The Great Depression II was on the cards in 2007/2008 before governments took on gargantuan debts to brush it under the carpet. We're all paying for that with governments straining under comically heavy debt loads and interest rates held stupidly low long-term to avoid bankrupting the banks. The last thing we should be doing is allowing the same corrupt institutions which created the crisis loose to do it all over again. It will all just happen again with no room for manoeuvre left.
1) The 700B in assets distributed via the Troubled Asset Relief Program (TARP) have all been sold by the government, earning 15.3B in profit in the process [0].
2) The federal funds overnight rate has been raised 4 times in the last year with more raises planned [1].
3) While the federal debt load is high, the actual annual interest paid by the government in servicing the debt is in-line with historic norms [2].
2) Rates are on the rise, though its only fair if its also recognised the absolute level is historically low. And most likely these rates have been a significant variable creating share market and property asset bubble many markets and sectors are in right now. And this bubble has reasonable odds of creating another serious debt problem. Time will tell.
3) Repayments are at historic levels relative to the economy. This doesn't make it OK IMOP as the total load is dangerous in that what happens if interest rates rise? And I'm sure here many people will believe 'US controls the rates' but then this comes with additional flow on problems including but not limited to; 1) Monetary policy is now weakened as one of the more influential economic management tools for future use 2) Risk is through the roof should the appetite for US treasuries drop 3) The cost of servicing and repaying this is getting dumped on future generations, which will limit future opportunity of the economy.
And to be clear, I'm not proclaiming US doom. The US has an amazingly strong and diverse economy. But to focus points that post-2008 has not changed the playing field, and not recognise the high risk game the US are playing with their economy seems unfair.
> market and property asset bubble many markets and sectors are in right now. And this bubble has reasonable odds of creating another serious debt problem. Time will tell.
Trillion dollar companies have me concerned this will ruin 401ks of our parents/grandparents.
Historically Politics will cause economic issues to be postponed on future generations/elections. These interest rates and growing debt are candy, and we will soon be having a stomech ache. The USD is sick.
My interest in Bitcoin is due to my mistrust of the leaders in political and economic sectors.
As compared with the trillion dollars worth of cheap real estate the public would have gotten had the banks been forced to liquidate all their holdings at the same time at massive losses.
"the public" tend to not have much cash on hand, especially in times of crisis. Those that would have benefitted from a massive real estate firesale would have been savvy 0.1 percenters.
That’s not true at all. I worked at one of the big pe firms that made lots of money from 2008. Their goal was to move things to profitability asap. Either get a loan to performing (via getting holder to repay or rent), sell the note, or foreclose and sell the property (sometimes to a sister company). Same goes for anyone holding a property. Empty properties are targets for squatting and quickly fall into disrepair. The last thing a savvy investor wants is a nonperforming property.
...and a massive plunge in real estate values would probably cause a lot of existing property owners to be upside-down on their holdings, forcing many to sell and/or default on their mortgage/debt repayments, which is sort of how this got started in the first place
On the monetary side it's hard to say which would have been better. There were people in debt, so keeping deflation at bay was important. Then again, even if 0.1 percenters bought these, overall cost of living and consumables would be cheaper, and debt is generally dischargeable, so you could argue keeping deflation at bay wasn't really to protect the debtors but the debt holders.
All said, well considered fiscal stimulus years ago would have been most directly beneficial to "the public" among all measures.
If a good chunk of the population is doing it it becomes less stressful. It's not like the alternate route (the one we took) has been stress free either.
I wonder how many of those TARP assets were bought either directly or indirectly via the FED via QE?
You would also wonder, why not apply this government intervention to all other industries and businesses that are in trouble? Why does Banking get bailed out and others don't?
Over 90% of the monetary supply consists of credit as opposed to money. If companies and people can't borrow money, the world economy freezes and banks control credit unfortunately.
Certainly, you would think they ought to be regulated or constructed in such a fashion where taking down the entire world economy through their own greed should be impossible?
As it stands, they reap the profit in the good times, they get bailed out in the bad (and still make a profit I expect).
Essentially the taxpayer subsidises and protects one of the richest industries in the world from their own mistakes and greed.
That's the spirit of the current system, and it mostly works. The 2008 crisis was crazy because nobody anticipated the magnitude of moral hazard between insurers <=> (banks <=> rating agencies <=> pension funds) <=> mortgage lenders <=> homebuyers. Homebuyers thought they were in great financial shape because lenders kept pushing them easier loans, lenders were writing mortgages with their eyes closed because the banks buying the mortgages were making so much money packaging them into MBSes and selling them to pension funds, the pension funds were enjoying great returns on these products rated AAA by rating agencies asleep at the wheel, and meanwhile the banks offloaded their MBS risk by purchasing CDSes from insurers who were blindly making lots of money selling them. The whole thing was a self-reinforcing feedback loop that burst violently.
I definitely blame the banks for being overly creative in coming up with perverse, complicated multi-party incentive structures that are hard to regulate while lobbying for deregulation. But at the same time, the mortgage lenders, insurers and rating agencies deserve some blame for being negligent at their jobs.
Bingo, and to this point, GE had to go to a government program despite great credit ratings to fund short-term debt in 2008, because the financial lending market had seized up that badly:
because without banks to act as facilitators you would not be able to finance a house or car. Small businesses lending would dry up as would most lending for equipment and commercial real estate.
Banks did a lot to earn their terrible reputations over the past 15 years but it is also true that they provide necessary liquidity to a vast number of markets.
#3 provides little comfort, given we're not showing any signs of reducing it and rates will likely rise due to, e.g. #2.
#1 doesn't seem like a compelling argument, there were probably far better investment opportunities than +2% ROI, so this was likely still a subsidy, even if there were nominal gains. Not that we shouldn't have done it, but that argument isn't convincing to me.
Rates will rise, but that doesn't affect the interest rate for bonds already issued, of course.
