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Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

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81–90 of 161 posts

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#81

The biggest moral hazard is in colleges. The boards of colleges justified higher expense structures in the name of trying to win a zero sum rankings game. The best case for them is a lot of people wondering why they are paying $30k a year to watch online lectures while inflation wipes out the debt. The worst case for schools is a total restructure due to lower revenue and donations due to students unwilling to overpa…

> The biggest moral hazard is in colleges. The boards of colleges justified higher expense structures in the name of trying to win a zero sum rankings game.

That's not what "moral hazard" means.

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#82
post #13

The statement about the lack of inflation from QE and other stimulus programs from 2008 is pretty questionable. There's been little inflation as measured using usual consumer price indices, but the construction of those indices is typically fairly focused on consumer goods and underweights the assets that rich people tend to invest in (stocks, real estate, bonds, etc). The QE and stimulus programs from 2008 were sign…

Every HN thread on economics has a bunch of comments like these that are earnestly misinformed about economics. When commenting on something outside of your wheelhouse, please recall Socrates from the Apology: "I observed that even the good artisans fell into the same error as the poets; because they were good workmen they thought that they also knew all sorts of high matters, and this defect in them overshadowed their wisdom."

I'll point out just two deficiencies in these threads and leave the rest to you. If P/E ratios in the US are "too high," then people would invest their money elsewhere for better return, right? Maybe international stocks or bonds or whatever. And why don't they, if they have every incentive to seek a better return? Because there are no better returns, even in countries with higher interest rates. So how could P/E ratios be too high? The more likely explanation is that this is the "new normal" - savings outpaces investment opportunities for many reasons (aging populations, growth in countries with stronger saving cultures, etc.), which pushes up the premium on assets.

Second, on the subject of interest rates and QE, a little international perspective would make you reconsider the effect on the overall economy. All other developed economies have lower interest rates, more QE, and slower growth than the US. Look at Europe, look at Japan. The issues of "why are asset prices rising" and "why is inflation low" are much larger than just US policy. We are talking global trade and demographic factors that influence these things. The current stance of fiscal and monetary policy is the symptom, not the cause. And in fact the US has been significantly more successful than our counterparts on that topic, as a fast and strong response in 2008 pre-empted the kind of drawn out economic malaise seen in Europe, where the ECB waited years before easing policy to the degree that we had. Now Europe has lower rates, more QE, lower inflation, a worse labor market, and less growth than the US. And that's before factoring in the coronavirus crisis. Policy may have increased inequality in some ways, but if you're going to make that claim you have to also answer the corresponding counter-factual: potentially the poor would have been even worse off (relative to the rich) if there were no policy interventions and the labor market collapsed. There have been some papers on the topic, and it is not at all obvious that inequality is worse now than it would have been if there was less policy intervention.

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#83
post #13

The statement about the lack of inflation from QE and other stimulus programs from 2008 is pretty questionable. There's been little inflation as measured using usual consumer price indices, but the construction of those indices is typically fairly focused on consumer goods and underweights the assets that rich people tend to invest in (stocks, real estate, bonds, etc). The QE and stimulus programs from 2008 were sign…

QE never really worked, bailed out a bunch of corrupt and broken companies that should have gone bankrupt, and kicked the can down the road. They were supposed to unwind QE1 but they never did. And $4T in toxic QE1 assets sat on the Fed's balance sheet going into this mess. The Fed is propping up the bond market and toying with the idea of buying equities. We just had 17 million people file for unemployment in 3 week…

QE1 worked well and the banks are not corrupt. It's in the later years, while stocks and the economy were on a tear, that the Fed at. al. refused to raise interest rates ... this perpetuated the housing bubble among other things, which is the #1 source of inequality (hint, it's not between the billionaires and the rest of us, it's between the propertied and the unpropertied).

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#84

Earlier quoted context omitted.

I don’t think the problem is “a month” of inactivity, although clearly there are no shortage of people and businesses who can’t survive even that. The real problem is that we’re a month in and there’s no genuine end in sight, optimistic politicians notwithstanding. The actual end of the crisis could be two months away or two years.

