The parallels with today's banking problems are eerie. Instead of "savings and loan" community banks that loaded up on risky high-yield bonds that could not be repaid in full, today we have local and regional banks that have loaded up on (a) loans to office buildings that cannot be repaid in full, and (b) long-term treasury and agency bonds whose present value has declined well below par due to rising long-term interest rates. The clock is ticking.
B] The bonds themselves aren't risky, they're just long term securities that don't fully appreciate in value for a long time. A very quick change in environment, much higher interest rates, result in immediate liquidation only at far less desired prices. A buyer can still hold them to term and get their full value; it's just there are better investments.
A] I can't really speak to real-estate, but generally as a consumer I find the market incentives are misaligned to what should be socially desired results. There's too much darn rent seeking.
B was also true in the Savings and Loan Crisis of 1980.
The mark-to-market decline of long-term loans wiped out an entire category of financial services (the Savings and Loans service). Remember "A Wonderful Life??" George Bailey? That was "Savings and Loans".
Gone, the entirety of the entire sector was wiped out, despite the 30+ year bonds still being "good on their money".
While it’s true that the future cash flow from the bond hasn’t changed, it is quite literally worth less money now, because better investments are available.
For a bank, these better investments are available to its depositors if they leave. The bank’s borrowing costs have gone up (or will soon) and that’s the difference between profits and losses. The losses will happen sometime (unless interest rates go down again), but when they get recognized is a matter of accounting.
So the bonds were risky, as is any fixed-income investment when your borrowing costs are variable. (Though it’s clearly not as bad a loss as it would be if the bonds defaulted.)
Well..imagine if you as a trader would never get the "margin-call" and you would be able to defer the currebt payments until you cash in your future bets.
Here we have the banks simply bailed out by the gov(i.e the tax payer gets the short stick while JP Morgan gets the long stick).
> (b) long-term treasury and agency bonds whose present value has declined well below par due to rising long-term interest rates.
Apparently 10y US T-bills are now financial weapons of mass destruction according to the HN hivemind.
> (a) loans to office buildings that cannot be repaid in full,
This is a big problem with CMBS but I'm not aware of those being significantly involved in any of the recent blow ups. AFAIK this is still next-year's financial crisis that is only just starting to simmer.
> The parallels with today's banking problems are eerie.
No, no they're not. Not even close. Please read up about this before propagating outright falsehoods.
The S&L industry in the 1980s was doing FTX type nonsense: using depositor funds for very risky investments. This worked great when the markets were going up. Not so much when the market crashed in 1987.
Banks now are holding excess liquidity and funds they otherwise can't lend out (within their risk limits) in US government bonds. The problem is they took long term bonds for slightly higher yield at a time when interest rates were near-zero. And then interest rates went up and created a loss if it were realized. Many companies have been undone by this kind of penny-pinching. It's bad risk management.
Even in the case of SVB, it had more assets than depositor funds and despite the vast majority of deposits (by value) being uninsured, every depositor got their money back and it cost the taxpayer nothing.
I remember this, IIRC one of the Bush Brothers almost got arrested for what he did. But his farther was president at the time, so no arrest. I forgot the details.
Neil Bush is the guy you’re thinking of, Silverado Savings and Loan was the institution. His dad (George HW Bush) was the Vice President (for Reagan) at the time.
> Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.3 billion. Neil Bush, the son of then Vice President of the United States George H. W. Bush, was on the Board of Directors of Silverado at the time.
There was a president after that who was in a partnership that bought an S&L in the eighties and gave itself bad loans, but it was made out to be so complicated that no one could ever understand it. Everyone else involved in the partnership besides the president and first lady went to prison, though.
After investigation, the independent counsel was unable to find any charges it thought were provable beyond a reasonable doubt other than perjury though. If Starr could have hung fraud charges on Clinton, surely he would have?
One thing that i feel people really aren't getting right now is that rates are still extremely low and they are moving slowly too compared to previous financial shocks. The fed rate today is 5%. The historical average is 7.5%. They are moving by the smallest amount they can each meeting.
There was a post earlier today with comments of the form "why are Meta selling bonds right now when rates are so high shouldn't they sell bonds when it's cheap?"
But there's no reason to think rates are high right now except for a comparison to the weird run of near 0% that went on for too long.
So we have banks failing due to shock at the recent rate rises but the recent rate rises haven't actually been that extreme or fast. We seem to have got into a phase where there was an assumption that near 0% rates were here to stay. Banks even gambled on this assumption. If anything you should be leaning towards "wow rates are really cheap right now!" because they are historically.
> The Berkshire Hathaway CEO still resides in the five-bedroom home in central Omaha, Nebraska, he purchased for $31,500 in 1958, which is about $329,505 in today’s dollars.
But the house clearly isn't worth only $329,505 in "today's dollars." Sure, it's more modest than a full-blown mansion, but it's still worth a lot more than that, closer to about a million dollars. And that's including if you were to try buying the house with zero knowledge or context that Warren Buffett once lived in it.
Of course, these things are all 'worth' what someone will actually pay for them, but unless we believe that that housing market is so screwed that Buffett's house would sell for ~$330k if the housing market crashed down to reality (which would actually imply potential deflation and a CPI that would result in the home being worth much lower, per "real" dollar figures), that house is never selling for less than $330k. Not even less than $660k, in my opinion. The only way these homes would come close to their price in CPI is if something catastrophic happened to the neighborhoods in which they exist.
All things I don't want, and can't really buy a car without.
But yeah, I think the fact that Americans, at all income levels, have more stuff than they did 40 years ago, is part of understanding the macro picture. More stuff does not always mean more quality of life.
My car from 2010 will forever have tire pressure alerts because I am not shelling out $1k to replace the broken tire pressure monitors. As an example, they're more of an annoyance to me. I don't use bluetooth or digital radio either, but yes, my car does have bluetooth. Don't see the point in it myself.
The only new feature I wish my car had is a nice display that is hooked up to a backup camera, or even better, the ability for the car to automatically park itself, especially parallel parking in tight spots.
Prices of articles can vary due to changes in the price level and due to other causes (such as obsolescence, changes in consumer preferences, and so on). CPI only informs us about changes in the price level, it doesn't tell us anything about anything else. So the fact that the price of a particular article hasn't changed exactly according to CPI is completely normal, and not a reason to believe that the CPI is "wrong".