No disagreement on opportunity cost - I was responding to the prior posters assertion that the government "took on gargantuan debts to brush [the financial crisis] under the carpet".
I guess you could say that some of the debt incurred during the crisis was attributable to a loss in tax revenue as well as the cost of the approximately 1T in stimulus funds between the Economic Stimulus Act and the American Recovery and Reinvestment Act. That's still a relatively small portion of the total debt of ~16T which is probably mostly due to a mixture of the Bush tax cuts and growing Social Security/Medicare outlays.
Bonds already issued were bought by people like you and me and pension funds who will now be paid many years of below-market interest. It's also embedded into the inflated pricing of every other asset that will have low expected returns going forward. No matter how you seem to want to do funny accounting, you're still paying that cost.
Which is not true at all. US real yield has gone from less than -1.5% on the short end [1] to around 1% recently across the yield curve. Historically it was around 2%. Not only that, the term premium is still likely negative [2]. The financial repression was real.
This does not mean that without low interest rates things would be better. (And I'm not saying Greenspan et al. handled the early 2000s well. But I'm also not convinced that the economy's set point is the federal funds rate. I think it's just an aspect, and business fundamentals - like real aggregate demand, which is much more sensitive to disposable income than to interest rates - are much more important for growth.)
The Fed can do that. Congress not so much. (Sure, technically Congress can legislate money into being, but there are good reasons why it uses bond auctions to fund its accounts.)
$15.3B is, what, 2.19% ROI? Do you know what else could have been done with an investment of $700B in government outlay in the same period?
The Fed funds rate is being raised on the backs of long-term investors who are forced to suffer interest-rate risk, bar the ones who got out in time of course with sufficient inside information -- guess who those are. This is just the flip side of the Fed funds rate being kept low on the backs of short-term investors in prior years. If you were in short-term investment until recently and began investing as the economy got better -- all very rational, risk-averse behavior -- or were just beginning to accumulate savings, you just got screwed twice. You'll get screwed a third time when the next financial crisis hits. We're all literally still paying for the banks' last mistakes, and will continue to do so for many years to come.
And yeah, your chart [2] conveniently ends at 2017-01-01 just after the time when interest rates troughed. This is also with the backdrop of a relatively strong GDP and not considering the increasing fiscal load being shunted to the state and local levels. The fiscal situation is not good and the only thing propping it up is dollar seigniorage, which, let's be honest, is necessarily going to end at the worst moment when you most need it.
Investors invest in both good and bad times. It's not like they are just sitting on money when it rains, but of course risk adjusted returns are lower in a pessimistic economic climate, and a lot of project gets put back into the drawer, the economy ('s growth rate) contracts.
That 700B was essential to stagger that contraction, and it was too small, because Congress is retarded, so the Fed tried its best with QE and other ZIRP compatible tools.
It's of course not a secret that there are possible things to do on the federal level that would generate more ROI than what Congress currently spends on. (For example health care reform, criminal justice reform, public transport and urban planning reform.)
The rate rise is to keep inflation at the 2.0 mark, which is the Fed's target. Like it or not, they are doing what they have to do to meet that target. Investors might be negatively affected by this, but the general population very much favors this.
Also, (both long and short term) investors have options to hedge interest rate changes, if they want.
There are many, many problems with regulations (SEC, CFTC, FinCEN are not proactive, the CFPB is currently being dismantled, and the market is at the same time too oligopolistic and too heterogeneous, too many layers of laws, only the big players can afford to navigate the legal maze), with banks (only the ruthless remains, the sane ones were long priced out of the market), and with the Fed policies of the past (Greenspan et al.'s handling of early 2000s), and even the financial news media is to blame (as they are very biased, either for or against the establishment, detached rational analysis is simply not bringing in the clicks).
Interest rate hedges are not free. There is no free lunch. Anyway I am not suggesting that there is a way to avoid paying the cost one way or the other, once the horse has left the barn when the banks put junk on their books with depositors' money. Unless you can unwind those or claw back years of executive compensation the damage is done.
Agreed, but long term rates are and always were (to my knowledge) higher exactly because of the larger uncertainty.
That said, "mark to market" is better than some magical nominal pricing. Of course creative accounting is the name of the game, that's why regulators need proper authority to request reports that help clarify things (so that helps them to stay ahead).
1) yes, but was TARP worth the governments risk? Given the riskiness of the debt, perhaps the government should have taken a lot more profit. A dime less in profit given the massive risk profile is de-facto a subsidy for the bank.
2) The 'big whale' you didn't mention is the trillion dollars in crap mortgages that are sitting on the Fed's balance sheet at face value. That more than doubled the Fed's assets, and those assets were way overvalued ... basically making the USD backed by crap. Which is a 'cost' to anyone using USD, esp. those issuing debt in USD, like the Government, i.e. taxpayer.
So while it's fine and good some of the bailouts were above board, there's too much of it that wasn't.
The government should have eaten all those banks, turfed the execs, and the sold them later for a massive profit a few years later basically wiping out most shareholder value and taking the profit into public coffers. That would actually be closer to capitalism than the bailout program.
> The government should have eaten all those banks, turfed the execs, and the sold them later for a massive profit a few years later basically wiping out most shareholder value and taking the profit into public coffers. That would actually be closer to capitalism than the bailout program.
The closest thing to capitalism that would have also massively benefited people - not major corporations - would be to let capitalism do its thing, aka punish those who overleveraged via market-based mechanisms.... like bankruptcy and liquidation. Those who didn't do stupid shit would benefit from the flood of assets.
We controlled variance - how well we did this is arguable - at a massive cost. Maybe it was worth it, but let's not act like there wasn't a huge cost to bear.
no room for manoeuvre within the current system. So we'll have to change the system. Unfortunately, I have not yet seen dissent proposals of what the new system should look like (I don't consider crypto a feasible alternative). Nevertheless, I am optimistic.
