call.
If the local courts do blatantly refuse enforcing proper process of insolvency and fair distributing of assets to debtors, two ways of possible (not necessarily certain) recourse come to mind.
One is using non-Chinese courts for claims directly against other bondholders - if Evergrande pays everything to bondholder A and nothing to bondholder B, then B may have a claim on part of the money unfairly paid to A, and they may try to get their assets abroad (if any - A might have only Chinese operations) as compensation.
The other is applying various international treaties on protection of investors (it has been relevant in some earlier cases, but I have no idea on the specific treaty status with respect to China). That's highly political (but anything of this size is inherently political), but a hypothetical option would be to get a judgement that Chinese government is liable for part of the damages (not the whole defaulted part - that risk is on investors - but the post-default payments to some bondholders instead of others) and e.g. apply tariffs to Chinese exports to seize compensation for that. But the practical results of such an escalation IMHO depend more on political factors than legal aspects.
Most bond agreements have thought of that: nobody wants to be the one creditor defaulted on. So there's an agreement that any default is treated as a default on all.
(see also the long running Argentina "pari passu" fiasco: https://www.creditslips.org/creditslips/2020/01/a-cautionary... )
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Some good explanatory threads I saved when the Evergrande news first broke a couple of months ago:
https://twitter.com/SahilBloom/status/1439920043404546050
https://twitter.com/FabiusMercurius/status/14392189567791513...
https://twitter.com/INArteCarloDoss/status/14389444317349191...
It's not that true for Western countries after the 2008 financial crisis? It seems to not have stopped housing bubbles.
The Chinese. Real estate is really the only investment open to the middle class. Property owners have on average nearly three properties, something stupid like that. That won't change.
If Tether collapses, it could result in widespread blowback against the entire crypto market.
There's also increased regulation in India and broader skepticism. Crypto is feeling anxious right now, and many are harvesting their gains based on the uncertainty.
Chinese banking system on the other hand is very conservative and the banks are state owned.
The problem wasn't real estate developers getting shreked but rather the financial institutions the underpin everything suddenly facing massive liquidity crisis and enormous losses as MBS plummeted.
I fully expect a bunch of over-leveraged Chinese RE developers to fold here but I don't expect further contagion unless there is something unaccounted for - like international institutions being overly exposed to bad Chinese RE debt or something.
It's a consumer confidence issue in the Chinese real estate bubble and public finance issue relating to how Chineee municipalities finance normal operations via land sales through special purpose vehicles.
Basically if Chinese people stop believing houses are an endless fountain of money they Chinese government is in an enormous mess and this seems to be a step towards that happening.
Is there something I don’t know or are you just repeating stuff you think you know?
$72bn of mystery dark money.
I assume it is a very similar situation with Tether, since they have had banking issues in the past. Whoever they bank with would be shunned immediately by other banks and governments, as many see crypto rightfully as a competitor. But the money is too attractive so you do have banks crossing that line to help, on the caveat that it remain anonymous. You can’t run Tether or a weed operation without banking, so you see our conundrum.
Anyone know where to find the figure?
Now if the entire real estate in China goes south - thats a global problem and a huge political issue. That would signal that we might be on a warpath as the party would need to stabilize the economy with some kind of threat narrative or risk being run out of office. This is *highly speculative* of course.
I guess it's all fine then. Nothing to worry about. Keep walking. /s
One thing I think is interesting: $188 billion? That should be about the scale that PBoC estimates the losses will be. That number might be a lot bigger than just Evergrande...