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Old 03-04-2019, 11:32 PM
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Is the global financial system more stable now than in 2008?


I’ve been taking a course on Corporate Governance. It’s surprisingly interesting, and covers the 2007 financial crisis in a lot of detail.

The professor makes the argument that the global financial system is not much safer than it was after the last big crash, despite the many reforms that were made and the tremendous amount of money spent by governments.

Without getting too detailed, an argument is made that banks are still too incentivized to take big risks as many are still too big to fail; that too many smaller financial institutions are exempt from more onerous requirements, that mortgages have too many exemptions; that changes were largely made at national but not global levels and the systems of different countries remain dependent; that many countries have staggering debt; that Chinese banks have moved in the opposite direction of more regulation and capital requirements...

This is without Trump watering down Dodd-Frank or Brexit volatility.

Wondering if anyone agrees or argues that the system is far safer today?
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Old 03-05-2019, 01:50 AM
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My sources believe that the system is /less/ safe, because the new regulations make the system more uniform and more narrow, without providing enough more protection.

The system is at present safer, because each crash cleans out the marginal and unsafe lending practices. When the next crash happens, even more of the system will be effected, and it will be even more tightly linked. The new regulations will ensure that the specific cause of the crash won't be something specifically addressed by the regulations: there will be some new and interesting way of crashing.

The argument about the banks being too big to fail has never convinced me: America has bigger banks partly because the small banks were squeezed out by regulation. Because when the small banks failed, they failed all at once, because they were engaged in the same practices. And the sector was "too large to fail", so they bailed it out, then regulated the sector out of competition. Going backwards to smaller banks again wouldn't solve the problem: the sector would still be too important to fail. Like water or electricity.
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Old 03-05-2019, 06:22 AM
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Darwin's Law about Survival of the Fittest means that craps players who bet the Field or Big Six are now in short supply. They've been driven out by their own loss of capital. Failing business models fail. This is applauded by fans of the free market. Lessons are learned.

But what lessons were learned by bankers in the wake of the 2008 Crisis? They learned that they'll get their $100 million dollar bonuses even if the paper they created goes bad, that Uncle Sam will step forth, injecting enough cash to pay those huge bonuses. Stockholders have learned their lesson: Heads we win, Tails the taxpayer picks up the losses. As long as they're betting on banks that are "in with the in crowd." (What exactly did the managers of Bear Stearns do that made the insiders happy to turn them into a scapegoat?)

No, I am NOT proposing that the banks should have been forced into bankruptcy as a result of the 2008 Crisis. I am simply proposing that they should have been forced to expand their capital base to achieve clear solvency. This is what the duty of bank regulators has always been ... until the U.S. bank regulators were in the pockets of the bankers. Either way, the U.S. taxpayer would have ended up owning a lot of bank paper. But why not let the taxpayer make a big profit on bank stock while bankers learn a lesson? Instead the banks gleefully unloaded their worthless debt paper onto the hapless taxpayer, and added to their collections of Lamborghinis and yachts.

Excess profits during the booms; then profit again with government help during the crashes. I'd say the banks have found a good business model for themselves and hope to repeat their success.
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Old 03-05-2019, 06:29 AM
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Originally Posted by Melbourne View Post
My sources believe that the system is /less/ safe, because the new regulations make the system more uniform and more narrow, without providing enough more protection.

The system is at present safer, because each crash cleans out the marginal and unsafe lending practices. When the next crash happens, even more of the system will be effected, and it will be even more tightly linked. The new regulations will ensure that the specific cause of the crash won't be something specifically addressed by the regulations: there will be some new and interesting way of crashing.

The argument about the banks being too big to fail has never convinced me: America has bigger banks partly because the small banks were squeezed out by regulation. Because when the small banks failed, they failed all at once, because they were engaged in the same practices. And the sector was "too large to fail", so they bailed it out, then regulated the sector out of competition. Going backwards to smaller banks again wouldn't solve the problem: the sector would still be too important to fail. Like water or electricity.
Pretty good analysis here.

I'd add that the elimination of all those smaller banks mean that the survivors of 2008 now have more of everyone's money in their hands, which will make the next crash even worse.
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Old 03-05-2019, 01:39 PM
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The only jurisdiction where senior bankers were jailed was Iceland, as far as I know. Should this happen more often for serious malfeasance? Would it have any value as a deterrent? Should big companies have been allowed to fail, with shareholders paying the price? (Our course claims the highest costs were not due to the bailout).

Governments were in a very difficult spot. It is hard to require banks to have more and better capital (make better loans) at the same time that there is no liquidity or even intrabank lending (get money flowing by making loans). Quantitative easing helped. Stricter restrictions on bailout conditions would have made sense.
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Old 03-05-2019, 01:41 PM
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The US banking system is safer. Higher capital ratio's, and as mentioned excessively risky lending practices haven't risen to the levels of 2007, it takes more time for that to happen. I also agree the shrinkage in small banks is neither here nor there. That had happened to a large extent, v long ago, even 10 yrs ago. And the whole problem is a herd mentality: whether it's a herd of elephants or lemmings is not the key issue.