I'm kind of curious what it means (and why) for real interest rates to be going down over time like that graph depicted (and assuming it's accurate).
Is it a lack of global economic growth because of natural resource depletion?
For example, you could probably get away with a loan for 18% real if you can sail to America and (leaving politics/historical atrocities aside for a moment) come back with a ship full of gold.
If I had to take a loan with a rate that high I don't think I could possibly pay it back (if it's enough money) without multiple jobs or somehow getting lucky. I don't know that my labor could produce enough.
These are the shockwaves of the Chinese economy slowing down. China has been a large source of new demand for years, particularly for resource extraction economies; zero-covid supply chain shocks were the first wave, China’s property shock was a second, and economics are not quite back to solid yet either. For decades it has been easy to invest in China; it is not really so easy or cheap to develop in other areas, because postwar East Asia really focused on efficient infrastructure rollout, and now private companies have to pick between countries with cheap labor and countries with good infrastructure.
Yeah, there are a lot of interesting theories regarding this (which were far more common in the halcyon days of 2021, when it seemed like ZIRP was the new normal).
I actually think an underrated piece of this is that investments have become far less capital intensive. Business in previous economic cycles required a huge amount of capital to begin and maintain: railroads, oil, manufacturing all require enormous sums of capital to continue. Conversely, the dominant businesses in this economic cycle are all Internet based. Google, Meta, etc could run for 1,000 years without substantial cash need, it's a far less capital intensive model. You can see this reflected statistically: the FCF yield of the S&P 500 is 2x what it was in 1990.
If businesses need far less cash than before yet remain highly productive, it stands to reason real interest rates would drop: the demand for capital by economic drivers has gone down, while the supply of capital has increased through FCF gains.
I wonder if something like space colonization/resource extraction would reverse or change the trend toward lower interest rates? I imagine (perhaps excluding some sort of sci-fi esque replicator robots) such endeavors would be very capital intensive.
On the other hand, you'd probably need a high interest rate to justify offering that loan in a time when a transatlantic journey was significantly less predictable and more dangerous.
Do you have any particular articles or blog posts or anything you'd care to share? I could search of course but I'm not sure if there's a canonical article.
The key insight is that savings and investment opportunities are two sides of a single market. Demand and supply. Savings grow reliably and opportunities do not, so demand for investment opportunities outstrips supply of investment opportunities. Therefore, the opportunities get more expensive = lower rate of return.
That graph basically makes me think there is no "normal" and no trend, it appears to just jump all over the place, widely, continuously. i don't know if that's right, but that's my reaction to that graph!
> graph basically makes me think there is no "normal" and no trend
You're right. The data shows "across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been 'stable', and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6-1.8bps p.a. has prevailed. A consistent increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressed sovereign real rates are in fact converging 'back to historical trend' – a trend that makes narratives about a “secular stagnation” environment entirely misleading, and suggests that – irrespective of particular monetary and fiscal responses – real rates could soon enter permanently negative territory" [1].
Basically, over the very long run, real rates go down 0.6 to 1.8 basis points (1/100th of a percentage point) each year, and tend to be low. We've witnessed a few centuries of extraordinary growth, which mandated resource prioritization, which kept rates high. TL; DR Anyone talking about where rates "should" be based on looking at charts is often talking tripe.
One pattern I noticed was that the low-to-low was about 40 years. We should probably expect rates to continue to rise over the next couple of decades before subsiding again, if that graph is any indication.
historical rates don't matter because a significant chunk of the people making decisions weren't around for that time period. And even those who were around were still incentivized to make risky decisions to try and find yield with 0% rates
we've got a lot of fake growth on paper fueled by 0% rates that never existed and has to be shaken out of the system. The fundamental problem is economists thinking they can twist dials on the financial system and play god to prevent recessions and depressions, which will just result in rarer but more extreme financial crises when reality hits them in the face
the economy is fundamentally less efficient and less productive due to the covid pandemic(people not working) and the economic decoupling from China and Russia. Printing money doesn't change those fundamentals, the end result in the short term will be lowered living standards for everybody. More money chasing fewer goods equals inflation, not complicated
>More money chasing fewer goods equals inflation, not complicated
It's not complicated, except those who missed out on the 0% rates are hit the hardest and want to catch a similar boom that isn't coming back.
Those looking to buy a house now feel cheated. The prices are similar to ~2020-2022 but the rates are much higher. The rates being lower than historical average is irelevant for those looking to buy know because the current housing prices are also much higher than historical averages.
Our entire economy is now addicted to cheap money so those who missed out on the cheap money will want it back.
I was listening to a local real estate talk show this weekend.
They said the largest generational group buying and selling houses pre-COVID were the Millennials.
Now?
Its the Baby Boomers. They can pay cash so they are immune to the interest rates and they tend to have more equity in their properties so they're in a very advantageous position to take advantage of really bad time for real estate.
I live in Minneapolis. The inventory here has been historically low since Covid hit. Normally we should have around 15K properties for sale in the seven country metro area here. Right now, its closer to about 4,200 which is crazy. A lot of people are not even putting their houses on the market. They find an agent and within days they have several buyers. We've had three families just POOF move out of our neighborhood. No "for sale" sign, no showings, just gone.
That’s going to hurt them over time. Current RE values assume abnormally low interest rates in their valuations. Over time, reversion to the mean in both interest rates and valuations will eat away their equity.
Further, not letting the property go to market is just bizarre. It’s saying they think they can’t get a better deal by letting more people bid on it. That’s categorically false unless the seller knows the value of their property is below current market conditions. Being that they’ve probably not transacted much in the current market this is erroneous. Let the property go to market and take in bids over at least a couple weeks.
Any bidder saying their bid evaporates if the property goes to market is not worth believing.
Of course, maybe I’m wrong and there are serious buyers who make true highest offer off market. But that probably signifies something truly and even bizarre - and possibly a tendency towards market failure.
Where? Not where I live (Europe). Prices here have dropped max 5%. But if you take the increased rates in to consideration then the total price you'll be paying till the end, is actually higher than before the discount.
