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Comment by Neywiny | Hacker News Reader

We need failure. Just like forest fires, we need controlled burns of dead wood

I remember my dad who was a great investor always said that and it was one of the things that disturbed him about QE and letting some of the big banks survive.

What we’re seeing today with these quasi-public markets and even the AI mania is exponentially worse. We’re playing chicken with the whole economy, and the marginally effective regulatory regime has been completely gelded.

On the other side of the coin. Two of the most powerful barons of the era believe they are eradicating the Antichrist and colonizing mars, respectively.

Interestingly, the big banks today are some of the best run financial institutions in history. The real garbage in today's banking sector is in the mid-cap banks who went heavy into commercial real estate loans.

US banks managed to lobby recently to be able to hide their restructured loan rate, again, so while your sentence is true, given the hate for regulation in the US, do you reckon it will not last?

Banking regulation drawn under Obama one are the main reason why US big banks financial are sane and not over-leveraged. I bet those will disappear slowly, then all at once. Given no one seems to be working on obvious insider trading cases (AMD weird trade pattern just before OpenAI announcement), I'm not sure the annual stress tests will even be looked at next year.

My anecdata - I’m not based in NYC, and I’ve interviewed a half dozen excellent candidates purged from FINRA. That place has been set aflame. SEC is worse from what I’ve been told.

Saving this for next time the big banks fail and demand a government bailout.

I don't know what it would be, e.g. pretty major dislocations go untouched because the banks can't deploy capital into them like repo in 2019.

It's quite possible that the drive towards central clearing kills someone e.g. by warehousing too much in one place/lack of discretion in margin requirements for a central house etc

Out of curiosity - what is the definition of a "well run financial institution"? I could imagine plenty of well run criminal organizations that make all sorts of profit via a combination of human trafficking and protection rackets. But is there an industry recognized understanding of what the best run financial institution would be?

Extremely low leverage, diversified portfolios, lots of cash on the balance sheet, and large amounts of stable free cash flow. Citi which is probably the crappiest of the US megacap banks used to be levered 50:1, today it is only 12:1 and prints $10-$15B a year.

This isn't just me the internet rando saying this. Steve Eisman (the character the big short is based on) has been covering the large banks for 30 years and said on his podcast that for the first time in his career he sees no problems in those banks.

Agreed. In my city some midrange bank is financing a new commercial office space - the surrounding blocks are practically vacant. That whole category is practically useless for much anything other than allowing chinese people to get cash out of china.

Credit Suisse wasn't a mid-cap bank.

Not a US bank, and their market cap in 2019 was only $35B

You can get jail time if you're found to be responsible for causing the forest fire. That's what's needed in finance, otherwise it's just a matter of time until the next "financial innovation" befalls the economy.

To reuse your analogy, I fear that the forest wasn't managed properly and that the coming fire will do a lot more damage than a controlled burn. And I have no idea when it's going to start nor how to fireproof my investments !

Controlled burn = good regulations.

Too big to fail = put out all fires.

Regulations are what lead to private credit being what it is today. Post Dodd-Frank banks are unable to take on a lot of the lending risk with these style of transactions anymore which paved the way for asset managers to create the shadow banking system that exists today.

The lending risk is the same. It doesn’t really matter what color the rug has. Stop sweeping.

It's most certainly not the same. An asset manager going broke because they bought some bad loans is infinitely better off for the public at large than a bank becoming insolvent and depositors losing their money.

Then you'll find a new set of regulations on private credit at some point in the future.

> And I have no idea when it's going to start nor how to fireproof my investments !

You don't, that's the idea.

The hypercolony of wood-termites, on the other hand... :p

Too big to burn

Slow controlled burns that don’t bring down the ecosystem. For a hypothetical person in their late 50s, they’re looking forward to having their retirement go to shit and not recover before they’re dead.

Yeah I was a burn-it-all-down person too when I was in my 20's. It hits differently now after 40 years of work and the desire to retire and play with my grandkids. I guess in the current batch of 20'something's eyes that makes me The Man. I admire their spirit but scoff at their lack of empathy, the same lack I had. Fucking irony.

Might be better than putting it off until the discontent grows to the point that the young generation sees it fit to kill us off or confiscate everything we have and leave us standing in breadlines and living in collectivized apartments.

Tell me what to do. I go to protests. I vote. I volunteer for Indivisible. What ELSE should I be doing?

Keep the focus on the evidence and the science. We have Picketty's book on Capital, Peter Turchin's research exposing elite capture and elite overreach, and perhaps most important the experience of digging our way out of the great depression with strong regulations, high taxes, and pervasive unionization of labor. Promoting the idea that we understand what is going on, have been here before, and know ways out can be very empowering.

Thanks. Honestly I'm terrified about what is happening, and feel 100% impotent. I worry that no matter how many protests we have, he and his fascist ideology are still winning. Voting every 2 years doesn't seem to be doing much.

Why is playing with your grandkids more important than making sure that they have a future to look forward to? Maybe there is a lack of empathy on both sides.

Tell me what to do. I go to protests. I vote. I volunteer for Indivisible. What ELSE should I be doing?

Right or wrong it would be political suicide for anyone with a shred of power to say that. Quite understandably the “dead wood” burning takes a lot of lives with it, and the people on fire tend to be understandably distressed and angry.

The issue is this: the main driver of demand for higher-than-market returns is government pensions, and these cannot fail.

Unfortunately the government will bail out the billionaires and no new lesson will be learned. Exactly like what happened during the Great Financial Crisis.

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