But the next crisis could come from some very different direction than US mortgage lending. It probably will. Are all other potentially dangerous financial situations (Eurozone's chronic problems, growth of Chinese debt, growth of rich country govt debt generally, etc.) safer now than 2007? Not necessarily. But it's very hard to factor out hindsight in determining what will cause a global financial crisis and what will be contained and muddled through as a national, industry etc issue.
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Old 03-05-2019, 06:27 PM
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I am not a banker and certainly not an economist, so take what I am about to say with a big barrel of salt. What I would have done in 2008 was to force the banks, in return for the bailout, to issue a big pile of paper to give to the government. This would have the effect of diluting the shares of all the stockholders of course. The next time, they might watch a bit more closely. They are still ahead of where they would have been had the banks been allowed to fail. And now the government would have been in a position to sell those stocks and make a big pile back. Maybe they could have indemnified some of the poor people whose houses went under water.
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Old 03-05-2019, 06:46 PM
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Originally Posted by Melbourne View Post
My sources believe that the system is /less/ safe, because the new regulations make the system more uniform and more narrow, without providing enough more protection.
Examples? In the old days, after the New Deal and before deregulation, banks served a narrow niche and were considered rather boring. And things were very stable.


Quote:
The argument about the banks being too big to fail has never convinced me: America has bigger banks partly because the small banks were squeezed out by regulation. Because when the small banks failed, they failed all at once, because they were engaged in the same practices. And the sector was "too large to fail", so they bailed it out, then regulated the sector out of competition. Going backwards to smaller banks again wouldn't solve the problem: the sector would still be too important to fail. Like water or electricity.
Much of the growth of big banks come from them swallowing up smaller banks. I've not heard that this was due to smaller banks failing, and I think it is more due to deregulation and is akin to the growth of a few large players in other sectors.
The too large to fail banks were also engaging in investment strategies previously not allowed, which let them grow when times were good.
When small banks fail they get merged with other banks and the depositors are protected. That does not cause the crisis which happened when a giant bank failed. There was a requirement for more capitalization and stress tests, but we'll see of the additional regulation, which the banks fought, mostly successfully, helps the next time.
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Old 03-05-2019, 09:24 PM
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Huh, somehow I thought this thread was already in Great Debates. I have a hard time imagining an objective measure of economic stability, so that's a much better fit. Moving.
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Old 03-05-2019, 09:45 PM
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We are also less safe now because governments responded to the last crisis by expanding the money supply, lowering interest rates, and racking up mountains of debt. They basically shot all their bullets, and now we have fewer tools left to deal with the next crisis.

Look at America's debt, which is now about 22 trillion dollars. In 2008 it was about 9 trillion dollars. If the next crisis involves inflation, the stsndard tool for combating it is now unavailable to the government, because increasing interest by even one percentage point will result in an additional 220 billion dollars in debt service when the debt matures. And I believe a large percentage of the U.S. debt is held in short term instruments, as in about 20% matures in less than a year, and about 40% is in bonds that mature between 1yr and 10 yrs. That's from a chart Inhave that's three or four years old. I'm guessing it's even worse now. The more debt the government carries, the more incentive to trade safety for a slightly better interest rate.

In Canada, when the last crisis hit we were actually running surpluses, and had lower taxes (giving more room in the tax code to raise revenue or pay down debt if necessary). Today our taxes are higher, our economy weaker, and we have a huge debt. We are in a much worse position to handle the next crisis.

Finally, the response to the last crisis, which saved the bankers and CEOs from the consequences of their actions, was the motherlode of moral hazards that incentivized more of the same behaviour.
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Old 03-06-2019, 12:22 AM
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We are also less safe now because governments responded to the last crisis by expanding the money supply, lowering interest rates, and racking up mountains of debt. They basically shot all their bullets, and now we have fewer tools left to deal with the next crisis.

Look at America's debt, which is now about 22 trillion dollars. In 2008 it was about 9 trillion dollars. If the next crisis involves inflation, the stsndard tool for combating it is now unavailable to the government, because increasing interest by even one percentage point will result in an additional 220 billion dollars in debt service when the debt matures. And I believe a large percentage of the U.S. debt is held in short term instruments, as in about 20% matures in less than a year, and about 40% is in bonds that mature between 1yr and 10 yrs. That's from a chart Inhave that's three or four years old. I'm guessing it's even worse now. The more debt the government carries, the more incentive to trade safety for a slightly better interest rate.

Finally, the response to the last crisis, which saved the bankers and CEOs from the consequences of their actions, was the motherlode of moral hazards that incentivized more of the same behaviour.
I'm sure you'll agree that whatever the benefit of racking up debt during the downturn was, racking up debt today during prosperity is worse. And I agree that it might tie the hands of the government when the next crisis hits.

I also agree that we should have used a regulatory neutron bomb in 2009, where the banks survived but their leaders did not (figuratively, I mean.)
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Old 03-06-2019, 12:42 AM
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Yep. Running big deficits at a time of full employment is about as stupid as it gets.

I could get behind a 'bailout' law that says that any company that receives a government bailout in lieu of bankruptcy must replace its CEO and its entire board of directors. If we are going to bail out companies, we have to figure out how to counteract the inevitable moral hazards and distortions bailouts create.
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Old 03-06-2019, 07:20 AM
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We are also less safe now because governments responded to the last crisis by expanding the money supply, lowering interest rates, and racking up mountains of debt. They basically shot all their bullets, and now we have fewer tools left to deal with the next crisis.
....
Finally, the response to the last crisis, which saved the bankers and CEOs from the consequences of their actions, was the motherlode of moral hazards that incentivized more of the same behaviour.
We are in agreement!

