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Comment by csomar | Hacker News Reader

This is a wrong characterization and makes it look like it's the Fed fault all along. Government bonds still have risks (ie: The government not paying) but more importantly, they are tightly linked to the main interest rate. Their prices can fluctuate significantly and do all the time.

Bankers know that. That's kind of the first or second lesson they'd teach you at a basic financial course. Everything is priced in terms of interest rate and time. They have been trading these things for decades.

Here is an article I wrote in 2020 that explores that volatility, though from another angle: https://omarabid.com/zero-rates-world

Another thing that I find funny is that everyone has "hindsight" now. Everyone is surprised how these banks are surprised that interest rates went up!

Here is a quote from that article in 2020:

> Maybe, but it's also possible that these high prices are here to stay.

I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly. The responsibility of the blow up is fully on them, however.

> now finding itself both tightening and loosening fiscal policy simultaneously

Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.

View on HN

> I honestly was thinking we will stay in this zero-rate regime for the next decade or more. I suspect the people at SVB thought in a similar fashion and plan accordingly

I have been working in several trading companies, both as trader and in IT, and the first thing they teach you when trading, is that the market always knows better than you. So hedge your risks and don't trust that you have some kind of vision that knows better than the markets. Actually 'vision' was used jokingly when someone accidentally made a profit by not hedging and ending up on the right side of the market.

Bankers know this. In this case, SVB could have hedged their risk with interest rate swaps, for instance. But for those they would have to pay a premium. Why? Because the market believed there was a real chance the rates would go up. If at SVB they really planned on zero rates to stay for a decade or more, they have simply been gambling.

Imagine how different the calculus would have been through the pandemic had the Fed been raising rates in 17-19? They would have had runway to lower interest rates before going to zero. In hindsight, the zero interest rate regime was aberrant-unprecedented and forced the market to magic up lots of “accommodations.”

Anyway, the problem with svb was exactly that they decided to not hedge against the possibility of raising interest rates. And for much of the market, that was a bad call. So anyone defending them needs to explain the rational of keeping the zero interest rate regime post-Covid. And it’s got to be better than “line goes up and to the right” for your chosen asset

There’s interest rate risk, credit risk, and prepayment risk with the securities they buy.

On a Treasury or guaranteed bond, there is no credit risk.

On a Treasury there is no prepayment risk.

Therefore if you hedge out the interest rate risk, you’re essentially left with 0 risk.

0 risk = 0 or near 0 premium.

e.g. there’s no point in doing the trade if you hedge.

You don't need to hedge out all the risk. You can for instance hedge the risk that rates go up more than one percent and take the risk when it changes less, in return for a moderate yield. This way you limit your losses when things go wrong and probably you'll avoid bankruptcy.

Besides that, financial institutions don't only make money on re-investing deposits. They charge all kinds of fees as well, which make for a steady income.

There is always a point as the risk is not binary. SVB should have hedged against big interest jump that would bankrupt them, not against any risk.

Yes that’s the point. Treasuries are cash, they are not meant to make money for banks, they are meant to be a place for banks to put money when they don’t have anything else to do with it. Banks are supposed to make money from the premium between the base interest rate and the rate on the loans they make. The implied contract when you deposit money in a bank is that the bank has a dependable business model as a lender. They are not supposed to be gambling.

SVB got greedy. They thought that zirp would continue forever and they made long term bets on that basis and lost. Banks should not be making long bets on macroeconomic conditions: that’s not a bank, that’s a hedge fund.

> Treasuries are cash,

Obviously not.

[edit to add: this seems a controversial comment, it’s being upvoted and downvoted wildly]

Some brokerages break down various types of position (equity, bond, etc). Mine in particular has a "Cash and equivalents" section. Money market accounts go there, but so do treasury funds and such.

I suspect the upvotes are because you're technically correct, treasuries are not literally cash. The downvotes are because grandparent obviously meant that treasuries are considered cash equivalents (whether or not they actually should be, given liquidity concerns).

Treasuries (without further qualification) are not cash equivalents. (And it’s not because of liquidity concerns.)

Treasury bills may be cash equivalents. They present (almost) no interest risk.

Long-term treasury notes/bonds is what was being discussed. There is interest risk in that case and neither your broker nor anyone else would consider them cash equivalents (unless they are already close to maturity).

The trouble is that other US government interventions also eliminated a big chunk of the "anything else to do with it". In particular, most mortgages in the US are fixed rate for the entire duration of their term through government backing, which almost entirely eliminates one of the big sectors of loans that banks in other countries can use to make money on the premium from interest payments with less duration mismatch than 10-year or 30-year bonds. In most other countries, mortgages are either variable rate or only fixed rate for a relatively short period. Also, a substantial proportion of all US mortgages in existence apparently locked in their interest rates during the time period in 2020 and 2021 when they were at record lows.

