Savings and Loan Crisis 1980–1989
federalreservehistory.org
federalreservehistory.org
Given that this is a financial sector that no longer exists, it's hard for people who weren't around then to understand what a huge deal this was at the time.
https://en.wikipedia.org/wiki/Savings_and_loan_association?u...
S&Ls focussed on residential mortgages. Credit unions can issue credit cards, business loans, HELOCs, et cetera.
Historically, S&Ls had time deposits/CDs which they used to finance mortgages. Credit unions were like banks, but tied to a group, e.g. a church or fraternal organization. Over time, S&Ls started taking demand deposits and credit unions broadened the definition of a member to the point of meaninglessness.
If your dad was a member you could start an account, but IIRC not if they were a former employee.
If memory serves loosening the rules on CUs was part of solving the S&L crisis. So BECU (Boeing Employees’ CU) could serve any Washington residents for instance.
I don't feel like I've learned anything more than a factoid I can repeat now. We "have S&Ls". We "didn't have S&L's" then. Okay. We still put savings in a financial institution. Those FI's still lend the money out. Many are still mutuals.
Aha! But back in the day, you'd have to be a member of a selective organization to be part of a mutual that doesn't all of that!
>Over time, S&Ls started taking demand deposits and credit unions broadened the definition of a member to the point of meaninglessness.
Oh. So not that, either.
I guess I just have different standards for what a meaningful difference looks like?
[1] "Given that this is a financial sector that no longer exists, it's hard for people who weren't around then to understand what a huge deal this was at the time."
https://news.ycombinator.com/item?id=35776271
[2] I mean, I did, but was too young to get what was going on for adults.
Calling it an emphasis makes it sound like an S&L could've just started looking like any diversified bank to stay alive, but it wasn't an option for them without a change to their regulatory environment--and couldn't have happened quickly enough anyway once the crisis was rolling.
If unchecked, the interest rate changes at the time would've eventually come for all banking, but the damage was limited.
What actually killed them was Volker raising interest rates to 18% in a misguided attempt to cause the inflation triggered by the break up of the Bretton Woods accords and the accompanying oil crisis. (That can also be read the other way round as it happens - one of the several things that stressed the fixed rate currency exchange agreement out of existence was the oil trade imbalance and the accompanying flows of dollars. Volker raised interest rates following economic textbook theory to suppress inflation, and it backfired rather spectacularly.
Unlike today - this wasn't strictly a quantitative money inflation (i.e. nobody had just increased the US money supply by 25%), and this is very clear in the M2/M3 figures of that time.
At any rate. Key thing, then and now - the US residential mortgage market is dominated by long term, fixed rate loans. When interest rates rise very quickly, this creates huge issues for the lenders. The S&L's got caught with a lot of low interest rate, fixed rate loans, and couldn't consequently pay their savers enough to keep their deposits. As savers moved deposits into higher rate institutions it pushed the entire S&L (and many banks as well) into difficulty, some compensated for this by making riskier (higher rate) loans, and the whole sector crashed.
One of the unfortunate side effects of this was that it led to Salmon Brothers developing a massive loan securitisation program (to buy the loans from the S&L as a way out, kind of), and that led directly to the Mortgage Backed Security crises of 2000 and 2006. It also somewhat resulted in the South American crisis in the 1980´s since that was another place the US banks went looking for high interest rate loans.
https://www.sdccu.com/loans/home-loan-mortgages/
How much of that debt they keep on their own balance sheet seems the critical question.
A] I can't really speak to real-estate, but generally as a consumer I find the market incentives are misaligned to what should be socially desired results. There's too much darn rent seeking.
The mark-to-market decline of long-term loans wiped out an entire category of financial services (the Savings and Loans service). Remember "A Wonderful Life??" George Bailey? That was "Savings and Loans".
Gone, the entirety of the entire sector was wiped out, despite the 30+ year bonds still being "good on their money".
Bailey ran a savings and loan. The run in the film was not a reference to the S&L crisis, seeing as the film predates it by decades.
I assume you meant the right thing, but there's enough ambiguity that I could see a reader being confused.
For a bank, these better investments are available to its depositors if they leave. The bank’s borrowing costs have gone up (or will soon) and that’s the difference between profits and losses. The losses will happen sometime (unless interest rates go down again), but when they get recognized is a matter of accounting.