Recall that it was exactly twenty years ago that the U.S. Treasury demand for long bonds had dried up, forcing the yield curve into inversion and consternating federal financial planners like Greenspan. We don't have that problem today!

Quote:
Originally Posted by Alan Greenspan in 2017
It is "perfectly fair" to say that there "is 'irrational exuberance' in the bond market today." Greenspan did not criticize the policies of the current Fed. But he warned that the low rate environment can’t last forever and will have severe consequences once it ends.

“I have no time frame on the forecast,” he said. “I have a chart which goes back to the 1800s and I can tell you that this particular period sticks out. But you have no way of knowing in advance when it will actually trigger.”

One point he did make about timing is it likely will be quick and take the market by surprise.

“It looks stronger just before it isn’t stronger,” he said. Anyone who thinks they can forecast when the bubble will break is “in for a disastrous” experience.”
[Plunging bond prices will likely be accompanied by plunging stock prices.]
Neither Greenspan nor his optimistic detractors mention the big elephant in the room: Mounting debt creates an incentive to inflate the dollar debt away.

The U.S. Dollar will remain the world's currency safe haven. Until suddenly it isn't.
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Old 03-06-2019, 08:51 AM
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Banks are safer today, as Voyager stated, because they’re required to hold more capital, and to undergo stress testing to ensure that capital is adequate to meet high-risk scenarios. From the Bank of England:
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Banking stress tests examine the potential impact of a hypothetical adverse scenario on the individual institutions that make up the banking system, and the system as a whole. This allows us to assess banks’ resilience and make sure they have enough capital to withstand shocks, and to support the economy if a stress does materialise.
https://www.bankofengland.co.uk/stress-testing

Here’s a link for bank stress testing in the US.
https://www.federalreserve.gov/newse...g20180621a.htm

Banks are also required to know their group-wide counterparty exposure. Unknown counterparty exposure was one of the causes of the liquidity crisis in 2008, which was a significant factor in the fall of Lehman Brothers. Basically with Bear Stearns, and then even more so with Lehman Brothers, different sections of the mega banks knew which financial obligations they held, such as loans but including many other types of financial instruments. However, they didn’t know their overall exposure. Therefore they couldn’t assess whether it was safe to make interbank loans. The liquidity freeze was because every bank was scared to make loans to other banks, because they didn’t know the how bad they’d be affected if those other banks went bust. That’s why the government had to step in.

However, just because banks are safer, that doesn’t mean there aren’t other risks. From what I’ve read, the big current risk is in the shadow banking system, which is largely unregulated.
https://www.investopedia.com/terms/s...ing-system.asp
The derivatives market has expanded hugely since 2008. Risks, and risk weighted valuations are notoriously difficult to calculate for derivatives. And most derivatives are held within the shadow banking system. Keep in mind that CDO’s, Collateralised Debt Obligations, were another big factor in the 2008 crisis. CDO’s are a type of derivative.

The other big global risk is China. One economist worried about China is Paul Omerod.
Quote:
The main problem is undoubtedly China. Households and companies taken together had debt levels of around 100 per cent of GDP in the mid-1990s. This has since risen almost inexorable to 250 per cent.
http://www.paulormerod.com/blog-2/
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Old 03-06-2019, 09:35 AM
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The only jurisdiction where senior bankers were jailed was Iceland, as far as I know. Should this happen more often for serious malfeasance? Would it have any value as a deterrent?
In the US at least, corporate leadership incompetence can sometimes be punished under the Sarbanes-Oxley Act.
https://en.wikipedia.org/wiki/Sarban...80%93Oxley_Act

The act basically requires CEO’s and CFO’s of publicly held companies to make affirmative statements about their business reporting, and makes them criminally liable if their statements are untrue. So, for example, a CEO is required to affirm that his business’s annual report is accurate, and he can be prosecuted if the annual report is fraudulent. This is supposed to make them ensure that their public reporting is true, and remove the excuse that they’re not responsible for fraudulent activities because they didn’t know about it. Theoretically, if a publicly traded financial institution is conducting high-risk activities – the investment equivalent of long-shot betting – while maintaining a public façade reporting that they’re being prudent and careful, then that company’s leadership could be prosecuted under Sarbanes Oxley if everything went pear-shaped.

Saying that, last I checked, which was around three years ago, there had been very few prosecutions under Sarbanes-Oxley.
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Old 03-06-2019, 09:42 AM
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I am not a banker and certainly not an economist, so take what I am about to say with a big barrel of salt. What I would have done in 2008 was to force the banks, in return for the bailout, to issue a big pile of paper to give to the government. This would have the effect of diluting the shares of all the stockholders of course. The next time, they might watch a bit more closely. They are still ahead of where they would have been had the banks been allowed to fail. And now the government would have been in a position to sell those stocks and make a big pile back. Maybe they could have indemnified some of the poor people whose houses went under water.
In the UK, the government did take an equity stake in the banks it rescued. It still owns a large percentage of the Royal Bank of Scotland.

https://uk.reuters.com/article/uk-br...-idUKKCN1N32E7
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Old 03-06-2019, 10:43 AM
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In the UK, the government did take an equity stake in the banks it rescued. It still owns a large percentage of the Royal Bank of Scotland.

https://uk.reuters.com/article/uk-br...-idUKKCN1N32E7
Clicking the link, I see the government is taking a substantial loss on those RBS shares, and is being chastised for that.