I'm not as familiar with how mortgage markets work in other countries, but at least in the US fixed rate mortgages are almost always risk balanced against fixed rate investmentsor wrapped up in securities that move risk off the banks' books.

A bank would indeed be crazy to hold onto fixed rate 30-year loans with interest rates at near zero.

Yeah, in the US fixed rate mortgages are handed off to the government who guarantees them and bundles them up into securities... that SVB then ended up buying a bunch of because it's not like there was exactly a wide variety of investment options available that they could back their deposits with that actually paid meaningful interest.

At least based on this article, it even sounds like this is what they wanted banks to do! The reverse-repo market was created because the Fed wanted banks to buy securities directly from them when interest rates where increased, sounds like SVB and others just followed that playbook

Maturity transformation (borrowing short and lending long) is still a core function of banking (and historically one of the key sources of profit. Manhunt this risk in a bank portfolio is one of the central jobs of management.

The naïveté was thinking the deposit base wouldn’t shrink (after growing 3x in as many years)

Would pre-2018 regulations (when they were eased for banks with deposits less than $250B) have prevented this?

I think so. I believe that this is the reason EU banks have been ok so far, as they do need to hedge interest rate risk.

EU banks are ok? Didn't Credite Suisse just go under and had to be forcedly saved by its main competitor?

Credite Suisse's problems predate the interest rate issues by years.

I have no idea about the substantive discussion, but just to point out: Switzerland is not in the EU.

Credit Suisse is Swiss. Switzerland is not a member of EU and they don't use euro.

I appreciate the correction but that probably doesn't change the point being made, as the economy of Switzerland is obviously closely tied to that of the EU (when I read EU I normally think Europe, not just European Union, which is my mistake, but in conversations like this I think "Europe" would be the better term after all).

Yeah, I almost added CS to the original post, but their problems were relatively unique to them, rather than being an extreme case of a common problem, like regional banks in the US (who didn't need to hedge interest rate risk).

Aside from where the bank is chartered...

I would suggest a read of https://en.wikipedia.org/wiki/Credit_Suisse#Controversies and consider that each time that happened they lost money and trust.

At this point, they have neither.

If you bought treasuries at the prevailing rate and swapped them at the same rate then the market price of the swap will be zero. You'll still have to pay credit and funding premia though. If, however, you only hedge once the prevailing rate moves against you, you'll pay a market premium in the form of a spread.

Oh you can get a lot more creative than that. You can hedge out "catastrophic" interest rate rises while taking your chances on smaller increases. In this case, catastrophic can easily be estimated by taking the duration of the book and the equity cushion and applying a margin of safety. Or you can simply ladder Treasury durations that inherently don't have enough duration to cause problems. SVB apparently did none of that.

There is exactly one investment strategy that presents no risk of ruin for a bank: depositing all customer deposits in the bank's account at the fed. That investment strategy is so discouraged by regulators that they literally denied the application for a charter from an organization whose stated investment strategy was exactly that. (google the narrow bank if this is unfamiliar to you).

For any other investment of any amount of your deposits, a run of sufficient size combined with an investment loss of sufficient size will ruin a bank.

That being said, SVB had by a wide margin the flightiest deposits and the most IR risk. But it was an error of magnitude, not category. There is no run-proof fractional reserve bank.

Interest isn't just compensation for risk. It's also compensation for temporarily giving up control of your money.

If the market always knows best then why do I need traders except for market making purposes? Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then?

I think "the market always knows best" is correct in most cases and if you think you know better you are probably wrong but there are empirical counterexamples like the Buffets of the world (unless one would claim that his gains come from some sort of other unfair advantages like the deals only he gets to make). I also think that human behaviour isn't always rational and herd effects and the like are a thing and not always priced in correctly. And while the flow of information feels pretty efficient in this day and age, I also think that there have to be some pockets where individuals can gain informational advantages.

I do like Sorros' book (Alchemy of Finance) which is dense and hard to get through but vibed well with me philosophically.

> Shouldn't everyone just buy the lowest cost passive ETF of a big enough index like S&P 500 then?

Yes, this is very best the advise to invest your money (except if your name is Warren Buffet). Buy it and hold it. There have been so many papers published that show this. You cannot predict the market, what you can do is save yourself some risk and some transaction costs. Any investment advisor that tells you different is plain wrong and probably has a second agenda.

You can also save yourself time. I see so many people use enormous amounts of time reading headlines about companies and consuming videos about the economy and all that jazz to stay up to date and make "informed trades". But in the end a lot of that time is wasted. And you might say that's ok if that is their hobby, but lets be honest, the reason people do this is because they got sold on the idea that they can get rich from it.

If everyone invested in index funds, then there would be a lot of money to be made from you alone looking at the market. There are often companies that announce some new product that will (at least for a few years) outsell their competition. Index fund have no way to know that the company will thus be worth more money than their competition, but you do.