I think maybe they were too slow to act, but once they did this has been among the fastest rate hikes in history except for the early 1980s. they have a chart here: https://fred.stlouisfed.org/series/FEDFUNDS
You can just draw a red line matching the slope of the current hikes then move that red line to previous rate hike cycles
structurally lower growth and inflation (even if inflation is high right now). Can't use an average of whatever long-length time series you're using when that's just not how rates work.
> One thing that i feel people really aren't getting right now is that rates are still extremely low and they are moving slowly too compared to previous financial shocks.
It's true that this graph excludes the rate increases we saw in the 1970s and 1980s, but it's the fastest and highest raise of rates in the last ~30 years. See here for a full timeline: https://fred.stlouisfed.org/series/FEDFUNDS
That is not true (well we can argue how we get to likely I guess), markets expect the rate to be lower than today in 1-2 years:
https://www.ustreasuryyieldcurve.com/
> They are moving by the smallest amount they can each meeting.
Moving each meeting means going from 0.08 in Feb 2022 to 4.57 in Feb 2023. It may not be quick compared to previous financial shocks, but it is much faster than recent interest rate increases (2015-2018 was 3 years to go up half as much; 2004-2006 went up 4% in two years). Additionally, a decade of basically zero interest rate, followed by 3 years of slow increases and then another two years of zero, followed by a steep climb is kind of unexpected and shocking. You can hardly blame people for not expecting a rates to rise so quickly when there hasn't been anything similar in the past 30 years.
risk management is not based on expectation but exactly the opposite: managing the deviations from expectation. this is even in the ISO definition of risk.
some risks are hard to estimate and manage. interest rate risk is not one of them. actually it is supposed to be the most tractable risk of them all, being a single macro variable. a bank's books are readily repriced under different scenarios
the SnL crisis was the cataclysmic period that ushered a new era. there is a large contingent of actors that profit handsomely by helping banks manage interest rate risk. somehow all this machinery failed but there isn't yet a clear explanation why. lack of regulation would be more convincing if there was something more unusual (an unknown unknown)
not learning from disasters starts becoming the pattern. e.g. what has changed globally in response to the covid pandemic?
Agreed. But I think there is one thing that is not being considered here, that is that the markets are priced to the previous era with almost 0% rates.
This means that you now have to pay for the thing that is priced to be sort of affordable to you with 0% interest but the interest you can get is more like 5%.
Best example of this is the current housing market (regardless whether building or buying). If your previous monthly to a mil was 3k$ now it is over 5k$. This immediately prices you out and will probably lead to a lot of stagnation in 20-30 months.
There's also real yield to account for. If rates are 0% and inflation is 2%, real yield is -2%. If rates are 5% but inflation is 7%, real yield is still -2%. Buying power is being lost even if the numbers in your account are going up.
High interest rates incentivize people to save now to spend more in the future and low interest rates incentivize people to spend now and spend less in the future.
Young people tend to be in the spend now camp as they purchase homes, cars and other big ticket items that they will pay with based on increasing incomes. Older people tend to save now so they can purchase what they need in the future when they have declining incomes.
The ratio of going to old influence interest rate demand.
High interest rates incentivize people to save now to spend more in the future and low interest rates incentivize people to spend now and spend less in the future.
Young people tend to be in the spend now camp as they purchase homes, cars and other big ticket items that they will pay with based on increasing incomes. Older people tend to save now so they can purchase what they need in the future when they have declining incomes.
The ratio of young to old influence interest rate demand.
When population is increasing you get bigger and bigger workforce and also more and more consumers.
When it is decreasing your workforce not only get smaller, but get smaller faster than the older population. And in total you get less consumers too.
So in a growing population situation, you can take loans with high interest rate and open business knowing you will have cheap labor, thanks to all new young people becoming adults, and over time lots of new consumers, so your business has guaranteed growth.
But if your population is declining, labor become expensive as each year there are less young people and less workers in total, while total demand also gets smaller but not fast enough. So taking a high interest loan is stupid idea, you have guaranteed high costs, and less sales long term, thus your business profits will never be bigger than the interest and you will eventually go bankrupt.
>We seem to have got into a phase where there was an assumption that near 0% rates were here to stay.
We have and that was caused by the Fed as well. After the 08 crisis the Fed kept the rate at 0% during what was basically the biggest 10 year bull run in history. It was insane and even many bankers I spoke with mentioned the causes of the original 08 scare/crash werent fixed, they were just band-aided heavily.
The amount of malinvestments made in the economy during this run of nearly free (0%) money is something that will haunt returns (and retirements) for decades to come. Many of the excesses (and confusing financial incentives) in Wall Street and Silicon Valley have their upriver source in the free-money fountain which was pumped by the Fed. Similarly, we see downstream effects in housing bubbles and other asset bubbles.
People say this is obvious only in retrospect, but people were warning about it forever. And if you don't believe that, just listen to Congress, the President, and Real Estate agents talking about Fed pumping more today ... they are still all for it.
I'm not bullish about the US economy anymore. I think it has become politically untenable to run the economy without this free money pumping. There's too many parasitic sectors in the economy now. They require the economic body to continue to bleed to survive.
The absolute rate isn't a problem right now, it's the Fed bouncing between extremes. Keeping rates extremely low for many years, followed by a very fast series of increases. If they had been more moderate with either of those factors things would be a lot less painful right now.
None of this is all that surprising either, which makes it even more frustrating. A great many folks were critisizing the Fed for keeping rates so low when the economy was booming, and I don't think many are surprised that the rapid increases have created instability.
> If anything you should be leaning towards "wow rates are really cheap right now!" because they are historically.
This is likely extraordinarily bad advice to listen to.
The Fed is still following an inflation target of 2% and they are very willing to crash the economy in order to get it. They've been fondly invoking the name of Paul Volker.
The rates we're at today are probably sufficient to crash the economy. As the maturity dates of loans hits and their rates adjust upwards we're going to see a lot of bad economic bets and loans that were predicated on 0% interest rates fail and see the fallout into the broader economy.
Even if they're not sufficient to crash the economy, the Fed has announced that it will do whatever it takes. So if the economy heats up and inflation comes back then the Fed will just jack up rates even more.