Care to explain how historically low interest is bad for governments in debt? Because that is completely the opposite of how it actually works for lenders (high interest destroys them).
His point is that we are at risk of high interest rates causing exactly that, and we are getting used to low interest as if it is normal while piling up more and more debt.
Or even sooner. Money is the story of wealth, but the real working and growing economy was almost always about debt. The moment someone invented writing someone wrote a letter of credit. Kings used it, and countries got built on next year's harvests, and of course went bankrupt when that harvest turned out bad.
> Stupid people getting loans they couldn’t afford.
> loans to stupid people,
Ah so it's (partly) the people's fault now? So when a banker shows up and offers a mortgage to a struggling family (which they can't afford), it's their fault for accepting it! I mean how could the banker ever have known? It's not like his job involves assessing these risks or anything.
Yes, people do have responsibility for their own finances. We blame people for mindlessly speculating in cryptocurrencies, there is no reason to not do the same when they take on an adjustable rate mortgage that takes 3/4 of the family income to pay.
Nobody struggling needs to buy a house. That's what renting is for.
It's literally one of the main jobs of the bank to make sure that it can get back the money that it lends!
A family borrowing too much is their problem, banks not doing their jobs is a national problem which should not be rewarded by bailouts, but by jail time and bankruptcies.
Whether the bank can get its money back and whether you can pay for the mortgage are different things.
It's not credit card debt, even if you go bankrupt the bank can still collect the debt by evicting you. So it's not the same as loaning someone money for consumables.
Banks price foreclosure and delinquency rates into their interest rates. In 2007/2008 this didn't work because the banks themselves were over-leveraged.
But it doesn't change the fundamental aspect of this that a bank can be quite happy to give you a loan you don't have a high chance of paying back. If they charge you high enough interest rates it's free money for them.
Actually, the banks packed those loans and sold it. They got the money. They got the bonuses and money after contracts. More contract, more money. They were no longer interested if the client can pay or not...
It doesn't change the argument that it's not just the banks that are responsible. People who took these loans also share the responsibility. I don't like the knee jerk reaction of assuming it's not those peoples' fault at least partially. There are many fiscally responsible people who didn't take out those loans and instead were renting the whole time and saving diligently, planning for their financial future. Nobody cares about these responsible people apparently.
> Nobody cares about these responsible people apparently.
That's because they aren't. It's not their responsibility to figure out their own credit risk in relation to other loans that are packaged up in CDSes by banks and given triple A ratings by rating firms and sold on the market.
It started with the banker that sold a mortgage while knowing the people couldn't afford it, and continued with other firms packaging it up all nice and shiny until the whole financial system collapsed. There is no way consumers (normal every day people) are responsible for this mess.
It is their responsibility to be fiscally responsible and plan their spending in a way to have sound finances. Taking out a mortgage with near zero deposit with monthly repayment that takes 3/4 of your family income is irresponsible and I disagree with stripping such people of any responsibility. Just because it's easy to get a loan doesn't mean consumer is not responsible for judging feasibility of the loan.
What if interest rates go up and my monthly repayment goes up by 10-15%? What if I lose my job tomorrow and it will take me 6 months to find a new role? These and similar are common sense questions a consumer should ask himself/herself before taking out a loan. I am not going to put 100% of the blame on the bankers. You don't need a degree in economics to be able to ask these simple common sense questions and make a judgement on whether it's a good idea to take out that loan.
> You don't need a degree in economics to be able to ask these simple common sense questions and make a judgement on whether it's a good idea to take out that loan.
That's personal responsibility, different from being responsible for the global economy. A dangerous game based on credit and loans was being played by banks and financial firms, but the people getting a mortgage where the poker chips not the poker players.
I'm not from the US, the crisis in 2008 hit my hometown (in Europe) hard. Do you expect me to (partly) blame US homeowners for this?
Indeed. You have to sit down and sign an enormous stack of paperwork to get a mortgage in the U.S., and a large fraction of it is government mandated forms that explain the risks, which you sign acknowledging you read and understood them.
If you're getting a mortgage it's time to start acting like an adult already.
Responsible for their own finances, or responsible for the crisis? The latter claim is what seems to have started this conversation, and the individual getting a loan had very limited insight into the general mechanisms that led to trouble, and it's not their responsibility to ensure that whoever they get the loan from (and whoever its sold to downstream, without their input) is capable of handling it if many of the people they gave loans to default.
Huh?! AFAIK the majority of the mortgages just before the GFC were literally "no risk zero deposit" - if you couldn't repay, you could just move away and mail the keys to the bank, and you had no other obligations. Perfect (for the loan-taker) in case the housing market started crashing or just declining. You'd be stupid not to take such a loan!
There are similarities though. Cheap credit can allow giving huge loans to people who drive prices of property up and fuel the buying frenzy. This aspect is similar to the ever rising price of cryptocurrency bringing in more and more buyers.
You are right, of course, but in our society we (correctly) punish illicit drug suppliers, dealers and buyers, because they are all knowingly engaged in activities that they know they shouldn't be engaged in. Punishing only one of those parties would be... classist? Maybe even racist?
OP was talking about casual or moral responsibility, not about criminal. Unless it was fraudulent neither party is to criminally blame, even if both hurried the economy toward the cliff. Even if "the banks" did so knowlingly. It was not their job to care about that.
And while it's sad, that banks were this short-sighted, it's important to note, the less ruthless ones were already priced out of the market.
OP was blaming them for bringing the global economy to its knees.
Regardless: yes there is culturally a big difference in buying bitcoin and getting a mortgage: the latter is not considered a risky investment precisely because everyone isn't expecting you'll get one if you can't pay it off. Bitcoin on the other hand is not a loan, but putting money you already have into a risky investment (note: I'm making a living of cryptocurrencies) .
Yes, it's absolutely partly the people's fault. There were tons of people taking massive loans they should not have. People cannot abnegate personal responsibility there.