The problem is the above is similar to a zero sum game in that there is a fixed total profit to be made in that way, and that money is shared between everyone who is correct (including index funds!). Since there are a lot of people trying to make the above trades the total profit you can make is reduced as they have already moved the price above what a pure index fund market would have it at. (a true zero sum game every winner is paired with a loser, while the above doesn't actually have losers in the same way, but I don't know any other way to explain it)

I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it. However reading all the reports is boring, while writing code is fun, so I just invest in index funds.

> I concluded long ago that if I made studying the market my full time job and hobby I could make a good income doing it

I'd be curious how you reached this conclusion. The outside view (lots of academic papers on this) is that nobody beats the market over a long time frame. I've often thought this assumes scale-invariance; as I look to make lower volumes of money, I'll see things that aren't worth a real trader's time. Another way I can see this as true is if you don't need to have the money invested all the time - if you strategically pick 1 investment every 5 years, can I expect to beat the market by picking the absolute best trade?

Despite those ideas, I concluded long ago that nobody can beat the market over time, with maybe 1-2 exceptions.

There are a handful of people - Peter Lynch, Warren Buffet... That over the years have proven that thesis false. The vast majority do not beat the market, but the vast majority are investing on emotion and fads.

I would have completely missed amazon and google, but there were other companies that would for a while grow at better than market rates that I would have found (or so I think!), and would have been able to get out of in time (this isn't hard because I don't need to call the top, I can be off by many months and still have a nice return). These companies carry much less downside risk vs dot coms - most of which failed, and part of doing well long term is ensuring that your losses are not good because you will have them from time to time.

Note that you don't have to beat the market by much to pull this off so long as you live cheap those first years.

> nobody can beat the market over time, with maybe 1-2 exceptions.

Apologies for the poor wording. Agreed there do appear to be a few people who beat the market regularly. My perspective is those people are not using the same tools available to even elite traders - Buffett gets really good deals because of who he is. That kind of thing isn't available to anyone else and in the context of "could GP beat the market if they worked really hard and were really smart", it rounds to "nobody can beat it".

I haven't read those academic papers you mentioned so I might have missed some insights, but after thinking about it on and off for a while my thoughts on it are:

1. Many people trading on the stock market are professional traders who do it as a full time job, and they have access to information and tools that you don't. So unless you expend similar amount of time in studying the markets, it's highly unlikely you'd beat them.

2. Even the best traders generally beat the market by a couple percent on average. So in order to compensate for time cost of equivalent to a full time job on studying the markets, the fund you're investing needs to be: (your salary / x%) -- Let's say you expect 100k salary, and somehow you can beat the market by 5% if you put in the time, then you need a fund of 100k/0.05 = 2000k for the enterprise to "break even" so to speak.

3. Most people don't have 2 million to invest. And even if they do, they don't want to spend 40+ hours a week studying the stock market. So, since trading is basically a zero sum game, most people who invest small amounts of money perform worse than the market.

This doesn't even go into the tricky details of determining whether your performance is due to skill or luck (or lack thereof). The 5% is subtle enough, but not having any degree of certainty at all makes reviewing your decisions and trying to improve your trading skills even harder.

That said, there's probably more than a couple people besides the big names who can pull this off. It's just that even if you consistently beat the market, it takes a long time for people (including yourself?) to notice, because the effects are so subtle at first. In a sense Warren Buffet owes his fame not only to his skill but also to his age, and his willingness to engage in the activity even when he has all the money in the world. I suspect most other people find other interesting things to do once they earn a hundred million or so since it's more money than they ever need...

This is a reasonable summary of mutual funds not beating the market. I think it's maybe a single-digit number of individuals can do it, but the reasonable default should be something like "a number that rounds to 0% of money managers in any format are able to beat the market over a long time frame".

https://www.nytimes.com/2022/12/02/business/stock-market-ind...

> If the market always knows best then why do I need traders except for market making purposes?

You may not. It doesn't follow that the market doesn't. Long term US stock investment isn't the only reason people use capital markets. And even for passive etfs, your counterpart is likely hedging their exposure with someone who you didn't buy the etf from.

Seems to me you're missing the forest for the trees.

"The Market" is the spontaneous order generated by millions of individual transactions seeking equilibrium.

Individual traders can fail, be greedy, or succeed, and the market as a whole still balances out.

Think of it like a biotope pond, which exists and naturally adjusts to all sorts of conditions, and think of the Federal Reserve and Banks lending practices as a corporation dumping 40 metric tons of mislabled organic fair-trade ketchup into that pond.

Too much of even a good thing, still poisons the system.

I thought the market knows best was kind of a joke. As in all your best reasoning and prayers, but it can still go against you, the market knew best. Is it in the same vein as a wizard being neither early or late, he arrives precisely when he means to (nothing’s ever priced incorrectly)? Or, like a loving mother who beats you (you didn’t properly factor in jupiter)? Depends how you’re feeling, but the market always knows best.