We aren't going to get a 70s style decade of stagflation or hyperinflation or any of that nonsense. That happened during a period when the Fed "grew up" in the shadow of the Great Depression and WWII and was worried about crashing the economy so it ran hot and inflation was high and long term interest rates were high. Post-Volker we are not in that kind of policy regime.
The most likely outcome is that we will hit a serious recession and unemployment will spike again above 6%, and without much government support the recovery will be gradual like post-2008 and not like the crazy V-shaped post-2020. And the Fed will once again wind up cutting rates down to zero again. The CPI will fall like crazy due to the high unemployment, while asset bubbles will inflate again and the rich will once again use cheap money to buy up everything on a firesale.
If you showed me a Fed that was actually worried about tanking the economy, or a Fed that set a higher inflation target, then I'd agree that higher long term interest rates were on the horizon.
This time is different from what we've seen before because this is the first real inflation scare since maybe the early 90s, so it seems wildly different to most Millennials, but the game at the Fed fundamentally hasn't changed. We're heading back to ZIRP again a lot sooner than we're heading for 10% rates, but it might be a bumpy ride in the middle.
And I guarantee you that all the tough talk about ZIRP being bad is going to evaporate once the recession hits and rich people need to be able to borrow cheaply again.
Given that this is a financial sector that no longer exists, it's hard for people who weren't around then to understand what a huge deal this was at the time.
One of the biggest things that had material impact on people at the time was the Resolution Trust Corporation that was dumping real estate into the market over seven years.
The sector no longer exists? Well, nothing under that name exists, but I'm struggling to see the substantive difference between an S&L and a credit union, even after checking out the Wikipedia page on that:
> I'm struggling to see the substantive difference between an S&L and a credit union
S&Ls focussed on residential mortgages. Credit unions can issue credit cards, business loans, HELOCs, et cetera.
Historically, S&Ls had time deposits/CDs which they used to finance mortgages. Credit unions were like banks, but tied to a group, e.g. a church or fraternal organization. Over time, S&Ls started taking demand deposits and credit unions broadened the definition of a member to the point of meaninglessness.
Credit unions used to have extremely tight criteria for membership. You had to be a former or current employee of the company or things of that sort.
If your dad was a member you could start an account, but IIRC not if they were a former employee.
If memory serves loosening the rules on CUs was part of solving the S&L crisis. So BECU (Boeing Employees’ CU) could serve any Washington residents for instance.
Yeah, that's exactly what I'm talking about: "well, substantively they're the same, but, uh, well, S&L's emphasized mortgages more". Um, okay. But, at the end of the day, I'm not seeing the substantive financial relationship I can't have today that I could during the S&L era. Or, by extension, what's so different today, now that that "sector" of finance is gone, as suggested in the original comment[1]. What do I not get as a result of not having lived through that time?[2]
I don't feel like I've learned anything more than a factoid I can repeat now. We "have S&Ls". We "didn't have S&L's" then. Okay. We still put savings in a financial institution. Those FI's still lend the money out. Many are still mutuals.
Aha! But back in the day, you'd have to be a member of a selective organization to be part of a mutual that doesn't all of that!
>Over time, S&Ls started taking demand deposits and credit unions broadened the definition of a member to the point of meaninglessness.
Oh. So not that, either.
I guess I just have different standards for what a meaningful difference looks like?
[1] "Given that this is a financial sector that no longer exists, it's hard for people who weren't around then to understand what a huge deal this was at the time."
S&L were forced to be focused on long-term residential loans and to offer a vulnerable, narrow savings product offering and weren't allowed to significantly diversify with other kinds of lending.
Calling it an emphasis makes it sound like an S&L could've just started looking like any diversified bank to stay alive, but it wasn't an option for them without a change to their regulatory environment--and couldn't have happened quickly enough anyway once the crisis was rolling.
If unchecked, the interest rate changes at the time would've eventually come for all banking, but the damage was limited.
You're actually quite right - fundamentally they were fractional reserve lending institutions. The main difference with banks was somewhat selective membership, and restrictions to loans to their membership to buy property.
What actually killed them was Volker raising interest rates to 18% in a misguided attempt to cause the inflation triggered by the break up of the Bretton Woods accords and the accompanying oil crisis. (That can also be read the other way round as it happens - one of the several things that stressed the fixed rate currency exchange agreement out of existence was the oil trade imbalance and the accompanying flows of dollars. Volker raised interest rates following economic textbook theory to suppress inflation, and it backfired rather spectacularly.
Unlike today - this wasn't strictly a quantitative money inflation (i.e. nobody had just increased the US money supply by 25%), and this is very clear in the M2/M3 figures of that time.
At any rate. Key thing, then and now - the US residential mortgage market is dominated by long term, fixed rate loans. When interest rates rise very quickly, this creates huge issues for the lenders. The S&L's got caught with a lot of low interest rate, fixed rate loans, and couldn't consequently pay their savers enough to keep their deposits. As savers moved deposits into higher rate institutions it pushed the entire S&L (and many banks as well) into difficulty, some compensated for this by making riskier (higher rate) loans, and the whole sector crashed.
One of the unfortunate side effects of this was that it led to Salmon Brothers developing a massive loan securitisation program (to buy the loans from the S&L as a way out, kind of), and that led directly to the Mortgage Backed Security crises of 2000 and 2006. It also somewhat resulted in the South American crisis in the 1980´s since that was another place the US banks went looking for high interest rate loans.
Some like Pentagon Federal keep 100% of their mortgage loans. That's a nice feature of buying through them, not having your loan sold to random companies from time to time. That leads to them being very conservative with their lending and giving you an enhanced interrogation to get approved though. If every lender operated like them these financial crises wouldn't come as often.
In a way its kind of immaterial if there is a "run" on a credit union. I can't imagine very many members have shares over the insured limits (250k in checking, 250k in savings), so the deposits have to be almost entirely insured. Also all the little old widows whose GM pension gets deposited every month are not gonna organize and pull their money like silicon valley VCs. They could still be insolvent and get federalized or whatever, but the damage to real people should be minimal even in this kind of unlikely scenario.
I'm thinking of those little old widow's kids reminding her that 0.1% on her "savings" account is not keeping up with the price of groceries. If she's not too old to be reasoned with, her money is going to walk, to TreasuryDirect, or at least a CD.