What price did it pay for the shares to begin with? Did it pay a "sweetheart" price, rather than a competitive market price?
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Old 03-06-2019, 11:03 AM
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Thanks for moving the thread. I did do a search back a year or so, but I’m sure the topic is discussed occasionally.

The shadow banking system was a major cause of the crash. I’m not sure how much better things are in this regard.

Certainly the capital requirements and individual bank shutdown procedures seem helpful. But credit rating companies and auditing accountants can still be in significant conflict of interest. And the fact so much bailout money went to bankers bonuses shows that some dubious lessons were learned.

Derivative markets are better regulated. But I’m sure many company boards have members who get little independent information, or are happy to rely on executive summaries.

It will be interesting to see what happens after the next festival of deregulation. Canadians are proud of their “reaction” to the crisis, but were in a fortunate position now ruined by people and institutions piling on debt.
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Old 03-06-2019, 12:02 PM
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There's an old saying that generals always plan for the last war. Then they are surprised when the next war doesn't look like the last one. The same is true for regulators - they regulate based on the last crisis. So we write all kinds of new rules to prevent the exact mechanism of the last crash.

But crashes and crises happen because the complex system that is the global economy gets way out of whack and needs to correct. The failure will then come at some weak point. Strengthen the weak point, and all you've done is cause the next failure to be at a different weak point. Maybe the banking system will be fine this time, but real estate will collapse. Or perhaps the stock market will crater. Or inflation will finally show up in a big way. Or a war will break out, or something like that.

When a system is deeply unbalanced, it's going to correct. You can't regulate that away. Global debt is out of control at all levels - federal, state, municipal and individual debt are at record levels. China is slowing down and showing signs of major trouble. The U.S. economy seems to be doing well but it's also borrowing money like mad to do it. Canada's growth just went off a cliff and is now 0.1%. Canada is also borrowing money as fast as it can at just about ecery level.

That which can't continue indefinitely, won't. You can't predict when the crisis will hit or where or how, but unless we start unwinding the mistakes we keep making, one is certainly coming,
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Old 03-06-2019, 01:47 PM
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Clicking the link, I see the government is taking a substantial loss on those RBS shares, and is being chastised for that.

What price did it pay for the shares to begin with? Did it pay a "sweetheart" price, rather than a competitive market price?
Quote:
To maintain financial stability at the height of the financial crisis, the UK government injected a total of £45.5 billion into the Royal Bank of Scotland (RBS) between October 2008 and December 2009. The UK Government became the majority shareholder of RBS in November 2008 taking a 58% stake in the ordinary shares alongside a tranche of preference shares. In April 2009 the preference shares were converted into ordinary shares. In December 2009 a further tranche of B shares acquired leading to a total economic ownership of 84.4%.
https://investors.rbs.com/share-data...tatistics.aspx
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Old 03-06-2019, 01:49 PM
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There's an old saying that generals always plan for the last war. Then they are surprised when the next war doesn't look like the last one. The same is true for regulators - they regulate based on the last crisis. So we write all kinds of new rules to prevent the exact mechanism of the last crash.

But crashes and crises happen because the complex system that is the global economy gets way out of whack and needs to correct. The failure will then come at some weak point. Strengthen the weak point, and all you've done is cause the next failure to be at a different weak point. Maybe the banking system will be fine this time, but real estate will collapse. Or perhaps the stock market will crater. Or inflation will finally show up in a big way. Or a war will break out, or something like that.

When a system is deeply unbalanced, it's going to correct. You can't regulate that away. Global debt is out of control at all levels - federal, state, municipal and individual debt are at record levels. China is slowing down and showing signs of major trouble. The U.S. economy seems to be doing well but it's also borrowing money like mad to do it. Canada's growth just went off a cliff and is now 0.1%. Canada is also borrowing money as fast as it can at just about ecery level.

That which can't continue indefinitely, won't. You can't predict when the crisis will hit or where or how, but unless we start unwinding the mistakes we keep making, one is certainly coming,
Modern Monetary Theory argues that government debt doesn't matter. See here for a decent intro to MMT. I'm still trying to get my head around MMT and its implications. But apparently, it's gaining traction (and not just on the far left).

Last edited by Trom; 03-06-2019 at 01:53 PM.
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Old 03-06-2019, 02:29 PM
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Modern Monetary Theory is a dangerous joke. It's not even much of a 'theory'. More of a crackpot idea that suggests governments can just print money, then control the ensuing inflation by hiking taxes.

Even Paul Krugman thinks it is nuts.
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Old 03-06-2019, 05:22 PM
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I think banks are a bit safer than they were in 2008. At least with regards to some of the complex financial instruments that got them into trouble before.