That is not what is meant, and you should stop thinking that.

> But for those they would have to pay a premium.

Wouldn't that be equal to holding short-term treasuries. In that case, they'd be sitting at billions of "worthless" money. Question is, who is the other bank that took that risk. Because of the nature of the market (ie: competition) they had to produce yield comparing to their peers.

So either their peers were smarter or the big unfolding is yet to happen.

Their exuberance at the state of the economy in 2020 and early 2021 can be seen in their interview with Bloomberg. They expected the growth of tech to continue to grow at the rate that it did with the start of the pandemic and that that was going to be stable afterwards.

https://www.bloomberg.com/news/videos/2021-05-20/innovation-...

> the market always knows better than you

If humans could predict the future, we wouldn't have gambling.

> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.

Big call. Huge. Got some data or similar to back it?

Edit: If there's clear picking of winners, or even plausibly so it's gonna look pretty bad. [1]

[1] https://www.theguardian.com/business/2021/jan/01/janet-yelle...

You don't need a direct financial kickback to define corruption.

From: https://www.cnbc.com/2023/03/16/svb-signature-bank-failures-...

> Treasury Secretary Janet Yellen told senators that government refunds of uninsured deposits will not be extended to every bank that fails, only those that pose systemic risk to the financial system.

If you’re too big to fail, you’re too big to exist. We should either let them fail (my preference, despite the pain) or bail them all out. But I also think that if we’re going to insist that there is a private entity that is too big to fail, it should be broken up until the pieces are not too big to fail.

Or it shouldn't be a private entity.

Better a private entity that needs bailing out with taxpayer money than one that is normally funded by taxpayers.

Socialise the risks, privatise profit.

To be clear: I think we shouldn't socialise the risks either. Just saying it's better than fully running it on taxpayer money.

Banking is basically nationalized now.

The government outsourced this responsibility to the Federal Reserve at the same time that a federal income tax began.

There are 3 main ways to balance a government budget. Spend less, raise more funds through taxes, or make the scale of debt decrease through inflation.

> Banking is basically nationalized now.

More like government is privatized

¿Por que no los dos?

Actually svb did fail. And flunk. The shareholders are wiped out. The employees are gone. Saving the depositors is an act of charity.

And if you save one bank, it restores confidence in the other banks against a bank run. Otherwise I was thinking of removing money in all banks combined.

Yellen just repeated the exact federal reserve policy, like every treasury sec/federal reserve chairman has done since forever. Kinda wild to define that as corruption, but to each their own.

Instead, why don't you look at how many people have lost uninsured deposits since the FDIC was created in 1933? You'll find its extremely low to nonexistent. Thats because while the FDIC has a 250k insurance limit, it does its absolute best to not use it- Usually by coordinating a bank sale or private-public rescue plan.

Watch the exchange between Sen Lankford and Sec Yellen yourself:

https://www.youtube.com/watch?v=Bcvl104tyRY

Yellen says unsecured depositors at TBTF banks will always be bailed out, but those at smaller banks are on their own. It's one of the most incredible moments I've witnessed. I'm not sure if there's some hidden agenda being pursued, or if Yellen is just so far removed from the real world that she doesn't understand the consequences of her statement.

I'm not sure why any company or individual would hold >$250k at a non-TBTF bank after this. It borders on financial malpractice.

I never understand things like this. She looks like a deer caught in the headlights when he asks her the most predictable and basic question about her decisions. How can you be in such a position, make such decisions, and be unable to offer a compelling answer to the most basic questions?

Even if it some sort of a hidden agenda and [further] centralizing banking is just seen as a convenient stepping stone towards CBDCs or whatever, you'd come up with some passable explanation ahead of time. I mean it's not like the Senator there pulled out some gotcha she couldn't have expected.

There is a concept in the armed forces for making decisions in a given timeframe (struggling to find a source for this). Essentially you do the best you can in the time you are given. Then you move on and iterate. If you dither too much you probably don't have to make a decision anymore as the enemy has made it for you. In that framework it is accepted that a solution is not perfect.

I think about these crises the same way. They had 48h to sort it out and they had to make a decision. The decision has side-effect-like consequences. Should she now lie about this?

So now, why did they only have 48h to make a decision? I don't know. I doubt nobody has thought about this before. But I assume that regulating banks is particularly hard, because of lobby pushback and the banks ability to exploit any loop hole quickly. They are literally organisations that look out for how to make money by exploiting asymmetries. These organisations work against the slow democratic decision making that involves non-aligned actors (who are also often not trained in this particular issue) in the upper and lower houses of parliaments of different countries.

Another question is. Why are small banks treated differently than big banks. I have read somewhere that small banks have less regulatory oversight. Maybe the decision is much more to support heavily regulated banks and not so much those which are for various reasons not as much regulated. Why would the government want to hold the bag that it was not allowed to look into?