Right, so she walks, and so do a lot of other widows, the credit union becomes insolvent, NCUA comes in and winds it down and makes the other widows whole. Not ideal, but seems fine.
Credit unions are not-for-profit companies that operate like a co-op or a mutual insurance company. The depositors are the owners. S&Ls were for-profit businesses.
When imaginary numbers were first introduced, they were viewed with skepticism and even derision by some mathematicians. However, over time, they proved to be an invaluable tool in solving complex mathematical problems, such as those involving electrical circuits and quantum mechanics.
CBDC will help resolve the difficult mathematical problem when politicians overspend (or steal) money they took from the public, and the accounts don't balance. They can just create more money instantly. And no one will know.
What's happening now is an example of the system working, not broken. The comparisons are also made to 2008. Between that and the SnL crisis there are three important differences:
1. Unlike 2008, we don't have a whole host of risky borrowers and poor debt;
2. Rates are still historically low (as another commenter mentioned); and
3. The banks being taken over by the FDIC are solvent. That is, their assets exceed their depositor funds, even if they have to realize losses on long-term bonds by selling them.
It's worth noting that accounting rules allow banks to keep bonds off the books and nominally kept at face valuew with the intention of holding them to maturity.
We've had bank runs on banks that largely catered to a single vertical (eg SVB, Singularity) and were relatively small. This made them vulnerable. On top of that, you had poor risk management by holding long-term bonds instead of short-term bonds.
Management chases short-term yield and if 10 year bonds are offering 1.75% (a couple of years ago) but 3 month bonds are only offering 1.69%, many banks will hold the long-term bonds instead, even though they open themselves up to rising interest rate risk. They are paying the price for now and depositors aren't left holding the bag. So the system is working.
Also, commercial real estate. You can’t fill empty buildings with jeremiads in the Wall St. Journal demanding lazy, entitled workers get back to the office.
From article: “the FSLIC decided it was cheaper to actually burn some unfinished condos that a bankrupt Texas S&L had financed rather than try to sell them”.
That doesn’t sound crazy. Especially if the condos were rubbish (as we see happen on many countries speculating on houses - unused properties with little intrinsic value).
While the pre-existing institutional fragilities were different, Fed tightening hit them both hard:
> ... rising dollar ex-change rates in response to the high U.S. interest rates of the early 1980s increased the difficulty of meeting debt commitments.
In 1988 the newspapers showed a list of the 100 S&L failures that were designated by the feederal authorities as highest priority for investigation and prosecution. This article did not mention that list. Since that time, I have never been able to find a scorecard on how many of those 100 cases led to legal consequences for the perps. Anyone here have any such info?
Keating is the name that is known, but I do believe it was hundreds of people. Like, hundreds of people did (some) jail time. But as Martin Shkreli would say, "I just want to let you know, jail is not that bad. So don't fret – I hope it doesn't happen. If it does happen...it's not that bad."
The name I remember was Neil Bush, who escaped any real consequences, and it was just a coincidence that his dad was George W. Bush, Vice President, and later the President of the United States.
> The savings and loan debacle was one-seventieth the size of the current crisis, both in terms of losses and the amount of fraud. In that crisis, the savings and loan regulators made over 30,000 criminal referrals, and this produced over 1,000 felony convictions in cases designated as “major” by the Department of Justice. But even that understates the degree of prioritization, because we, the regulators, worked very closely with the FBI and the Justice Department to create a list of the top 100 — the 100 worst fraud schemes. They involved roughly 300 savings and loans and 600 individuals, and virtually all of those people were prosecuted. We had a 90 percent conviction rate, which is the greatest success against elite white-collar crime (in terms of prosecution) in history.
It would take some digging to go through press releases and such:
> NEVIS was convicted in 1989 of 24 felony bank fraud charges in the District of Oregon arising from the collapse of State Federal Savings and Loan of Corvallis. He initially was sentenced to a term of imprisonment for two years, to be followed by probation for a period of five years, with restitution in the amount of $2 million to be paid in annual installments of $400,000 as a condition of probation.
Thanks for the links. I'd seen the high body count for the total put away for the entire S&L crisis, but never knew that it actually focused so well on those cases. I had personal connections to two persons involved one way or another. One had definitely deserved some consequences for one of the top 100 cases, but avoided them. The other was pretty much a rank-and-file front-line employee of a mom-and-pop S&L. His name was on the wrong documents because of a fairly common combination of inadvertence, indiscretion, dumbth, and wanting to keep his job; he was severely punished.
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[ 0.25 ms ] story [ 183 ms ] threadA] I can't really speak to real-estate, but generally as a consumer I find the market incentives are misaligned to what should be socially desired results. There's too much darn rent seeking.
The mark-to-market decline of long-term loans wiped out an entire category of financial services (the Savings and Loans service). Remember "A Wonderful Life??" George Bailey? That was "Savings and Loans".
Gone, the entirety of the entire sector was wiped out, despite the 30+ year bonds still being "good on their money".
Bailey ran a savings and loan. The run in the film was not a reference to the S&L crisis, seeing as the film predates it by decades.
I assume you meant the right thing, but there's enough ambiguity that I could see a reader being confused.
For a bank, these better investments are available to its depositors if they leave. The bank’s borrowing costs have gone up (or will soon) and that’s the difference between profits and losses. The losses will happen sometime (unless interest rates go down again), but when they get recognized is a matter of accounting.
So the bonds were risky, as is any fixed-income investment when your borrowing costs are variable. (Though it’s clearly not as bad a loss as it would be if the bonds defaulted.)
It's kind of hard for the American Dream to be a rent seeker, and for their not to be a lot of rent seeking...
Apparently 10y US T-bills are now financial weapons of mass destruction according to the HN hivemind.
> (a) loans to office buildings that cannot be repaid in full,
This is a big problem with CMBS but I'm not aware of those being significantly involved in any of the recent blow ups. AFAIK this is still next-year's financial crisis that is only just starting to simmer.
No, no they're not. Not even close. Please read up about this before propagating outright falsehoods.
The S&L industry in the 1980s was doing FTX type nonsense: using depositor funds for very risky investments. This worked great when the markets were going up. Not so much when the market crashed in 1987.