So the bonds were risky, as is any fixed-income investment when your borrowing costs are variable. (Though it’s clearly not as bad a loss as it would be if the bonds defaulted.)
It's kind of hard for the American Dream to be a rent seeker, and for their not to be a lot of rent seeking...
Apparently 10y US T-bills are now financial weapons of mass destruction according to the HN hivemind.
> (a) loans to office buildings that cannot be repaid in full,
This is a big problem with CMBS but I'm not aware of those being significantly involved in any of the recent blow ups. AFAIK this is still next-year's financial crisis that is only just starting to simmer.
No, no they're not. Not even close. Please read up about this before propagating outright falsehoods.
The S&L industry in the 1980s was doing FTX type nonsense: using depositor funds for very risky investments. This worked great when the markets were going up. Not so much when the market crashed in 1987.
Banks now are holding excess liquidity and funds they otherwise can't lend out (within their risk limits) in US government bonds. The problem is they took long term bonds for slightly higher yield at a time when interest rates were near-zero. And then interest rates went up and created a loss if it were realized. Many companies have been undone by this kind of penny-pinching. It's bad risk management.
Even in the case of SVB, it had more assets than depositor funds and despite the vast majority of deposits (by value) being uninsured, every depositor got their money back and it cost the taxpayer nothing.
* https://billmoyers.com/2013/09/17/hundreds-of-wall-street-ex...
It would take some digging to go through press releases and such:
> NEVIS was convicted in 1989 of 24 felony bank fraud charges in the District of Oregon arising from the collapse of State Federal Savings and Loan of Corvallis. He initially was sentenced to a term of imprisonment for two years, to be followed by probation for a period of five years, with restitution in the amount of $2 million to be paid in annual installments of $400,000 as a condition of probation.
* https://www.justice.gov/archive/opa/pr/Pre_96/November95/584...
I'm sure there's a body of research on it, but you'd have to have decent search-fu to know which keywords for particular academic articles and such.
There was a post earlier today with comments of the form "why are Meta selling bonds right now when rates are so high shouldn't they sell bonds when it's cheap?"
But there's no reason to think rates are high right now except for a comparison to the weird run of near 0% that went on for too long.
So we have banks failing due to shock at the recent rate rises but the recent rate rises haven't actually been that extreme or fast. We seem to have got into a phase where there was an assumption that near 0% rates were here to stay. Banks even gambled on this assumption. If anything you should be leaning towards "wow rates are really cheap right now!" because they are historically.
> The Berkshire Hathaway CEO still resides in the five-bedroom home in central Omaha, Nebraska, he purchased for $31,500 in 1958, which is about $329,505 in today’s dollars.
But the house clearly isn't worth only $329,505 in "today's dollars." Sure, it's more modest than a full-blown mansion, but it's still worth a lot more than that, closer to about a million dollars. And that's including if you were to try buying the house with zero knowledge or context that Warren Buffett once lived in it.
Of course, these things are all 'worth' what someone will actually pay for them, but unless we believe that that housing market is so screwed that Buffett's house would sell for ~$330k if the housing market crashed down to reality (which would actually imply potential deflation and a CPI that would result in the home being worth much lower, per "real" dollar figures), that house is never selling for less than $330k. Not even less than $660k, in my opinion. The only way these homes would come close to their price in CPI is if something catastrophic happened to the neighborhoods in which they exist.
But yeah, I think the fact that Americans, at all income levels, have more stuff than they did 40 years ago, is part of understanding the macro picture. More stuff does not always mean more quality of life.
The only new feature I wish my car had is a nice display that is hooked up to a backup camera, or even better, the ability for the car to automatically park itself, especially parallel parking in tight spots.
Not a million, but closer to that than to #329k.
https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
https://www.getloans.com/blog/220-year-history-of-interest-r...
Conversely, extremely low rates in the 2010s were also abnormal.
* 2% mortgage, 2% real growth and 2% inflation
* 7% mortgage, 0% real growth and 5% inflation
If we wind up in stagflation we may still have low real interest rates but everyone will be having a bad time.
Is it a lack of global economic growth because of natural resource depletion?