> There is a concept in the armed forces for making decisions in a given timeframe (struggling to find a source for this).

OODA loop? https://en.wikipedia.org/wiki/OODA_loop

I was thinking the same. But it sounds more like how to prevent being OODAed by someone else.

They had 48h in this case, but who gets bailed out and on what terms is a massive strategic decision that should not be made on the hoof. I must be naive because I thought planning for this kind of problem was part of her job.

First up, I do not have any particular insights what happened behind the doors and how government planning _really_ works. But if business / engineering management is in any way similar, there would have been a huge amount of uncertainty at the moment the hand was forced.

One would hope that there were some specialists at hand that know parts of the system, laws, implications on the overall economy etc.

There are likely a couple of plans available how to deal with this kind of situation. But likely not for this exact situation. Plans that exist but have not been implemented as policy likely are too rough around the edges or have significant opposition for different reasons.

On top of this, at this level of complexity and abstraction everything is kind of an opinion until tested and proven (but no time for that). Because no one truly understands all details and system connections.

On top of this in government you never know 100% what the motivations behind all these suggestions and plans is. What is factual, and what is politically tainted.

So all of the sudden things turn from certain to probabilistic. The leader has to figure out how to weigh the opinions and how to make a coherent enough decision (remember this is a system, and individually good decisions can be bad when taken together) to be net positive until the structured decision making can catch up.

Hopefully this is what is happening now and a general policy is decided on based on structured analysis. And hopefully it is quick enough to be ready before the next crisis hits.

Why did they only have 48 hours to make a decision? Because the banks (and the financial markets) were going to re-open on Monday morning.

>> you'd come up with some passable explanation ahead of time

Central bankers are appointed based on two criteria:

1. A willingness to print money for the government so it can spend more than it raises in taxes.

2. Looking presentable, sounding sophisticated and emitting enough bafflegab that (1) seems scientific instead of ideological.

Thinking deeply about economics and the role of banking/central banks in society is an anti criteria, because if you did think about those things you'd end up concluding that the only fair and stable solution is way less money printing and quite possibly none. That would directly undermine the government that appoints you. Your salary depends on you not understanding your own area of specialism.

I do feel like the defining characteristic of the 2020s is turning out to be people's struggle to accept the horrible truth that government officials/scientists who claim to be experts systematically have no idea what they are doing.

Maybe it's a question not supposed to ask. They all know the answer but it's inconvenient to answer before the public.

> Yellen says unsecured depositors at TBTF banks will always be bailed out, but those at smaller banks are on their own.

I agree SVB and Signature uninsured deposits shouldn't have been guaranteed, but that's not quite what Yellen said. The $250K guarantee applies to deposits at all insured banks. Having clarified that, Yellen said:

> A bank only gets that treatment [guaranteeing all deposits] if a [super] majority of the FDIC, a super majority of the FED board, and I in consultation with the president determine that the failure to protect uninsured depositors would create a systemic risk and significant economic and and financial consequences ...

Exactly. The subtext to this clip is that she cannot do what the congressman is acting without an act of congress, and he should know that. It’s well executed grandstanding.

As I understand it, the piece you are missing is that she legally/procedurally cannot guarantee depositors prior to a bankruptcy - that would require an act of congress. The congressman know this as well, so it’s just grandstanding.

Finally! People calling it what it is. Corruption.

And the domestic angle isn’t even the worst. Breton-Woods put America in a sort of custodianship which they have betrayed. Raising and lowering rates to promote your domestic economy without even considering the global impact is fucked up if you promised the world that your currency can serve as a trusted foundation.

World order is still fluctuating all as a result of these betrayals.

>if you promised the world that your currency can serve as a trusted foundation.

How do people get this backwards?

The US didn't say, "use our currency as the global reserve currency!" Countries chose and continue to choose to use the USD for global commerce. No one is forcing them, the USD really is valuable.

>World order is still fluctuating all as a result of these betrayals.

So raising rates is a betrayal, but allowing inflation to eat away at savings of those with USD holdings is not betrayal?

Yeah, USD is pretty badly managed, but still better than most other currencies.

Also the US runs a deficit so there are lots of opportunities to own dollars abroad.

And all the 'democracy spreading' in countries that considered selling resources for something else than dollars is just encouragement for other countries to make the right decission?

You know what the US does to country leaders who even talk about trading oil in currency other than USD? Hint: kill with impunity.

Bretton-Woods is history. Since the Nixon Shock, the USD isn't the global reserve currency anymore. It's still influential, but only because of the giant domestic market in the USA and its status as the only global superpower.

USA wouldn't be able to run at trade deficit for decades if it didn't literally print money for the rest of the global economy.