Banks now are holding excess liquidity and funds they otherwise can't lend out (within their risk limits) in US government bonds. The problem is they took long term bonds for slightly higher yield at a time when interest rates were near-zero. And then interest rates went up and created a loss if it were realized. Many companies have been undone by this kind of penny-pinching. It's bad risk management.
Even in the case of SVB, it had more assets than depositor funds and despite the vast majority of deposits (by value) being uninsured, every depositor got their money back and it cost the taxpayer nothing.
Neil Bush was the chosen one to be the next president in the dynasty, but the flack from the S&L scandal forced the family to back George W instead.
https://en.m.wikipedia.org/wiki/Savings_and_loan_crisis#Silv...
> Silverado Savings and Loan collapsed in 1988, costing taxpayers $1.3 billion. Neil Bush, the son of then Vice President of the United States George H. W. Bush, was on the Board of Directors of Silverado at the time.
There was a post earlier today with comments of the form "why are Meta selling bonds right now when rates are so high shouldn't they sell bonds when it's cheap?"
But there's no reason to think rates are high right now except for a comparison to the weird run of near 0% that went on for too long.
So we have banks failing due to shock at the recent rate rises but the recent rate rises haven't actually been that extreme or fast. We seem to have got into a phase where there was an assumption that near 0% rates were here to stay. Banks even gambled on this assumption. If anything you should be leaning towards "wow rates are really cheap right now!" because they are historically.
> The Berkshire Hathaway CEO still resides in the five-bedroom home in central Omaha, Nebraska, he purchased for $31,500 in 1958, which is about $329,505 in today’s dollars.
But the house clearly isn't worth only $329,505 in "today's dollars." Sure, it's more modest than a full-blown mansion, but it's still worth a lot more than that, closer to about a million dollars. And that's including if you were to try buying the house with zero knowledge or context that Warren Buffett once lived in it.
Of course, these things are all 'worth' what someone will actually pay for them, but unless we believe that that housing market is so screwed that Buffett's house would sell for ~$330k if the housing market crashed down to reality (which would actually imply potential deflation and a CPI that would result in the home being worth much lower, per "real" dollar figures), that house is never selling for less than $330k. Not even less than $660k, in my opinion. The only way these homes would come close to their price in CPI is if something catastrophic happened to the neighborhoods in which they exist.
But yeah, I think the fact that Americans, at all income levels, have more stuff than they did 40 years ago, is part of understanding the macro picture. More stuff does not always mean more quality of life.
The only new feature I wish my car had is a nice display that is hooked up to a backup camera, or even better, the ability for the car to automatically park itself, especially parallel parking in tight spots.
Not a million, but closer to that than to #329k.
https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
https://www.getloans.com/blog/220-year-history-of-interest-r...
Conversely, extremely low rates in the 2010s were also abnormal.
* 2% mortgage, 2% real growth and 2% inflation
* 7% mortgage, 0% real growth and 5% inflation
If we wind up in stagflation we may still have low real interest rates but everyone will be having a bad time.
Is it a lack of global economic growth because of natural resource depletion?
For example, you could probably get away with a loan for 18% real if you can sail to America and (leaving politics/historical atrocities aside for a moment) come back with a ship full of gold.
If I had to take a loan with a rate that high I don't think I could possibly pay it back (if it's enough money) without multiple jobs or somehow getting lucky. I don't know that my labor could produce enough.
I actually think an underrated piece of this is that investments have become far less capital intensive. Business in previous economic cycles required a huge amount of capital to begin and maintain: railroads, oil, manufacturing all require enormous sums of capital to continue. Conversely, the dominant businesses in this economic cycle are all Internet based. Google, Meta, etc could run for 1,000 years without substantial cash need, it's a far less capital intensive model. You can see this reflected statistically: the FCF yield of the S&P 500 is 2x what it was in 1990.
If businesses need far less cash than before yet remain highly productive, it stands to reason real interest rates would drop: the demand for capital by economic drivers has gone down, while the supply of capital has increased through FCF gains.
The key insight is that savings and investment opportunities are two sides of a single market. Demand and supply. Savings grow reliably and opportunities do not, so demand for investment opportunities outstrips supply of investment opportunities. Therefore, the opportunities get more expensive = lower rate of return.
The world in increasingly having more supply of money (savings) than before.
It doesn't look like from a median household perspective, but we have a glut of overall money
Huh? Those are two terms for the same thing.
You're right. The data shows "across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been 'stable', and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6-1.8bps p.a. has prevailed. A consistent increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressed sovereign real rates are in fact converging 'back to historical trend' – a trend that makes narratives about a “secular stagnation” environment entirely misleading, and suggests that – irrespective of particular monetary and fiscal responses – real rates could soon enter permanently negative territory" [1].
Basically, over the very long run, real rates go down 0.6 to 1.8 basis points (1/100th of a percentage point) each year, and tend to be low. We've witnessed a few centuries of extraordinary growth, which mandated resource prioritization, which kept rates high. TL; DR Anyone talking about where rates "should" be based on looking at charts is often talking tripe.
[1] https://economics.rutgers.edu/downloads-hidden-menu/news-and....
we've got a lot of fake growth on paper fueled by 0% rates that never existed and has to be shaken out of the system. The fundamental problem is economists thinking they can twist dials on the financial system and play god to prevent recessions and depressions, which will just result in rarer but more extreme financial crises when reality hits them in the face
the economy is fundamentally less efficient and less productive due to the covid pandemic(people not working) and the economic decoupling from China and Russia. Printing money doesn't change those fundamentals, the end result in the short term will be lowered living standards for everybody. More money chasing fewer goods equals inflation, not complicated
It's not complicated, except those who missed out on the 0% rates are hit the hardest and want to catch a similar boom that isn't coming back.
Those looking to buy a house now feel cheated. The prices are similar to ~2020-2022 but the rates are much higher. The rates being lower than historical average is irelevant for those looking to buy know because the current housing prices are also much higher than historical averages.
Our entire economy is now addicted to cheap money so those who missed out on the cheap money will want it back.
They said the largest generational group buying and selling houses pre-COVID were the Millennials.
Now?
Its the Baby Boomers. They can pay cash so they are immune to the interest rates and they tend to have more equity in their properties so they're in a very advantageous position to take advantage of really bad time for real estate.