Interestingly, I spent the last two years consulting for a consortium of the largest global investment banks, building a margin requirements model to ensure that banks that trade in these instruments maintain enough capital to not go insolvent if 2008 happens again. My wife also spent the last 15 years working for a rating agency that rates those same instruments that caused all the trouble in 2008. These things are all being watched very closely by regulators.

Which, like Sam Stone, leads me to believe that the next financial crisis will be caused by something completely different and unexpected. Well...unexpected to everyone who doesn't work directly with what will cause it.
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Old 03-07-2019, 09:58 AM
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I am not in a position to know how “onerous” (how come regulation compliance is never demanding and disheartening?) the pass/fail system was for banks and services. Does heavily diluting this requirement, as recently done, give the perception banks and NFBIs are cavalier about compliance?
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Old 03-07-2019, 10:05 AM
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1. There's an old saying that generals always plan for the last war. Then they are surprised when the next war doesn't look like the last one. The same is true for regulators - they regulate based on the last crisis. So we write all kinds of new rules to prevent the exact mechanism of the last crash.

2. But crashes and crises happen because the complex system that is the global economy gets way out of whack and needs to correct. The failure will then come at some weak point. Strengthen the weak point, and all you've done is cause the next failure to be at a different weak point. Maybe the banking system will be fine this time, but real estate will collapse. Or perhaps the stock market will crater. Or inflation will finally show up in a big way. Or a war will break out, or something like that.

3. When a system is deeply unbalanced, it's going to correct. You can't regulate that away. Global debt is out of control at all levels - federal, state, municipal and individual debt are at record levels. China is slowing down and showing signs of major trouble. The U.S. economy seems to be doing well but it's also borrowing money like mad to do it. Canada's growth just went off a cliff and is now 0.1%. Canada is also borrowing money as fast as it can at just about ecery level.
1. That's always true to some degree but has some element of unfairness IMO wrt to the US banking system. The populist politics of banking ('they should go to jail!' etc) is one thing. But the regulatory changes to banking in the US, mainly higher capital ratio's, have improved the resiliency of US banks. That's pretty hard to argue IMO.

The sturdiness of banks in Europe hasn't particularly improved, not as much anyway. And banks in some other places (China) whether or not sturdy are a lot more important now that 10 yrs ago. The Chinese economy (and debt, as you mention) is just a lot bigger now relative to the whole world that it was not long ago.

2. I agree that corrections are inevitable. But to take a step back, when asset values drop a lot that does not necessarily cause a *financial system* crisis as in the banks and other financial institutions. There was a big drop in tech stock values at the beginning of this century, no financial crisis. Even when debt can't be repaid, on a first order basis that's a wash. Insolvent borrowers write off liabilities, the lenders write off assets, net macro economic effect is zero. Crisis comes from the 'deadweight' effects of bankruptcies in terms of other productive assets going to waste (can't be repurposed immediately to work for someone else, be it physical assets or intangible assets like a particular company's collective knowledge, and of course displaced workers). And *financial system crisis* perhaps most of all from perceived increase in risk due to lack of transparency. For example in 2008-9 many complex mortgage securities fell dramatically in value, but the great majority have paid off every cent since as scheduled. A lot of the crisis was about sudden uncertainty if they would, exacerbated by their lack of transparency, not a knowledge that they would not pay as promised. That's usually the most destructive element, spiking uncertainty and retreat of risk appetite.

3. This is absolutely true and a potentially huge problem, higher global debt and as % of global GDP. But back to 2, it's difficult to predict when debt is unsustainable, and even if it is, extremely difficult to predict when the zero sum write off of liabilities and assets necessary to make it sustainable again will cause a sudden crisis. Back to 1, it's also impossible for financial institutions to have high enough capital ratios to weather *any conceivable* level of panic that might arise, and still function at all efficiently, which they must for the economy to function.

However I believe the answer to the OP question if focusing on US banks (which a lot of responses did and always do) is 'yes'. For the whole global financial system if meaning financial institutions probably still yes since US ones are significantly better off and big, and no place else are banks in a lot weaker position. Some just haven't improved much (Europe). Also keep in mind there was a bad loan problem in China 10 yrs ago, that's not new and it's not clear their banks are in worse shape right now. Japanese banks are further along in the slow recovery form non-crisis write off of a lot of assets in the 1990's. So overall I think the answer is yes if interpreted the way 'financial system' usually is. It doesn't mean there can be no more crises, or worse ones. Further ones are inevitable eventually, and might be worse.

Last edited by Corry El; 03-07-2019 at 10:09 AM.
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Old 03-07-2019, 10:17 AM
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I am not in a position to know how “onerous” (how come regulation compliance is never demanding and disheartening?) the pass/fail system was for banks and services. Does heavily diluting this requirement, as recently done, give the perception banks and NFBIs are cavalier about compliance?
Because there needs to be a balance between being "safe" and actually making money.

Although talking to some of these Wall Street guys, you would think there is nothing more disheartening than "only" making $250k a year because regulations are cutting into their bonus-making ability.

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Old 03-07-2019, 11:00 AM
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Neither Greenspan nor his optimistic detractors mention the big elephant in the room: Mounting debt creates an incentive to inflate the dollar debt away.