A lot of things had to go wrong in the banking system for the crash to happen, but that was one of them.
No, that's not what anyone, even the OP is saying. People were taking massive mortgages, far beyond their means, they were buying several houses renting them out. They were knowingly falsifying information they provided to the banks etc. etc..
Not all banks were doing dirty things, and not all people were doing things, but many banks were and so were many individuals, and so the rest of us pay the price.
This crisis is truly an American style crises - people in most other countries are hugely risk averse when it comes to this kind of stuff. Even buying cars on payments is a newer thing in some advanced countries ie Spain.
Not just attitudes though ... 'bankruptcy' is a survivable event for companies and individuals in America. Less so elsewhere.
You're taking the exception (people buying several houses and renting them out) and just declaring that it applies across the board. In many cases it wasn't like this at all - just families who had been duped into thinking they could afford something they couldn't. Sure you could point the finger and say they could have pored over every clause in their mortgage contract and produced their own models for what could happen to their repayments under various circumstances, but why would they? They had no idea whoever "sold" them the mortgage was acting in bad faith. It's only now we know that it was all a sham and that you shouldn't trust these guys as far as you can throw them.
The idea that the financial crisis was brought on by some greedy underclass with ideas above their station is a myth that the banks have been pushing ... and it seems a few HNers have just bought it hook, line and sinker.
You're simplifying the already situation well outlined in the parent comment. Maybe your argument is that people aren't responsible for their own decisions? Ie when they go to casino and blow their salary on gambling, it was not their fault, it was evil casinos. If they sell their used car too cheaply, it's fault of that sneaky dealer.
From what I heard many people in US were (maybe still are) taking all kinds of non-necessary loans. Well that's really not the healthy mentality, nor is it standard anywhere else across the globe. People that can't do simple 2nd grade math on paper take those here in Europe, and often they suffer, together with their families.
Seriously, there is something called financial literacy, and 101 of that is - don't buy shit you can't afford with a HUGE comfortable margin. 102 would be don't take loan on anything but your housing, unless you're starting a company. Any other loan, you're entering needless risk for not good enough reason. My personal opinion this is one of the failures of modern schooling - these things should be taught to every child, over and over. How to do taxes, how government works, how to become a better member of society and contribute to it, and how to effin' be financially smart whatever your circumstances are.
I think you overestimate the coherence of your arguments. Do you respect the law? Do you agree that people that sign any contract that binds them for majority of their lives should do their due diligence and actually check what they sign or at least give it a serious thought?
Nobody here is vouching for the banks here, they share their huge part in what happened, but your views are simplistic and a bit paranoid to be honest - 'banks pushing their myths on HN crowd' - the situation has been analysed ad nauseum and its pretty clear what led to the crysis. Nobody needs to push anything, not that banks would be magically able to do it anyway
> just families who had been duped into thinking they could afford something they couldn't.
Duped? You don't need to pour over financial models to know that spending 3/4 of your pay on a mortgage is going to cause problems. One thing I will say is that in the US, personal finance education is woefully inadequate. Just look at the number of people and the amount of balances that get carried on CCs. That alone is a sign how poorly people think about money.
The sad part is that a budget is not hard. It does require some self discipline, which is also sorely lacking.
They didn't care. They were selling the loans on to other institutions which in turn were repackaging them and selling them on and so on and so forth. In the end, it was often unclear who was left holding the bag.
The banks, for the most part, were being rewarded for originating loans that they weren't going to hold, so they had perverse incentives to loan as much money as they could. There was massive fraud throughout the system from the the borrowers to the mortgage agents to the banks to the re-packagers (other bigger financial institutions, usually) to the credit agencies. It was a total shit show all around.
A person cannot go bankrupt in some EU countries. You will be placed under supervision and your income will be managed by a third party (usually government). This is also the reason why there are agencies which (by law) monitor debt so you cannot acquire more than you can afford. This includes everything from mortgages to pay-day loans.
No one said that at all. The point is that there was plenty of greed to go around. I watched multiple friends get caught up in the hype. They called me stupid for not taking on a huge loan because "housing only goes up" or "you'll never be able to afford a house if you don't buy it right now" or "I'm going to sell this in a year for 100k profit".
My thought was always I have a good job in software making way above the median income, and I can't comfortably afford a house. There is no way this can continue. It lasted much much longer than I would have guessed though.
Yes it is partly their fault. Contrast people without sufficient income, who took huge mortgages with almost zero deposit and repayment amount too high for their income, to fiscally responsible people who didn't participate in the mortgage frenzy, instead trying to save more to afford bigger deposit / smaller mortgage in the future. The first group of people was bailed out by the second group partially. This is quite unjust.
Your comment is simply saying: contrast people who participated in the real estate bubble with responsible people who did not. I agree that the second group suffered because of the first and that this is unjust. Whether we can expect people generally to not participate in market manias to avoid such a predicament, is another question.
I took a reasonable mortgage that my wife and I could afford, paid a standard 20% down payment and saw the "value" of my first home drop 50% post 2008. Am I stupid? Was that my fault?
The "boogeyman" borrower who borrowed millions, made no down payment and had 0 income rarely exists.
Personally I think 20% is a small deposit but better than what a lot of people are getting away with these days. You’re still taking a massive loan that you will be paying off for decades. You should only do such risk if you are ok with the property losing value. E.g. Only people buying their first house for family should ever take a mortgage if they have decided to live in that place for next 20-30 years. People buying second or third homes or flipping houses should be burned in mortgage crises, not bailed out, that’s immoral.
> saw the "value" of my first home drop 50% post 2008.
So what? Not every investment goes up, and even those that do go up rarely do so linearly. As far as your situation is concerned, who cares if the value dropped 50%. You were smart, bought something you could afford (presumably on a fixed rate), and just kept making the payments. Over the long term prices would come back.