I live in Minneapolis. The inventory here has been historically low since Covid hit. Normally we should have around 15K properties for sale in the seven country metro area here. Right now, its closer to about 4,200 which is crazy. A lot of people are not even putting their houses on the market. They find an agent and within days they have several buyers. We've had three families just POOF move out of our neighborhood. No "for sale" sign, no showings, just gone.
Further, not letting the property go to market is just bizarre. It’s saying they think they can’t get a better deal by letting more people bid on it. That’s categorically false unless the seller knows the value of their property is below current market conditions. Being that they’ve probably not transacted much in the current market this is erroneous. Let the property go to market and take in bids over at least a couple weeks.
Any bidder saying their bid evaporates if the property goes to market is not worth believing.
Of course, maybe I’m wrong and there are serious buyers who make true highest offer off market. But that probably signifies something truly and even bizarre - and possibly a tendency towards market failure.
I think maybe they were too slow to act, but once they did this has been among the fastest rate hikes in history except for the early 1980s. they have a chart here: https://fred.stlouisfed.org/series/FEDFUNDS You can just draw a red line matching the slope of the current hikes then move that red line to previous rate hike cycles
Are you sure? This graph says otherwise:
https://ibb.co/hW9TP0x
It's true that this graph excludes the rate increases we saw in the 1970s and 1980s, but it's the fastest and highest raise of rates in the last ~30 years. See here for a full timeline: https://fred.stlouisfed.org/series/FEDFUNDS
But overall, the last couple decades were the exception not the norm.
Look at the 50s and 60s. That low in the 60s took 40 years to get to again!
It will likely be another 40 years before we see those low low rates again.
Moving each meeting means going from 0.08 in Feb 2022 to 4.57 in Feb 2023. It may not be quick compared to previous financial shocks, but it is much faster than recent interest rate increases (2015-2018 was 3 years to go up half as much; 2004-2006 went up 4% in two years). Additionally, a decade of basically zero interest rate, followed by 3 years of slow increases and then another two years of zero, followed by a steep climb is kind of unexpected and shocking. You can hardly blame people for not expecting a rates to rise so quickly when there hasn't been anything similar in the past 30 years.
some risks are hard to estimate and manage. interest rate risk is not one of them. actually it is supposed to be the most tractable risk of them all, being a single macro variable. a bank's books are readily repriced under different scenarios
the SnL crisis was the cataclysmic period that ushered a new era. there is a large contingent of actors that profit handsomely by helping banks manage interest rate risk. somehow all this machinery failed but there isn't yet a clear explanation why. lack of regulation would be more convincing if there was something more unusual (an unknown unknown)
not learning from disasters starts becoming the pattern. e.g. what has changed globally in response to the covid pandemic?
This means that you now have to pay for the thing that is priced to be sort of affordable to you with 0% interest but the interest you can get is more like 5%.
Best example of this is the current housing market (regardless whether building or buying). If your previous monthly to a mil was 3k$ now it is over 5k$. This immediately prices you out and will probably lead to a lot of stagnation in 20-30 months.
NFA.
Population growth and the natural birth rate was much higher, too.
7.5% isn't going to be normal somewhere like Japan with declining population.
It's not going to be normal in the US with barely any population growth.
Interest rates are arguably a derivative of growth.
Young people tend to be in the spend now camp as they purchase homes, cars and other big ticket items that they will pay with based on increasing incomes. Older people tend to save now so they can purchase what they need in the future when they have declining incomes.
The ratio of going to old influence interest rate demand.
When it is decreasing your workforce not only get smaller, but get smaller faster than the older population. And in total you get less consumers too.
So in a growing population situation, you can take loans with high interest rate and open business knowing you will have cheap labor, thanks to all new young people becoming adults, and over time lots of new consumers, so your business has guaranteed growth.
But if your population is declining, labor become expensive as each year there are less young people and less workers in total, while total demand also gets smaller but not fast enough. So taking a high interest loan is stupid idea, you have guaranteed high costs, and less sales long term, thus your business profits will never be bigger than the interest and you will eventually go bankrupt.
We have and that was caused by the Fed as well. After the 08 crisis the Fed kept the rate at 0% during what was basically the biggest 10 year bull run in history. It was insane and even many bankers I spoke with mentioned the causes of the original 08 scare/crash werent fixed, they were just band-aided heavily.
People say this is obvious only in retrospect, but people were warning about it forever. And if you don't believe that, just listen to Congress, the President, and Real Estate agents talking about Fed pumping more today ... they are still all for it.
I'm not bullish about the US economy anymore. I think it has become politically untenable to run the economy without this free money pumping. There's too many parasitic sectors in the economy now. They require the economic body to continue to bleed to survive.
None of this is all that surprising either, which makes it even more frustrating. A great many folks were critisizing the Fed for keeping rates so low when the economy was booming, and I don't think many are surprised that the rapid increases have created instability.
This is likely extraordinarily bad advice to listen to.
The Fed is still following an inflation target of 2% and they are very willing to crash the economy in order to get it. They've been fondly invoking the name of Paul Volker.
The rates we're at today are probably sufficient to crash the economy. As the maturity dates of loans hits and their rates adjust upwards we're going to see a lot of bad economic bets and loans that were predicated on 0% interest rates fail and see the fallout into the broader economy.
Even if they're not sufficient to crash the economy, the Fed has announced that it will do whatever it takes. So if the economy heats up and inflation comes back then the Fed will just jack up rates even more.
We aren't going to get a 70s style decade of stagflation or hyperinflation or any of that nonsense. That happened during a period when the Fed "grew up" in the shadow of the Great Depression and WWII and was worried about crashing the economy so it ran hot and inflation was high and long term interest rates were high. Post-Volker we are not in that kind of policy regime.
The most likely outcome is that we will hit a serious recession and unemployment will spike again above 6%, and without much government support the recovery will be gradual like post-2008 and not like the crazy V-shaped post-2020. And the Fed will once again wind up cutting rates down to zero again. The CPI will fall like crazy due to the high unemployment, while asset bubbles will inflate again and the rich will once again use cheap money to buy up everything on a firesale.
If you showed me a Fed that was actually worried about tanking the economy, or a Fed that set a higher inflation target, then I'd agree that higher long term interest rates were on the horizon.