The U.S. Dollar will remain the world's currency safe haven. Until suddenly it isn't.
And this is the mistake the 'starve the beast' guys always seem to be making. Running up the debt to eventually make large government unaffordable assumes elected officials won't just inflate the debt away and crash the entire economy to protect their own election odds.

If politician A cuts or kills social security because the government can't afford it anymore he's out on his ass.

If politician A pursues inflationary practices and economic condition - 'completely unpredictable, I swear!' - mean that payment is worth much less well, he can blame someone else for it and chase votes to his own content.
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Old 03-07-2019, 11:04 AM
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Yep. Running big deficits at a time of full employment is about as stupid as it gets.

I could get behind a 'bailout' law that says that any company that receives a government bailout in lieu of bankruptcy must replace its CEO and its entire board of directors. If we are going to bail out companies, we have to figure out how to counteract the inevitable moral hazards and distortions bailouts create.
I am closely affiliated with the industry and I've been advocating these things for years.

1. Any bank that accepts a bailout is automatically examined for break up.

2. Any member of the C-suites from a bank that takes a bailout is out and prevented from holding a similar position at any firm for ten years.

3. Any member of the board of directors for a bank that accepts bailouts is forbidden from ever holding another board position in the for-profit sector.

4. For fun, while we've here, each person may only serve on one for-profit and one non-profit board at the same time. No interlocking boards.
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Old 03-07-2019, 11:23 AM
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I am not a populist, and not generally in favour of jailing bankers, etc. They should make money, but shouldn’t abandon their principals to do so. The crisis was surprisingly complex and few could have seen that outcome in real time. However, companies that knowingly recommended “shit sandwiches” that we’re investing their own money elsewhere deserve more than generous bonuses.

Iceland might have had few choices, but it is surprising how well things ended there. Of course, tourism played a huge role in that.
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Old 03-07-2019, 11:34 AM
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2. I agree that corrections are inevitable. But to take a step back, when asset values drop a lot that does not necessarily cause a *financial system* crisis as in the banks and other financial institutions. There was a big drop in tech stock values at the beginning of this century, no financial crisis. Even when debt can't be repaid, on a first order basis that's a wash. Insolvent borrowers write off liabilities, the lenders write off assets, net macro economic effect is zero. Crisis comes from the 'deadweight' effects of bankruptcies in terms of other productive assets going to waste (can't be repurposed immediately to work for someone else, be it physical assets or intangible assets like a particular company's collective knowledge, and of course displaced workers). And *financial system crisis* perhaps most of all from perceived increase in risk due to lack of transparency. For example in 2008-9 many complex mortgage securities fell dramatically in value, but the great majority have paid off every cent since as scheduled. A lot of the crisis was about sudden uncertainty if they would, exacerbated by their lack of transparency, not a knowledge that they would not pay as promised. That's usually the most destructive element, spiking uncertainty and retreat of risk appetite.
A financial crisis is different than a stock market drop because banks are creating credit by lending money and that is a form of money creation. When uncertainty or insolvency means that bank isn't lending money then the amount of money being created is not enough to meet demand. That is what turns a financial crisis into a recession.
The good news is that the Fed is able to adjust to slowdowns in lending by creating enough money to keep the economy out of recession. That is why the focus solely on the banks is dangerous. As has been stated, crises are inevitable because circumstances change faster than the rules do, but a crisis does not have to be a recession if the Fed has its act together.
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Old 03-07-2019, 06:06 PM
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I think banks are a bit safer than they were in 2008. At least with regards to some of the complex financial instruments that got them into trouble before.

Interestingly, I spent the last two years consulting for a consortium of the largest global investment banks, building a margin requirements model to ensure that banks that trade in these instruments maintain enough capital to not go insolvent if 2008 happens again. My wife also spent the last 15 years working for a rating agency that rates those same instruments that caused all the trouble in 2008. These things are all being watched very closely by regulators.

Which, like Sam Stone, leads me to believe that the next financial crisis will be caused by something completely different and unexpected. Well...unexpected to everyone who doesn't work directly with what will cause it.
Just this morning I read that the Trump Administration wants to relax the regulations and decrease the strength of the stress tests. So I'm getting less confident that we won't repeat the mistakes of the past.
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Old 03-08-2019, 09:42 PM
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That’s it. It is inevitable the industry will claim the regulations are onerous and lobby for them to be relaxed. Although this might reduce investor confidence, there’s money to be made.

In fairness, I’m sure some changes are more useful than others. I’m prepared to believe that some of the less useful changes take disproportionate amounts of time and manpower. But it’s like the nuclear industry discussing their safety record.
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Old 01-05-2020, 08:55 AM
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If you've not yet watched enough documentaries on the 2008 financial crisis, Aljazeera has a new one. It calls attention to flagrant frauds by Lehman Brothers, e.g. sham transactions to make their leverage ratio seem much less than it was. Dick Fuld committed multiple perjuries in his testimony before Congress. Yet none of these criminals went to jail.

Towards the end is a comment that Hitler and World War II were the result of a causal chain that began with the Great Depression; and Trump and Brexit were similarly a result of the Great Recession.