The problem came in with people buying houses they could clearly not afford, and with no cushion for any downturn. They were not boogeyman borrowers, and were very common in places like Florida and Las Vegas. People who could only afford the teaser rate payment on a 3/1 ARM when fixed rates were at historic lows. Not a smart financial move on their part.
You took a risk. Taking a mortgage is not risk free. Prices of properties are not guaranteed to go up forever. We are in fact in huge housing bubble. Some people just rent. It’s not right to force renters to bail out people who took mortgages. Once this bubble bursts I hope we are not going to be bailing out mortgages again.
The problem wasn't so much that people took/were given loans they couldn't afford. Default rates fell for many years along with lending standards (not requiring a job, assets, or income for a loan became common). Continuous rapidly rising home prices kept defaults low. Believing home prices would always rise (at some minimum rate) made it rational for borrowers and lenders engage in this behavior.
To argue they were being irrational, you'd have to show that it was irrational for them to believe in the myth that this trend would never end, which is tantamount to expecting markets to not experience manias or bubbles.
Exactly: The question is not "who was stupid", the question is "who failed at their FULL TIME JOB of preventing that kind of stupidity from mattering."
Humans are all stupid and fallible in some ways or situations, and we create organizations in order to direct our strengths in a way that shores up the weaknesses.
An ignorant student is regretful-but-expected, while an ignorant teacher is a problem.
Yes. But people are responsible for their actions. Taking out a loan has consequences and people should not be striped of those. Somebody who takes a payday loan and goes to casino is responsible for his/her action, it's not just the loan shark's fault.
Sure, but unless we spend some effort (money) on curing or shooting the unlucky addict it won't lead to pretty things. Responsibility or not. And usually in civilized countries we don't like to shoot mentally ill people. But for some reason just watching as they tear apart their and their loved one's lives is a-ok, because responsibility. :(
Because responsible people then have to bail these people out with their savings / taxes going up. It's a moral hazard. If there are no consequences for your actions / financial decisions, people will never learn and will continue making bad choices because why not.
Agreed. But simply letting responsibility run its course does not make the world a magically better place. Processes that lead to better global state often require catalysts, such as gov intervention (regulation, Fed actions, addiction treatment, etc).
> Take away any of those components and you no longer have Great Depression 2.
The 2008 collapse was caused by parties unscrupulously seeking profit while blindly trusting the word of their dependencies... willful ignorance in a system of unsustainable but mutually beneficial arrangements.
That's a cultural problem. If we had outlawed anything you point out, the end result would be a different house of cards built out of the same unwarranted trust in abstraction layers.
And don't forget government policy and meddling politicians. If anything, that played one of the largest roles. Legislation meant to make "everyone" a homeowner by removing barriers to home ownership played a large role. Fannie Mae and Freddie Mac policies drove bank lending in large part. Originators were writing crap and Fannie and Freddie were buying it from them at a feverish rate without a second thought.
Even assuming you're right (and you're not) that "stupid" borrowers somehow contributed to this problem, a system which depends on everybody being smart and acting logically is about as robust as a castle made of playing cards and as useful as a car engine which explodes as soon as your mileage goes 1km past the scheduled oil exchange mileage.
I stated a simple and correct fact. In order for bad loans to exist there must be two parties involved: Irresponsible creditors and irresponsible (or stupid) borrowers. This is assuming that the terms of the loans are known by everyone. People lied to get loans but the banks, as many have pointed out, knew exactly who they were loaning to. And the borrowers knew very well that they couldn’t afford these loans. The only way they might not have is if they were not very smart.
I am completely surprised at how divisive this one simple fact has been. It is literally impossible to refute this.
And your comment on how society would be super fragile if I were right — it is.
> The only way they might not have is if they were not very smart.
There is another option. They may have been very smart and operating in the environment they saw around them. This is basically what the big flippers were doing. It's a dangerous game though because when the music stops you do not want to be the one without a chair.
Naked short selling [1] and short and distort [2][3] were also a big part of the pump and dump then the crash, they nearly broke the entire market.
> During the takeover of The Bear Stearns Companies by J.P. Morgan Chase in March 2008, reports swirled that short sellers were spreading rumors to drive down Bear Stearns' share price. Democratic Senator Christopher Dodd felt this was more than rumors and said, "This is about collusion." Chase was victimized by a similar "short and distort" scheme six years earlier when rumors arose about its purported relationship with Enron.
Naked short selling rules went into effect Thursday, Sept. 18, 2008 three days after the Sept. 15, 2008 Great Recession cliff that dropped Lehman and kicked it off [3]. Much cheaper to buy value and extract it when it is cheaper from a crash, the worst kind of players in the market extracted the value from the value creators.
Lots of the games played then are back with hedge funds creating movement to skim, short and distort and in some cases try to shakeup companies [3][4]. Amazon, Tesla, Apple, and many more are getting these attacks currently, we aren't ready for another big game, they might truly break public markets next time.
Naked short selling and pump and dump was in effect which is indisputable by the facts, Lehman was just a trigger point. Making it all about Lehman is disingenuous to the full statement and event.
The Great Recession was a value extraction event plain and simple, a banking squeeze in the end. Naked short selling, short and distort and pump and dump were the fuel, the value extractors took from the value creators.
The Great Recession wasn't an typical market correction but engineered, many banks and funds paid fines for their part [1][2].
Short and distort is back in full force, gearing up for another round [3].
People will not be ok with 'too big to fail' this time around, and if another Great Recession happens, it may permanently harm public markets for good.
> Naked short selling rules went into effect Thursday, Sept. 18, 2008 three days after the Sept. 15, 2008 Great Recession cliff
How you twisted that into your hate on Musk seems biased.
Clearly the facts are short selling and naked short selling exacerbated the Great Recession. Your Musk hate is outshining the facts.
The Great Recession wasn't an typical market correction but engineered, many banks and funds paid fines for their part on the fraudulent ramp up pump [1][2].
And naked short selling rules were reigned in 3 days after the Great Recession cliff [3].