These two things are related the other way round as well: to become a reserve currency, the using country must have a trade deficit. Else the rest of the world would not have enough liquidity to actually use the currency, and the market would grind to a halt. If no liquidity were available, any transaction would have to be secured with other assets. That asset would be the actual reserve currency then.

That's true, but it doesn't make it better in any way. Ideally reserve currency should not be the currency of any single country to avoid this situation where one country basically freeloads on the global economic development by printing paper and can even cause wave of global inflation by arbitrarily deciding to print waaay to much, too quickly.

You might argue that to keep printing this country needs to invest into aircraft carriers to keep everybody else in line and well behaved. But it's still a very profitable arrangement as the recent history of USA shows.

>Raising and lowering rates to promote your domestic economy without even considering the global impact

This is an honest question, that may be naive. But, what are institutions formed, founded, and ran inside of the US, overseeing the US government and policy, supposed to do instead of considering what is best for their own country?

Are you arguing that, because the world chose the US dollar as its de-facto global currency, that the US is obligated to consider the entire world first, instead of its own citizens?

"The upside of MMT and 0% interest rates is that it allows a whole set of businesses to become viable. Businesses with a 1% yield are not viable with a high interest rate as it makes more sense to just buy bonds. People who can generate yield will thrive, since the expected market yield is zero. It's still a question whether this will benefit mainstream; or a bunch of tech companies that have a monopoly of tech and innovation. In this kinda world, tech and innovation are the only possible venues to generate yield, since money is widely available for anything else."

It's almost like we should be optimising people getting stuff for creating actual value.

A decade ago I had lunch with a friend through kindergarten (our daughters were friends) he was a financial advisor and things were going good for him. I complained, as people who 'make' stuff often do, that finance was unbalancing everything and taking too big a share of profits (not to be annoying to him, just sharing a viewpoint) and he replied that the reason why finance was getting more of the share was because finance was where the innovation was nowadays.

He later got charges for corruption and there was a big investment scandal where some people who had done well with him before ended up loosing money later.

He is probably right.

So many businesses have become financialized now. In the UK, John Lewis, which is/was an upmarket department store (and also owns Waitrose, a grocery store), is a mutual, owned by it's employees, but is now in the built-to-rent property market. Its literally burning the reputation and diversifying in to all kinds of gimmicks as it dies.

Sainsbury's, one of the biggest supermarket chains in the UK, has been in to lending (credit cards, loans) for decades now.

Does Sainsbury's lend directly or does it put its name on credit cards issued by (e.g.) MBNA like many other companies? I've never looked too much at what they're up to.

Not only that, it was in the paper the other day that the CEO of John Lewis wants to sell a chunk of the company to a private investor so it won't even be a full mutual any more.

There is an observation that the real salaries stagnated since seventies for an average American because all the growth went into financial industries. Those rose in the last 50 years from few percents to close to a quarter of economy essentially resulting in a hidden tax paid by everyone to bankers.

essentially the point I was making. Although I think real salaries also stagnated because every household became a two-income household so people's household incomes rose hiding the fact that they were actually getting screwed over.

Which people are now starting to realise!

It the economics version of "software getting slower as hardware gets faster".

Those calculations are very tricky in conflict with the obvious huge increase in living standards since the 70s.

>Those calculations are very tricky in conflict with the obvious huge increase in living standards since the 70s.

People used to be able to buy a house and raise a family on one salary. Tell me where exactly the standard of living went up since the 70s.

Sounds nice though.

Well, let's see.

That family with one salary probably also only had one car. That car needed a tune-up regularly, and was lucky to make it to 100,000 miles.

They had a house, but it was a small house by current standards - maybe 1000 square feet.

They had one landline phone - no cell phones, and certainly no computers.

The breadwinner could retire at 65, but the median age of death was 68. They could afford medical care, but the medical care that was available didn't lengthen their lives to what we expect today.

So that's where it went - bigger houses, more cars, computers and cell phones, and better medical care. But if you're willing to live in a 1000 square foot house, only have one car, no computers or cell phones, and inadequate (by current standards) medical care, you can probably raise a family on one income still today.

> They had one landline phone - no cell phones, and certainly no computers.

I have no idea why those are mentioned. Do we somehow pay for development and manufacturing of those with exorbitant rents and mortgages?

When people talk about standard of living they talk about living, not various forms of entertainment brought on by sheer technological progress.

If you want to mention technology mention things like washing machines, dryers, dishwashers and fridges. Those contribute to standard of living. Not whether people figured out how to do astral projections or whatnot cheaply.

People in the 1950s used to buy much smaller houses. Owning a small (13 inch) black and white TV used to be a big deal. A computer costs millions of dollars (not accounting for inflation!) and filled large buildings. Women often didn't get a drivers licenses at all, and even they did there was only one family car so they needed to drive their husband into work if they wanted to use the car. Cars needed a lot of maintenance for things like the points, and they didn't really last long unless you rebuilt the engine which most people did. You had one phone in your house and it was a party line shared with your neighbors.