To OP's question, I offer a resounding I Don't Know. However IIUC corporate debt is at record levels, as are government and consumer debt. This is exacerbated by stock buybacks done to juice up stock prices — even Berkshire Hathaway is buying its own stock. One analyst claims that stock prices are driven by buybacks and indexing; and no longer reflect predictions of the real economy.

Any external shock that affects profits or confidence will lead to bond downgrades and a vicious cycle. With deficits huge and interest rates already low, dollar devaluation or deliberate inflation may be the only tools left to combat a major slowdown! (I've bumped this thread rather than starting a new one. Sorry if that was inappropriate.)
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Old 01-05-2020, 09:16 AM
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The IMF and World Bank have issued warnings about the global economy.

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Last October, the International Monetary Fund said that almost 40% of the corporate debt in eight leading countries – the US, China, Japan, Germany, Britain, France, Italy and Spain – would become so expensive during a recession that it would be impossible to service. In other words, tens of thousands of businesses, employing millions of people, would have gambled with high levels of borrowing and lost, making themselves insolvent.

Worse, the IMF said the risks were “elevated” in eight out of 10 countries that boasted systemically important financial sectors, adding that this situation was a repeat of the years running up to the last financial crisis.

Last month, the World Bank joined in. It said emerging-market and developing economies (EMDEs) had pushed their borrowing to a record $55 trillion (£42tn) in 2018.

Unlike the richer nations already mentioned, the 100 EMDEs across Africa, Asia and South America covered by the report were affected by rising private-sector debt coupled with higher government borrowing. And this extra state borrowing is not only larger, it has also changed in character. First, it has gone from being largely directed to investment spending to, more recently, being used simply to cope with the costs of health, education and welfare. Second, it is being more commonly borrowed from international investors hungry to lend developing countries cash at, relatively speaking, sky-high rates of interest.

There is little evidence that anyone is paying any attention to the dire misgivings expressed by either organisation.
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Old 01-05-2020, 12:29 PM
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I see the current situation as irrational exuberance. Stock markets are doing pretty well. Businesses have not learned many lessons from the need for new regulation, but they are confident that the current government does not have much appetite for restrictive intervention. Businesses have become even more adept at using the proper buzzwords in public relations while not changing that much, although there is some small divestment from a few areas.

The problem with volatile leaders, however, is that enormous issues like trade with China, Brexit and certain events in the Middle East were already house of cards even when approached with carefully considered policy, diplomacy, subtlety and compromise.

Each of these issues will result in unnecessary loss despite the fact rebuilding may take decades. The troubling thing is that the alternatives are expensive and will take a long time. By this, I mean:

- Alternatives to oil have been successful in some small, homogeneous countries. Important changes like practical electric vehicles are years further away for most applications than desirable. Oil will be around a long time. Coal is still popular in many places. Nuclear is better but the industry needs better transparency and long-term solutions.

- Conservative movements have become more populist. Traditional acceptance of mutually beneficial trade agreements has lessened, and with more nationalism, have become harder to procure.

- A lack of real cybersecurity has given strength to some belligerents that have mediocre traditional strengths. Until this exists, even things like autonomous vehicles have difficulties few articulate. This also is incompatible in the medium and long term with political decisions not based on subtlety, compromise, diplomacy, etc. I believe there will be a step away from technology despite the obvious benefits and potential improvements. The hype has long exceeded the practice, lack of control, and political forums where issues can be meaningfully discussed beyond weak claims of deniability.

Of course, there is always hope. Springs eternal. New generations are more skeptical of some types of progress. Over time, they will also come to value privacy, compromise and the fruits of peace, stability and trade. Corporate governance and government corporatism have always been cyclic.
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Old 01-05-2020, 12:44 PM
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Don't have much to add to the most recent comments, which are consistent with my sentiments on the economy being a mirage. Rising income and wealth inequality and rising debt levels, both of which are current trends, are never good signs.

Similarly, it's probably not a good sign when most of your investment growth is so heavily reliant on a handful of companies. Five companies -- all Big Tech -- have accounted for anywhere from a quarter to a third of the S&P's stock growth over the last year or so. And all of these companies have been engaging in stock buyback schemes to puff up their stocks.

It's increasingly likely that the next "recession" simply won't be; it'll be a depression instead.
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Old 01-05-2020, 01:20 PM
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Don't have much to add to the most recent comments, which are consistent with my sentiments on the economy being a mirage. Rising income and wealth inequality and rising debt levels, both of which are current trends, are never good signs.
Somewhat off topic, but how is the economic growth a mirage?

Human capital as well as non-durable and durable goods are all real. Even if some of the financial capital disappears, the human capital and productive capacity seem like they'd still be in place.

Agree that inequality and debt are serious problems.
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Old 01-05-2020, 01:38 PM
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Somewhat off topic, but how is the economic growth a mirage?

Human capital as well as non-durable and durable goods are all real. Even if some of the financial capital disappears, the human capital and productive capacity seem like they'd still be in place.
It's a mirage because it's based on a bubble of inflated stock prices and massive debt.

If there is a recession and demand decreases (people don't have so much money available to purchase goods) then there will be excess productive capacity and companies will start laying off workers, and you get a vicious circle.
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Old 01-05-2020, 02:00 PM
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Somewhat off topic, but how is the economic growth a mirage?

Human capital as well as non-durable and durable goods are all real. Even if some of the financial capital disappears, the human capital and productive capacity seem like they'd still be in place.