Though little has been done to reign in securities fraud using short and distort besides this SEC warning shot on a smaller fish this year [4]. Short and distort is illegal and needs to be a major regulatory push to avert another crisis, especially since the market is more automated and HFT run now.
The SEC short and distort warning shot this year happened almost a decade later almost to the day of the Great Recession cliff (Sept. 15, 2008 - Sept. 12, 2018) putting the big fish on notice [4].
> “While short-sellers are free to express their opinions about particular companies, they may not bolster those opinions with false statements, which is what we allege Lemelson did here,” said David Becker, an Assistant Director in the SEC’s Division of Enforcement. [4]
People will not be ok with 'too big to fail' this time around, and if another Great Recession happens, it may permanently harm public markets for good.
It openly admits that various banks we're being constrained due to their notorious bad behavior, but casts those constraints in a passively negative light, and then tacitly celebrates that these bad actors are now less constrained to act badly.
It's pretty bad if you ask me. A governments job is to follow the law too and not use its discretion in 'unwritten law' that is secretive.
No problem if they publicly said they would do this, but this way is precisely the problem of developing countries. You wouldn't think it would happen in America.
No, it does not excuse the behavior of the banks. The point is that the regulatory behavior was bad, not that it wasn't punishing a real crime.
It would have been significantly better if they announced publicly that JPM was going to have it's growth restricted because of reason X. This would have acted as a deterrent to other banks, sent a message to the public that the banks were indeed being punished, and avoided the image of a secret governance process.
Everyone who reads these publications is well aware of the financial disaster so it doesn't need to be reiterated on every article because the knowledge is assumed.
Disclosure is what happens all the time. I havent really heard of a recent or distant event where it was the norm to not disclose SEC actions. (barring some privacy clause or agreement reached via settlement)
Most likely, and I say this as an opinion, several of the banks they bought in 2008 were restricted from expanding until their house was in order.
These moves were, with 100% certainty, would have been announced and published at inception.
And no, the meaning of "financial disaster" is VERY different depending on which side of Fin services you stand on.
To many banks and bankers, the debacle is a failure of market participants - the cost of living in such exalted times. More regulation would only hamper future efficiency and delicious growth to shareholders.
For main street, this was a watershed moment where they saw that banks were a force unto themselves.
Their market niche so critical, that letting them continue more necessary than justice - overturning a basic tenet of American expectations (bad firms fail, merit rises).
"too big to fail", is the shadow of "too big to care".
Main street does not read Bloomberg or WSJ, so they tailor their articles to their audience's bias.
? JPM was actually cleaning up it's holdings of risky junk and taking write downs long before 2008. Posting poor results compared to peers but this allowed them to be in fairly good shape in 2008.
Well their job (The Office of the Comptroller of the Currency[1]) by law is to regulate banks for systemic risk. Recall that this same government bailed out the banks due to systemic risks. JP Morgan is then participating in risky activities and wants to expand thus becoming more important in the banking system. The government pushes back as it has had transgressions.
The whole "unwritten rule" thing is kinda nonsense. The OCC which was preventing the expansion was chartered to ensure the soundness of the banking system. That is pretty arbitrary and they have the authority to arbitrate on that. That sounds like they can use their discretion.
What you would think would not happen in America is that the government bails out private banks that behaved badly. If it were truly American capitalism they would fail. Banks would then not be able to become so large due to people and banks not wanting to have too much liability with any one institution. So it is inconsistent to have a system where the government cannot use their discretion in the growth of banks, yet be on the line for a huge bailout to stop the economy from collapsing when the banks get too greedy.
The law says that the regulator has a bunch of power to regulate the banks. They are following the law and the constitution, all of it. Stop making up bullshit conspiracy theories.
Ad hoc, secret regulatory actions might be allowed, but it's a surfire way to breed corruption since unfair enforcement becomes extremely difficult to detect.
The best part is how scrupulously Michelle Davis avoided any uncomfortable mentions of the crimes that brought said punishments. Wells Fargo’s business tactic of forcing their sales staff to commit fraud and identity theft is instead described as “a pattern of lapses and abuses”.
I had an interesting experience in Wells Fargo around 2012. I had probably 10 business accounts there, including the main receivable account, as well as an account from which about 7 contractors were paid monthly to the tune of $100,000/mo.
I was the only signatory to the account, the only person with a login. I had my personal accounts attached there as well. A some point I log in into WF from my regular office laptop (static IP) and instead of the account balances I see a warning: your access has been restricted due to security. Please call an 800 number. I log in from my phone via different IP, same result. My attempts to talk to the assigned business banker went nowhere: she repeated the same number. When I called that number, I got treated like a criminal, I got yelled at and I was told that all accounts needed to be renumbered, and the previous accounts would disappear including the account history. With multiple vendors and contractors, renumbering accounts is true hell. When I asked this person about the alternatives and for a reason for this action I was told that this was done "for my safety", and if I needed the details they could only be obtained via a subpoena. I tell her that according to my knowledge, a subpoena can be obtained only during a civil litigation, and I am asking her if she invites her customer to litigate against the bank? She rudely responds that if I do not want my accounts renumbered, she would leave this as as (with the security warning and no account access). Since this is business critical, I acquiesce and she removes the warning, but the accounts are read-only now. She then tells me that I need to go to a branch, killing my workday. At the branch a salesperson tries to sell me their new accounts and packages (that are of course worse than the original ones). When she realizes I am not an easy target, she just asks me if I am ready for the account renumbering. I ask her if my accountants will have access to the CSV - without this we cannot even make quarterly tax payments. She says sure. I ask her that just in case, I want to download the accounts (all 10 plus 4 personal ones). She says go ahead on your laptop (like I am paranoid, I don't need this). I ask her if they have WiFi in the branch. Not for me. No problem, I tether to my phone (for 2012 it was advanced) and download. Then she hits the button- the accounts are completely gone! Only the end balances got transferred to the new accounts. I leave. Then I call Wells Fargo and ask how I can get the CSV histories. A business Banker tells me that she can fax the hard copies of each monthly statement for $12 per statement per account!