For example, you could probably get away with a loan for 18% real if you can sail to America and (leaving politics/historical atrocities aside for a moment) come back with a ship full of gold.
If I had to take a loan with a rate that high I don't think I could possibly pay it back (if it's enough money) without multiple jobs or somehow getting lucky. I don't know that my labor could produce enough.
I actually think an underrated piece of this is that investments have become far less capital intensive. Business in previous economic cycles required a huge amount of capital to begin and maintain: railroads, oil, manufacturing all require enormous sums of capital to continue. Conversely, the dominant businesses in this economic cycle are all Internet based. Google, Meta, etc could run for 1,000 years without substantial cash need, it's a far less capital intensive model. You can see this reflected statistically: the FCF yield of the S&P 500 is 2x what it was in 1990.
If businesses need far less cash than before yet remain highly productive, it stands to reason real interest rates would drop: the demand for capital by economic drivers has gone down, while the supply of capital has increased through FCF gains.
The key insight is that savings and investment opportunities are two sides of a single market. Demand and supply. Savings grow reliably and opportunities do not, so demand for investment opportunities outstrips supply of investment opportunities. Therefore, the opportunities get more expensive = lower rate of return.
The world in increasingly having more supply of money (savings) than before.
It doesn't look like from a median household perspective, but we have a glut of overall money
Huh? Those are two terms for the same thing.
You're right. The data shows "across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been 'stable', and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6-1.8bps p.a. has prevailed. A consistent increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressed sovereign real rates are in fact converging 'back to historical trend' – a trend that makes narratives about a “secular stagnation” environment entirely misleading, and suggests that – irrespective of particular monetary and fiscal responses – real rates could soon enter permanently negative territory" [1].
Basically, over the very long run, real rates go down 0.6 to 1.8 basis points (1/100th of a percentage point) each year, and tend to be low. We've witnessed a few centuries of extraordinary growth, which mandated resource prioritization, which kept rates high. TL; DR Anyone talking about where rates "should" be based on looking at charts is often talking tripe.
[1] https://economics.rutgers.edu/downloads-hidden-menu/news-and....
we've got a lot of fake growth on paper fueled by 0% rates that never existed and has to be shaken out of the system. The fundamental problem is economists thinking they can twist dials on the financial system and play god to prevent recessions and depressions, which will just result in rarer but more extreme financial crises when reality hits them in the face
the economy is fundamentally less efficient and less productive due to the covid pandemic(people not working) and the economic decoupling from China and Russia. Printing money doesn't change those fundamentals, the end result in the short term will be lowered living standards for everybody. More money chasing fewer goods equals inflation, not complicated
It's not complicated, except those who missed out on the 0% rates are hit the hardest and want to catch a similar boom that isn't coming back.
Those looking to buy a house now feel cheated. The prices are similar to ~2020-2022 but the rates are much higher. The rates being lower than historical average is irelevant for those looking to buy know because the current housing prices are also much higher than historical averages.
Our entire economy is now addicted to cheap money so those who missed out on the cheap money will want it back.
They said the largest generational group buying and selling houses pre-COVID were the Millennials.
Now?
Its the Baby Boomers. They can pay cash so they are immune to the interest rates and they tend to have more equity in their properties so they're in a very advantageous position to take advantage of really bad time for real estate.
I live in Minneapolis. The inventory here has been historically low since Covid hit. Normally we should have around 15K properties for sale in the seven country metro area here. Right now, its closer to about 4,200 which is crazy. A lot of people are not even putting their houses on the market. They find an agent and within days they have several buyers. We've had three families just POOF move out of our neighborhood. No "for sale" sign, no showings, just gone.
Further, not letting the property go to market is just bizarre. It’s saying they think they can’t get a better deal by letting more people bid on it. That’s categorically false unless the seller knows the value of their property is below current market conditions. Being that they’ve probably not transacted much in the current market this is erroneous. Let the property go to market and take in bids over at least a couple weeks.
Any bidder saying their bid evaporates if the property goes to market is not worth believing.
Of course, maybe I’m wrong and there are serious buyers who make true highest offer off market. But that probably signifies something truly and even bizarre - and possibly a tendency towards market failure.
