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).
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.
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.
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?
- 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.
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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.
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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.
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.
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.
I am closely affiliated with the industry and I’ve been advocating these things for years.
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Any bank that accepts a bailout is automatically examined for break up.
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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.
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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.
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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.
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.
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.
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.
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.
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.)
The IMF and World Bank have issued warnings about the global economy.
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:
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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.
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Conservative movements have become more populist. Traditional acceptance of mutually beneficial trade agreements has lessened, and with more nationalism, have become harder to procure.
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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.
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.
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.
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.
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.
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.