When I discuss this later this awful experience with my regular business banker at my branch, I ask her if higher balance accounts get treated the same. She says that my accounts (low 7 digit balance) are too small, but starting from 8 digit, you get a different treatment!
I still cannot understand what kind of "safety" a new account number can provide, because every time I write a check I disclose my account number.
> Wells Fargo’s business tactic of forcing their sales staff to commit fraud and identity theft
That’s just a dishonest characterization. Wells Fargo didn’t “force” their staff to do any such thing. Staff gamed an incentive structure and WF didn’t catch it. “Lapse” is the most accurate characterization.
No. Words have meaning. Forcing someone to do something means coercion + intent to achieve a specific outcome. There was no evidence that WF intended anyone to commit identity fraud. You don’t get to redefine the meaning of well understood words.
There was a decade of complaints and more than enough to connect the dots. Looking the other way because you like the results goes to intent.
Threatening ones job unless they sign up X many customers for a product is coercion. Sales quotas are inherently coercive. If you choose to do zero quality control and employees learn cheating is okay then it is bad.
The branch employees were effectively forced to cheat because that was the only way to meet their sales goals and keep their jobs. The executives knew this, but chose to look the other way.
Recently, Bloomberg has had some very stilted articles -- editorial tone pushed in to articles and choice of coverage. It feels odd, and it feels wrong.
Agreed. I was curious what this was above, then as I started reading it, I was saying to myself "wait, I thought this was actually well-known that these TBTF banks were being curtailed out of punishment for their behavior." I don't see how this was secret, nor do I think it was even a problem since they appear to have been doing extremely well since then even with their growth "halted".
The limits make sense, the secrecy not so much. That guarantees an odd tone for an article to be read by (a) JPMorgan Chase shareholders and (b) Americans who don’t want another financial crisis.
Yeah it's a pretty odd article. It seems like things were working as they're supposed to and yet it implies that it's gonna be great now that the regulations have been lifted by the Trump admin. Unfortunately though, I'd imagine the banks will just continue with their bad behavior now that the shackles are off and it seems like there won't be anything in their way to slow down or halt their plans. Doesn't seem like a good thing really...
I don't find it odd. Economists are typically skeptical of government picking winners and losers. Here this is mentioned as the result of an unwritten rule, and as the title says, it was not done transparently.
It's not picking winners and losers in any sense of that phrase. They are literally punishing the bank for bad behavior and that's to be expected from what a regulator should be doing. If someone breaks the law and you send that person to jail you're not picking winners and losers in any way. You're meting out discipline as needed to punish the bad behavior and try to make it so that it doesn't happen again.
Also can you show where economists are skeptical of government picking winners and losers since the government has been doing it for ages and the economy has been marching on for a long while. In fact, picking winners and losers in the 2008 recession is what led to moving out of the recession.
>t's not picking winners and losers in any sense of that phrase. They are literally punishing the bank for bad behavior
This response repeats the confusion that I just responded to, and tried to correct.
Note that my post does not actually disagree with enforcement of regulatory authority. I also believe that regulators should enforce their regulations. What I pointed to was something different than this.
>If someone breaks the law and you send that person to jail
But that's not a valid comparison. I think this is where you, and others, are confused.
The judicial branch has the authority to enforce laws for breaking crimes. That's what you're comparing this to.
Regulators also have authority to enforce regulatory law.
But what is happening is that a regulator is arguably not using their regulatory authority appropriately. They are, "behind closed doors," and using "unwritten rules" using their authority to punish a company for bad behavior.
The problems here are of transparency, accountability, fairness, competitiveness, and freedom.
I could agree with you if I believed the regulator can do no wrong, but I don't believe that.
Banking is an industry with regulatory oversight/law, but that does not mean regulatory law or authority are the "banking police."
Although I said in the above post that JP Morgan should be held accountable to regulatory law... So the disagreement here seems to be with something I never said.
You said the judicial branch enforced laws which is incorrect. The judicial branch cannot bring charges. The police do, which may or may not end up in court. Here it was the banking police.
Ok, the judiciary does not technically enforce criminal law, but applies and interprets them. But that is a technicality of language which neither refutes nor reinforces the point I was making: this is not an example of criminal law being enforced. This is a case of regulatory law/oversight.
Should regulators hurt some companies and help others, behind closed doors and for unwritten rules?
That's a different kind of question than should "the courts and police enforce criminal law," which the above user I was responding to was confused about.
That is what the point was.
I can see how reasonable minds can agree on what amount of trust they place in the hands of regulators. Clearly, judging by downvotes, a majority HN believes they should have authority to manipulate markets by picking winners and losers based on determinations of good or bad behavior--and all behind closed doors and outside of written rules. I just simply dont agree with that, as most other economists and Bloomberg news clearly does not, either.
Again... you're injecting some sort of belief that they are manipulating markets and picking winners and losers when there is no such evidence of either of those statements being true including none in the article itself. You're stating that that punishing an organization for fraud is manipulating the market. It seems that you're cloaking that odd argument under the 'behind closed doors' and 'outside of written rules' aspect when they are not connected in any way. One has been created out of whole cloth and the other might actually be pretty valid. You're also hand-wavingly saying 'most other economists' don't agree with that organization policing fraud which multiple others have said (and myself) doesn't seem accurate while not providing any evidence that economists believe that. I'm not sure why you're taking this stance honestly as you're not giving any proof or evidence for any of it.
If you are punishing one organization for bad behavior 1) in secret and 2) without expressly breaking any written rules (the article says they broke "unwritten rules") then this is going beyond enforcement of regulatory oversight.
I dont disagree with the end result, I disagree with the method.
Also, you may disagree, but I dont believe you honestly dont understand what I am saying.