I think maybe they were too slow to act, but once they did this has been among the fastest rate hikes in history except for the early 1980s. they have a chart here: https://fred.stlouisfed.org/series/FEDFUNDS You can just draw a red line matching the slope of the current hikes then move that red line to previous rate hike cycles
Are you sure? This graph says otherwise:
It's true that this graph excludes the rate increases we saw in the 1970s and 1980s, but it's the fastest and highest raise of rates in the last ~30 years. See here for a full timeline: https://fred.stlouisfed.org/series/FEDFUNDS
But overall, the last couple decades were the exception not the norm.
Look at the 50s and 60s. That low in the 60s took 40 years to get to again!
It will likely be another 40 years before we see those low low rates again.
Moving each meeting means going from 0.08 in Feb 2022 to 4.57 in Feb 2023. It may not be quick compared to previous financial shocks, but it is much faster than recent interest rate increases (2015-2018 was 3 years to go up half as much; 2004-2006 went up 4% in two years). Additionally, a decade of basically zero interest rate, followed by 3 years of slow increases and then another two years of zero, followed by a steep climb is kind of unexpected and shocking. You can hardly blame people for not expecting a rates to rise so quickly when there hasn't been anything similar in the past 30 years.
some risks are hard to estimate and manage. interest rate risk is not one of them. actually it is supposed to be the most tractable risk of them all, being a single macro variable. a bank's books are readily repriced under different scenarios
the SnL crisis was the cataclysmic period that ushered a new era. there is a large contingent of actors that profit handsomely by helping banks manage interest rate risk. somehow all this machinery failed but there isn't yet a clear explanation why. lack of regulation would be more convincing if there was something more unusual (an unknown unknown)
not learning from disasters starts becoming the pattern. e.g. what has changed globally in response to the covid pandemic?
This means that you now have to pay for the thing that is priced to be sort of affordable to you with 0% interest but the interest you can get is more like 5%.
Best example of this is the current housing market (regardless whether building or buying). If your previous monthly to a mil was 3k$ now it is over 5k$. This immediately prices you out and will probably lead to a lot of stagnation in 20-30 months.
NFA.
Population growth and the natural birth rate was much higher, too.
7.5% isn't going to be normal somewhere like Japan with declining population.
It's not going to be normal in the US with barely any population growth.
Interest rates are arguably a derivative of growth.
Young people tend to be in the spend now camp as they purchase homes, cars and other big ticket items that they will pay with based on increasing incomes. Older people tend to save now so they can purchase what they need in the future when they have declining incomes.
The ratio of going to old influence interest rate demand.
When it is decreasing your workforce not only get smaller, but get smaller faster than the older population. And in total you get less consumers too.
So in a growing population situation, you can take loans with high interest rate and open business knowing you will have cheap labor, thanks to all new young people becoming adults, and over time lots of new consumers, so your business has guaranteed growth.
But if your population is declining, labor become expensive as each year there are less young people and less workers in total, while total demand also gets smaller but not fast enough. So taking a high interest loan is stupid idea, you have guaranteed high costs, and less sales long term, thus your business profits will never be bigger than the interest and you will eventually go bankrupt.
This is just patently wrong. I guess "extreme" is an opinion, but the speed at which they've raised rates is the higher than (debatedly, depending on the metric you use) any time in history, certainly any time in many decades.
And the thing that makes these rate raises more impactful is the fact that we were starting from near 0. Take a look at this 5-year treasury rate graph: https://www.macrotrends.net/2522/5-year-treasury-bond-rate-y.... If you held a 5 year bond at the low of 0.26% in Sept 2020, the decrease in value that bond would incur between then and now due to the rise in rates is worse than practically any other ~30 month period shown on that graph.
We have and that was caused by the Fed as well. After the 08 crisis the Fed kept the rate at 0% during what was basically the biggest 10 year bull run in history. It was insane and even many bankers I spoke with mentioned the causes of the original 08 scare/crash werent fixed, they were just band-aided heavily.
People say this is obvious only in retrospect, but people were warning about it forever. And if you don't believe that, just listen to Congress, the President, and Real Estate agents talking about Fed pumping more today ... they are still all for it.
I'm not bullish about the US economy anymore. I think it has become politically untenable to run the economy without this free money pumping. There's too many parasitic sectors in the economy now. They require the economic body to continue to bleed to survive.