In the 1970s houses were already getting larger, but not to today's. Nearly everyone had one 19 inch color TV, but few two. Only a few weird people had a computer in the house, and it connected to the TV for a monitor, for the rest a computer took up large buildings but many people had a terminal to use it via some time sharing system. Most women had a drivers license, but families only had one car unless the woman worked outside the house (which was most by this time). Cars with advances like electronic ignition cars need much less maintenance, but if your car was about to reach 100,000 miles you gathered your best friends to go for a drive to see it at all zeros: you had to add oil before you left (in a cloud a blue smoke), rebuilding engines was still common, but not something most people did. You had a private phone in your house.

Today most new houses are the size of what would have been considered upper middle class in the 1950s. Today people consider it normal to have a TV in every room. Today everybody has a computer in their home. Most families have a car per driver, and those cars often last 300,000 miles (though many people don't keep them that long). Everybody has a phone/computer in their pocket, few have them in the house at all.

There are a lot more things I could point out that have advanced. If you were willing to live like 1950 or 1970 you could get by on a lot less money.

I fail to see how larger TV sets equates to huge increase in living standards.

Maybe we could measure living standards by looking at mental health statistics? Percent of population on prescription mind-altering drugs?

Do bigger houses, leading to greater social isolation, actually represent an increase in living standards? I get that bigger house == bigger house, but maybe the metric is flawed.

The Internet, and all other new technology the last 50 years is an enormous increase in living standards that's easy to forget.

Housing is a weird example, since that's actually been getting worse, due to housing construction largely being banned.

Do you honestly think the only thing that's changed about life between now and the 70s is your house and TV are bigger?

Even if the standards improved, it came not from the financial industry and probably despite of it. When banking is 25% of economy, it is a heavy tax on everyone. The industry produces nothing and beyond few percents of economy as it was historically it brings just burden if not the outright harm.

I think that a healthy financial system does not need innovations beyond technological advances in operations and security. Anything else is happening at the expense of the economy at large. Banking (especially depository) should be boring as it used to be in the past.

"Innovation" == obfuscation

Increased (and arguably unneccessary) complexity that hides simple truths. For example, SBF and his colleagues were committing fraud.

Whether this added complexity is intentional is left as question for the reader. Regardless, obfuscation has its benefits.

Arguably same critique can be applied to software.

That's the future according to Horowitz: https://a16z.com/2020/01/21/every-company-will-be-a-fintech-...

I feel bad for your friend, however. He was not systemic enough.

That would have to be a 1% real yield on top on the massive XX% inflation the free money would cause! So XX + 1% would be the nominal yield to make it a viable business.

No, that's the point. Liquidity should be readily available, so you create 1% on as much as you can.

100% agreed. Government bonds are free money given to capital holders for doing absolutely nothing productive. It made sense when the government needed to raise revenue, but with fiat it’s just free money for nothing.

> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.

No no no, that's not how financial markets work. It's the stuff that happens after dinner over drinks that makes the difference

> This is a wrong characterization and makes it look like it's the Fed fault all along. Government bonds still have risks (ie: The government not paying) but more importantly, they are tightly linked to the main interest rate. Their prices can fluctuate significantly and do all the time.

The government controls interest rates, therefore the fact remains: it has in-fact been the feds fault all along. When you lower the cost of money (interest rates) so, so low, you send a signal to the market that says, "Hey, everyone -- invest, invest, invest!". That signal makes it look as if a lot of things are a good investment, thereby causing malinvestments all over the economy that eventually go bust.

> Wrong. This is corruption. Janet is picking winners and losers. Some people are losing their deposits and some are not. You are systemic if you had dinner with Janet yesterday.

When the government sets up a borrowing program and immediately shells out 300+ billion to banks, and when they bailout the 16th largest bank in the US to the tune of 100+ billion, Janet is certainly picking winners and losers, but at that scale, I think an argument could be made that fiscal policy is loosening, just like it was loosening when Bush and Obama handed out their bailouts.

Politicians are addicted to cheap money.

> makes it look like it's the Fed fault all along.

Bingo. https://www.youtube.com/watch?v=d0nERTFo-Sk&t=267s

> I honestly was thinking we will stay in this zero-rate regime for the next decade or more.

=^\

Until when? Until there were only billionaires left and all the poors died off? This is delusional thinking and it was the same thoughts the banks and the Fed had which is really why we are in this situation.

It is also why I left Economics behind.

Its hard to overstate how true your point is re-bankers responsibility.

The very basic thing you learn when studying banking is durations and how your primary job is balancing that for your debts and assets.

Bankers also have various tools to short circuit any issues, inclusing raising rates on deposits, getting wholesale funding, matching various duration bonds, etc.