This time is different from what we've seen before because this is the first real inflation scare since maybe the early 90s, so it seems wildly different to most Millennials, but the game at the Fed fundamentally hasn't changed. We're heading back to ZIRP again a lot sooner than we're heading for 10% rates, but it might be a bumpy ride in the middle.
And I guarantee you that all the tough talk about ZIRP being bad is going to evaporate once the recession hits and rich people need to be able to borrow cheaply again.
Given that this is a financial sector that no longer exists, it's hard for people who weren't around then to understand what a huge deal this was at the time.
https://en.wikipedia.org/wiki/Resolution_Trust_Corporation
https://en.wikipedia.org/wiki/Savings_and_loan_association?u...
S&Ls focussed on residential mortgages. Credit unions can issue credit cards, business loans, HELOCs, et cetera.
Historically, S&Ls had time deposits/CDs which they used to finance mortgages. Credit unions were like banks, but tied to a group, e.g. a church or fraternal organization. Over time, S&Ls started taking demand deposits and credit unions broadened the definition of a member to the point of meaninglessness.
If your dad was a member you could start an account, but IIRC not if they were a former employee.
If memory serves loosening the rules on CUs was part of solving the S&L crisis. So BECU (Boeing Employees’ CU) could serve any Washington residents for instance.
I don't feel like I've learned anything more than a factoid I can repeat now. We "have S&Ls". We "didn't have S&L's" then. Okay. We still put savings in a financial institution. Those FI's still lend the money out. Many are still mutuals.
Aha! But back in the day, you'd have to be a member of a selective organization to be part of a mutual that doesn't all of that!
>Over time, S&Ls started taking demand deposits and credit unions broadened the definition of a member to the point of meaninglessness.
Oh. So not that, either.
I guess I just have different standards for what a meaningful difference looks like?
[1] "Given that this is a financial sector that no longer exists, it's hard for people who weren't around then to understand what a huge deal this was at the time."
https://news.ycombinator.com/item?id=35776271
[2] I mean, I did, but was too young to get what was going on for adults.
Calling it an emphasis makes it sound like an S&L could've just started looking like any diversified bank to stay alive, but it wasn't an option for them without a change to their regulatory environment--and couldn't have happened quickly enough anyway once the crisis was rolling.
If unchecked, the interest rate changes at the time would've eventually come for all banking, but the damage was limited.
What actually killed them was Volker raising interest rates to 18% in a misguided attempt to cause the inflation triggered by the break up of the Bretton Woods accords and the accompanying oil crisis. (That can also be read the other way round as it happens - one of the several things that stressed the fixed rate currency exchange agreement out of existence was the oil trade imbalance and the accompanying flows of dollars. Volker raised interest rates following economic textbook theory to suppress inflation, and it backfired rather spectacularly.
Unlike today - this wasn't strictly a quantitative money inflation (i.e. nobody had just increased the US money supply by 25%), and this is very clear in the M2/M3 figures of that time.
At any rate. Key thing, then and now - the US residential mortgage market is dominated by long term, fixed rate loans. When interest rates rise very quickly, this creates huge issues for the lenders. The S&L's got caught with a lot of low interest rate, fixed rate loans, and couldn't consequently pay their savers enough to keep their deposits. As savers moved deposits into higher rate institutions it pushed the entire S&L (and many banks as well) into difficulty, some compensated for this by making riskier (higher rate) loans, and the whole sector crashed.
One of the unfortunate side effects of this was that it led to Salmon Brothers developing a massive loan securitisation program (to buy the loans from the S&L as a way out, kind of), and that led directly to the Mortgage Backed Security crises of 2000 and 2006. It also somewhat resulted in the South American crisis in the 1980´s since that was another place the US banks went looking for high interest rate loans.
https://www.sdccu.com/loans/home-loan-mortgages/
How much of that debt they keep on their own balance sheet seems the critical question.
CBDC will help resolve the difficult mathematical problem when politicians overspend (or steal) money they took from the public, and the accounts don't balance. They can just create more money instantly. And no one will know.
1. Unlike 2008, we don't have a whole host of risky borrowers and poor debt;
2. Rates are still historically low (as another commenter mentioned); and
3. The banks being taken over by the FDIC are solvent. That is, their assets exceed their depositor funds, even if they have to realize losses on long-term bonds by selling them.
It's worth noting that accounting rules allow banks to keep bonds off the books and nominally kept at face valuew with the intention of holding them to maturity.
We've had bank runs on banks that largely catered to a single vertical (eg SVB, Singularity) and were relatively small. This made them vulnerable. On top of that, you had poor risk management by holding long-term bonds instead of short-term bonds.
Management chases short-term yield and if 10 year bonds are offering 1.75% (a couple of years ago) but 3 month bonds are only offering 1.69%, many banks will hold the long-term bonds instead, even though they open themselves up to rising interest rate risk. They are paying the price for now and depositors aren't left holding the bag. So the system is working.
huh? student, auto, and credit card debt are all through the roof
auto loans are the new subprime
https://www.dallasnews.com/photos/2013/03/24/today-in-dallas...
https://www.google.com/maps/place/32°50'56.0%22N+96°34'01.8%...
and
https://www.google.com/maps/place/32°50'53.1%22N+96°34'53.8%...
That doesn’t sound crazy. Especially if the condos were rubbish (as we see happen on many countries speculating on houses - unused properties with little intrinsic value).
https://www.fdic.gov/bank/historical/history/191_210.pdf
While the pre-existing institutional fragilities were different, Fed tightening hit them both hard:
> ... rising dollar ex-change rates in response to the high U.S. interest rates of the early 1980s increased the difficulty of meeting debt commitments.
* https://billmoyers.com/2013/09/17/hundreds-of-wall-street-ex...
It would take some digging to go through press releases and such:
> NEVIS was convicted in 1989 of 24 felony bank fraud charges in the District of Oregon arising from the collapse of State Federal Savings and Loan of Corvallis. He initially was sentenced to a term of imprisonment for two years, to be followed by probation for a period of five years, with restitution in the amount of $2 million to be paid in annual installments of $400,000 as a condition of probation.
* https://www.justice.gov/archive/opa/pr/Pre_96/November95/584...
I'm sure there's a body of research on it, but you'd have to have decent search-fu to know which keywords for particular academic articles and such.