None of this is all that surprising either, which makes it even more frustrating. A great many folks were critisizing the Fed for keeping rates so low when the economy was booming, and I don't think many are surprised that the rapid increases have created instability.
This is likely extraordinarily bad advice to listen to.
The Fed is still following an inflation target of 2% and they are very willing to crash the economy in order to get it. They've been fondly invoking the name of Paul Volker.
The rates we're at today are probably sufficient to crash the economy. As the maturity dates of loans hits and their rates adjust upwards we're going to see a lot of bad economic bets and loans that were predicated on 0% interest rates fail and see the fallout into the broader economy.
Even if they're not sufficient to crash the economy, the Fed has announced that it will do whatever it takes. So if the economy heats up and inflation comes back then the Fed will just jack up rates even more.
We aren't going to get a 70s style decade of stagflation or hyperinflation or any of that nonsense. That happened during a period when the Fed "grew up" in the shadow of the Great Depression and WWII and was worried about crashing the economy so it ran hot and inflation was high and long term interest rates were high. Post-Volker we are not in that kind of policy regime.
The most likely outcome is that we will hit a serious recession and unemployment will spike again above 6%, and without much government support the recovery will be gradual like post-2008 and not like the crazy V-shaped post-2020. And the Fed will once again wind up cutting rates down to zero again. The CPI will fall like crazy due to the high unemployment, while asset bubbles will inflate again and the rich will once again use cheap money to buy up everything on a firesale.
If you showed me a Fed that was actually worried about tanking the economy, or a Fed that set a higher inflation target, then I'd agree that higher long term interest rates were on the horizon.
This time is different from what we've seen before because this is the first real inflation scare since maybe the early 90s, so it seems wildly different to most Millennials, but the game at the Fed fundamentally hasn't changed. We're heading back to ZIRP again a lot sooner than we're heading for 10% rates, but it might be a bumpy ride in the middle.
And I guarantee you that all the tough talk about ZIRP being bad is going to evaporate once the recession hits and rich people need to be able to borrow cheaply again.
https://www.dallasnews.com/photos/2013/03/24/today-in-dallas...
https://www.google.com/maps/place/32°50'56.0%22N+96°34'01.8%...
and
https://www.google.com/maps/place/32°50'53.1%22N+96°34'53.8%...
That doesn’t sound crazy. Especially if the condos were rubbish (as we see happen on many countries speculating on houses - unused properties with little intrinsic value).
1. Unlike 2008, we don't have a whole host of risky borrowers and poor debt;
2. Rates are still historically low (as another commenter mentioned); and
3. The banks being taken over by the FDIC are solvent. That is, their assets exceed their depositor funds, even if they have to realize losses on long-term bonds by selling them.
It's worth noting that accounting rules allow banks to keep bonds off the books and nominally kept at face valuew with the intention of holding them to maturity.
We've had bank runs on banks that largely catered to a single vertical (eg SVB, Singularity) and were relatively small. This made them vulnerable. On top of that, you had poor risk management by holding long-term bonds instead of short-term bonds.
Management chases short-term yield and if 10 year bonds are offering 1.75% (a couple of years ago) but 3 month bonds are only offering 1.69%, many banks will hold the long-term bonds instead, even though they open themselves up to rising interest rate risk. They are paying the price for now and depositors aren't left holding the bag. So the system is working.
huh? student, auto, and credit card debt are all through the roof
auto loans are the new subprime
https://www.fdic.gov/bank/historical/history/191_210.pdf
While the pre-existing institutional fragilities were different, Fed tightening hit them both hard:
> ... rising dollar ex-change rates in response to the high U.S. interest rates of the early 1980s increased the difficulty of meeting debt commitments.
Neil Bush was the chosen one to be the next president in the dynasty, but the flack from the S&L scandal forced the family to back George W instead.
https://en.m.wikipedia.org/wiki/Savings_and_loan_crisis#Silv...
> Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.3 billion. Neil Bush, the son of then Vice President of the United States George H. W. Bush, was on the Board of Directors of Silverado at the time.
CBDC will help resolve the difficult mathematical problem when politicians overspend (or steal) money they took from the public, and the accounts don't balance. They can just create more money instantly. And no one will know.