Also, while historical data is not an indicator of future data, the average long term interest rates in the US have always been higher than what it was in the past decade.

Yes, hindsight might be 2020, and this applies to even my comments. But we literally are paying these bankers exorbitant sums to know these and do better than the average Joe

Except that interest rates aren’t the market. They are controlled by the Fed who decides. The Fed was guiding for no raises in interest rates up until they decided to start jacking them at the fastest rate in decades.

This would not have been an issue if the Fed raised rates gradually over years and kept the bonds more or less even because of time value. But they panicked and very possibly because they have been politicized. They should have started raising rates in 2021 but with the election and the Fed seat up for appointment they sat on their hands.

There’s blame to spread around but there’s a reason 100s of banks are in this situation right now. They were all following the Feds regulations and guidance. And now they’re holding all these lousy bonds and the deposits that back them want to be moved into high interest accounts now. Whoops.

Had they guided for this then banks would have went shorter term.

The Fed controls one[1] specific, very short term interest rate. The other rates are determined by the market, though they do take the Fed rate into account.

[1] Normally. Sometimes the Fed does something like Operation Twist or QE or something, where they intervene in the markets of other rates. But that is not the normal way this works.

> ...though they do take the Fed rate into account.

Understatement of the year. It's based entirely on what they think the Fed will do in the future.

Fed open market operations are entirely to adjust the market conditions regarding rates to what they want them to be. The Fed is participating in these transactions to the tune of trillions of dollars

Who is losing their deposits?

> This is a wrong characterization and makes it look like it's the Fed fault all along.

Rates were far too low for far too long. Why was the Fed still aggressively expanding their balance sheet into 2022 when inflation was obviously happening?

This is a problem created by monetary theory academics with access to too powerful of tools. If you have it, you're going to use it.

Imagine if we gave generals the same kind of unrestricted access to weapons and allowed them to wage war at will with no oversight. That is the Fed.

The characterization might be incomplete, but it's wrong to say it's wrong.

The key being, SVB, etc are symptoms. And while we should certain chat about it the focus should be on The Fed. Again. Just like it played a key role circa 2007/2008.

Given The Fed's mandate, how is it once again missing the mark? And where has Congress been? They're mandated with overseeing The Fed, yes?

Yet we're led to believe this is a banking problem? With little of no legitimate dicussion of foundational problems?

I thought we would be trapped at near zero interest rates for even longer, possibly forever, and that the future was in general like Japan. I’m a bit surprised.

Of course I could still be right. These higher interest rates could be a blip.

> Some people are losing their deposits and some are not

No one has lost their deposits yet: I can't tell whether you are inaccurately describing the status quo, or making a prediction?

Interest rate swaps exist to manage this risk no?

No.

You /can/ manage short term liability mismatch against long term assets in one sense but it's actually useless when you think about why you have long term assets at all.

Just like you can manage the risk by selling your long term assets and buy short term to make the mismatch not exist.

The cost of managing using swaps will be about the same as selling your long term assets and buying t-bills. If it isn't, you hit it as hard as you can knowing it won't last and it's free money.

You hedge the existential risk away, while taking on the smaller risk for potential profits.

SVB shouldn’t need to hedge the interest rate increasing by .5 or 1%, but they definitely should have hedge the risk of it jumping 4% and more.

Take on /less/ long term assets (sell them and buy t-bills) to remove the existential risk.

It's not going to be much different in cost. You see it? Derivatives aren't magic pixie-dust insurance. They will cost about the same as a rebalance on that scale or you hit them as hard as you can because they're mispriced and represent free money.

I understand your point, and your first sentence is the point I (and probably others) are making too: they either take on less long term assets, or bar that, have to hedge them properly (which is equivalent to taking less assets). The hedge was meant to be done at the same time of taking such a massive risk.

Ok so you take deposits, which are a short term liability and you've got cash money you have to do something with.

1) Buy loads of long term debt and some swaps.

2) Buy less long term debt than that and t-bills.

These two options are exactly equivalent from a financial perspective. Same risk, same reward, quite similar costs.

If instead you've bought loads of long term debt and not hedged, why did you do that? This is the nub of the thing. Why? Because you couldn't make it pay otherwise with the given market conditions? So you took a punt on inflation and the official rate staying low? Could you have done that differently? Should you have? What were the implications for your business if you didn't take a massive bet on interest rates?

Swaps are entirely beside the point here. Swaps here are just "hey let's not actually make the bet we just went out of our way to make." It's likely going to cost you a little more than not exposing yourself to that risk in the first place. It's like betting on both teams in the superbowl. The house takes a cut.

"Should have hedged with swaps" misses: "why did they have an exposure of that size at all?" Recklessness? Idiocy? Should they be prosecuted for extreme negligence? Were they between a rock and a hard place and took a fairly desperate measure? (Which I'm also not excusing either fwiw).

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