This is not the same concern you're expressing unfortunately. You're arguing elsewhere that the government punishing outright fraud is manipulating the market and choosing winners and losers. I see nothing about that at your link and nothing that defends your belief in that. He's saying that the fed and the government should step in and make decisions about trying to buoy the market, which is what you want them to do when the economy might go belly up so that people don't all lose their jobs and riot and starve. I do see that it's where you got the phrase 'government should pick winners and losers' from however but the context is vastly different than what the original article we're commenting on is about.
I dont disagree that JP Morgan should not be punished. I already explained that. You're confusing some things. Another example of your confusion is you mentioned here that the government is punishing fraud; but in reality, they punished them in secret for "unwritten rules" which were broken.
A regulator should not pick and choose who to punish, in secret, and for unwritten rules. That's ridiculous, and this kind of secrecy and ambiguity is not an example of good governance, fair treatment, or competitive markets.
In a competitive market where government treat everyone equally (no picking winners and losers) everyone abides by the same rules, transparently. That's not what happened.
In fact, when government decides to meddle in markets in secret and without any written rule or law, this raises fear of exactly that. Probably in this case, the end result seems to be not unjust, but the method is horrible, and I have no idea why they did it this way.
And yes, this kind of market meddling, or "picking winners or losere," is a type of market meddling, not unlike what I linked to.
I would suggest going back over the article to see where your confusion started, and also the posts here, and my other response to you.
In a competitive market government should treat everyone equally by the same rules. Big banks do not exist in a competitive market as they are heavily shielded from competition, protected from failure, and massively subsidized by the government. As such they should be required to adhere to far more stringent rules.
I do agree that those rules should be transparent and not "unwritten" though.
How did you go from "punishment for multiple crimes and regulatory violations" to "picking winners and losers"? Economists typically think laws governing fraud should be enforced.
Laws should also be transparent. If there is a crime, the punishment should be known in advance and be imposed openly. How else will it act as a deterrent?
I assume it was private because it would hurt JP Morgan's stock price if it was made public. You could say investors have a right to know but my guess is JPMorgan wanted to keep it private.
A French economist, I think it's Charles Gave, said something like "bankruptcy is to finance what hell is to Catholics : if there was no hell they wouldn't behave well".
“Severe punishment “ constitutes expansion ban and fees. Great! Break the law, no jail for those people. It’s clear that as long as you are a banker you can do whatever the hell you want.
Exactly. Until bad behavior actually destroys profitability or sends people to jail, the banks are free to continue their abuse of the American citizenry.
Petition Congress for more proactive financial regulation agencies, otherwise they won't be able to jail bankers much.
Everything that matters was by the book. (The risk offloading.) The DoJ managed to get DPAs worth billions for stuff that wouldn't have landed anyone in jail anyway.
It is bad because you are willing to believe one side (composed of multiple companies) when it's in their interest to say what they are saying and completely discount no just their article but their publication.
> JPMorgan has racked up more than $30 billion in penalties, legal costs and related obligations since the 2008 financial crisis, some of which stemmed from its acquisitions of Bear Stearns Cos. and Washington Mutual Inc.
So they were being punished for agreeing to purchase companies that were failing and that Obama had pushed them to buy... and then he turned around and fined them for the crimes these previous companies committed.
I don't think JPM is innocent in the 2008 debacle as is outlined later on in the article, but it just rubs me wrong that they were punished for BSC and WMI.
It seems that if you don't punish them for the bad things the companies they acquired did then companies will just do bad things and then get acquired, even by another subsidiary or holding company just to evade the laws and regulations. Isn't that a huge loophole you'd be opening?
Makes sense to me. Unpunished crimes could be seen as an existing liability, and something the parent company acquires when they buy the violating company.
I would argue that they in fact are definitely a liability, but one which has been calculated to be worth it if you continue with the acquisition. Just because you buy a company doesn't mean their previous crimes should now magic-wanded away. It would be far too easy to take advantage of that. (If it wasn't clear, I'm agreeing with you 100%)
> I don't think JPM is innocent in the 2008 debacle as is outlined later on in the article, but it just rubs me wrong that they were punished for BSC and WMI.
Once their crimes are public knowledge, the expected cost of the future penalties should be priced into the purchase price. Unless the penalties were larger than expected (and if anything they were smaller), they got what they paid for.
IIRC, Bank of America was told in no uncertain terms by Bernanke and Paulson that they were buying Merrill Lynch. It was a shot-gun wedding at a pivotal moment in the crisis.
I don't remember if JP Morgan had a gun to their head, but there was likely significant pressure. Combined with the fast pace of events and uncertain liability (the crimes were not all known), the purchase prices were very rough guesses.
I hesitate to say that it was unfair that BofA and JPM were punished for the sins of the banks they bailed out. For one thing, neither of them were exactly innocent. Secondly, 10 years on they're both doing really well. While it's great they both took one for the team, so to speak, it's not like either made a great sacrifice.
I'm not familiar with the specifics of how the negotiations actually went down, but I can't imagine negotiations work like this when regulators are telling you "You must buy Company X" and you weren't interested in acquiring Company X to begin with.
Purchase prices only reflect a acquirer's view of the value of Company X under market conditions, which seems to have clearly not have been the case when the acquisition occurred.
I find it funny how the partisans blame the bailouts on one party or the other but in reality it was one of the few perfectly bipartisan efforts during the last decades.
I thought about that recently, specifically the tight (at least, so it seemed) integration of the Obama transition with the Bush crisis management team when the sky was falling.
It truly was a remarkably bipartisan moment in time.
It kind of felt like to me that the government had a backdoor agreement in place for them to purchase WM well before they declined to offer WM a bailout and declared them insolvent. It was a matter of hours between those two events and there is no way any due diligence was done and negotiations couldn't happen that quick.
I had bet money on the bailout so I was bitter for a while. First real market lesson for me.