Agree that inequality and debt are serious problems.
Greenwyvern beat me to it: we're in the midst of another debt binge. We're not necessarily binging on junk housing prices this time, though; these days it's good old fashioned consumer debt and it's also corporate debt. And in terms of the corporate debt, we have the most valued companies (ones that can be found in most retirement accounts in the country) are using profits that could and should* be pumped into raising wages and per capita purchasing power are instead being used buy back stocks, thereby reducing the supply of public stock and in return raising their value. This in turn entices more investment but it's investment that's illusory. Worth pointing out to that companies are using debt to do this.

But in terms of the real illusion, consider the fact that at a time when wages have in fact gone up due to near record low unemployment, the real purchasing power of the consumer isn't really getting any better. Medical costs are surging. Education costs are surging. And thanks to tariffs, we have inflation across a wide range of products. This is why some people think that if there were to be an energy shock -- certainly worth considering at the present time -- that this would be a cost-push inflation event that would shatter the economy. And it would probably send the international markets into a tailspin.

People will undoubtedly point out that economists have been predicting recessions for the better part of 2 years, and that's true. But if anything, the fact that the recession hasn't happened yet only makes it more likely that the pain will be worse. Moreover, I doubt that Trump has any policymakers who would have the competence to intervene the way Ben Bernanke and Tim Geithner did.

*As a matter of economics, it's clear that profits should be redistributed back to employees so that they can increase their purchase power. The most effective way to achieve this at a policy level is through fairer taxation, which we won't ever have until we sweep the conservatives out of power and until the sheeple wake up and smell their fake populism. That may not happen until 2024 at the earliest.

Last edited by asahi; 01-05-2020 at 02:04 PM.
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Old 01-05-2020, 02:36 PM
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The first problem is that the amount of debt is enormous. The bigger problem is that governments, consumers and business have stopped seeing debt as a big problem.

It isn’t. Until it is.

There is no doubt debt is not automatically a bad thing. Investments in infrastructure, capacity and things likely to become popular and profitable can be wise. But sketchy economic thinking (debt doesn’t really matter) seems to have diffused everywhere.

Unfortunately, much government debt seems to be focused on running existing programs, expanding new items of lower priority and failing to ensure efficiencies. This is true in Canada and the US. It seems to be true of African nations borrowing heavily from China. Consumers are spending on social luxuries and the mild improvements of technology offered by a set of fewer and stronger companies with little interest in full and unfettered free market competition. Smart businesses are hoarding cash; stock buybacks mainly benefit executives although they appeal to some investors.

Sure, this has been building for awhile and the current successes are surprising, but welcome. It seems naive to me, however, to think the remarkable current levels of volatility have been fully priced into the market.
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Old 01-05-2020, 02:41 PM
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What has also seems to have exploded are the use of creative definitions and changes in accounting principles for the sake of reducing apparent debt.

Canada hides its debt by downloading important services to the provinces, which then shift responsibilities to municipalities. It works for a while, but it doesn’t change the numbers.
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Old 01-05-2020, 02:53 PM
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It's a mirage because it's based on a bubble of inflated stock prices and massive debt.
Another reason apparent growth can be called 'mirage' is if it's concentrated in sectors of dubious value, especially "financialization," although employment in insurance and other non-personal service sectors (e.g. law, advertising) may also provide low human value per dollar.

In particular note that giants like Google and Facebook are heavily dependent on advertising (and worse) for revenue. The dollars paid for ads, and for fake news, are real, but any social or humanitarian value is minimal and thus "illusory."
  #43  
Old 01-06-2020, 04:26 PM
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Darwin's Law about Survival of the Fittest means that craps players who bet the Field or Big Six are now in short supply. They've been driven out by their own loss of capital. Failing business models fail. This is applauded by fans of the free market. Lessons are learned.

But what lessons were learned by bankers in the wake of the 2008 Crisis? They learned that they'll get their $100 million dollar bonuses even if the paper they created goes bad, that Uncle Sam will step forth, injecting enough cash to pay those huge bonuses. Stockholders have learned their lesson: Heads we win, Tails the taxpayer picks up the losses. As long as they're betting on banks that are "in with the in crowd." (What exactly did the managers of Bear Stearns do that made the insiders happy to turn them into a scapegoat?)

No, I am NOT proposing that the banks should have been forced into bankruptcy as a result of the 2008 Crisis. I am simply proposing that they should have been forced to expand their capital base to achieve clear solvency. This is what the duty of bank regulators has always been ... until the U.S. bank regulators were in the pockets of the bankers. Either way, the U.S. taxpayer would have ended up owning a lot of bank paper. But why not let the taxpayer make a big profit on bank stock while bankers learn a lesson? Instead the banks gleefully unloaded their worthless debt paper onto the hapless taxpayer, and added to their collections of Lamborghinis and yachts.

Excess profits during the booms; then profit again with government help during the crashes. I'd say the banks have found a good business model for themselves and hope to repeat their success.
We could also execute corrupt bankers and corporate executives. I don't know if the death penalty is a deterrent for crimes of passion but it is a pretty good deterrent to prevent multi-millionaires from trying to become billionaires by risking the global economy.
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