That's a fair point. It doesn't make me feel any differently about the proposition that, in a society that preaches values like rugged individualism and fiscal responsibility to its poorest members, it's strange to me that 99% of the government's per capita expenditures are going to places other than the people. Literally 99%. And by blindly subsidizing every single business, including like hedge funds and other spec…

Yeah, I've definitely been in the UBI camp for a while, and I'm hopeful that if nothing else positive comes out of this that we'll rethink how we're structured as a society in that regard.

So it's safe to say I think more of the money should be going directly to the most vulnerable, but I'm also sympathetic to the point that, at least as far as the way we've structured our economy, public companies aren't allowed to prepare for a 100% loss of business for months at a time. How much grief did Apple get for sitting on a pile of cash when it could be "better spent elsewhere"?

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#85

Earlier quoted context omitted.

I agree with the general principle here (that moral hazard is bad; that we should construct an economy in which it's possible to hit "pause" for any number of reasons), but that's not the economy we have. The one we have seems to reward financial engineering, cost-optimized supply chains that are highly vulnerable to even the most minor disruptions, and a general mindset that freaks out at the first sign of trouble.…

> So, how to we get out of this trap? Let it hurt. Unless investors feel it (and they only feel via the value of their investment), nothing will change, ever. Of course, you'll get plenty of people saying that it's unfair that this time they really have to live with the consequences of their risk management and that we should totally do that, starting tomorrow. But then you'll get the next cries next week when they'v…

I think that I agree with this ideologically, but the reason nobody lets that happen is because cumulatively, "retirement accounts" are the single largest "investor" on the stock markets.

So in this case "screwing investors" basically amounts to destroying the life savings of the elderly.

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#86

I see so much talk here on about how companies should be left to go bankrupt because of their "shitty decisions", that "the weakest companies should be allowed to fail", and "shareholders have to hold the bag" (all from comments here). This fundamentally misunderstands how businesses work. If your business has a 5% profit margin, and you're supposed to have enough savings to weather, say, six months of essentially fu…

I find your implied assumption that starting a company should in normal circumstances be seen as a get rich scheme that pays out in under 10 years as completely toxic, but that's an aside.

The point is large companies shouldn't be hurting for money, they have two big options on the table to generate money right now: issue stock or bonds. However, there are a lot of really stupid large companies that decided to max out their credit cards in the good times to pump up their stock price via buy backs. They can't issue bonds, but they could still issue stock. However, that would cause the price to crash, and Trumperino in Chief can't allow that to happen.

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#87

The biggest moral hazard is in colleges. The boards of colleges justified higher expense structures in the name of trying to win a zero sum rankings game. The best case for them is a lot of people wondering why they are paying $30k a year to watch online lectures while inflation wipes out the debt. The worst case for schools is a total restructure due to lower revenue and donations due to students unwilling to overpa…

I think the future is a series of online courses that have objective pass-fail, and somebody with recognized authority to issue degrees in X if you pass X's set of courses. And it's cheap - maybe $100 per class. And there's different classes competing to be in the set for X, and there's competing outfits with the authority to issue degrees.

Everything that you just listed is basically how our current system works.

Accredited institutions can issue degrees if you pass their courses. There are various "grades" that bucket people, but as far as getting the degree goes, you just need to pass. Grading is at least ostensibly objective. Admissions to accredited institutions is selective, and colleges compete with one another for students.

The only two differences are price per class and "objective grading".

The former amounts to "what if we had our current system, except everything were cheaper". Which, I guess I have to admit, would indeed be nice. It'd be nice if healthcare and cars and real estate were cheaper as well. Not sure how to actually do it, though.

And for the latter, we've done that in K12 (standardized tests). Almost everyone seems to agree it's a terrible system.

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#88
post #13

The statement about the lack of inflation from QE and other stimulus programs from 2008 is pretty questionable. There's been little inflation as measured using usual consumer price indices, but the construction of those indices is typically fairly focused on consumer goods and underweights the assets that rich people tend to invest in (stocks, real estate, bonds, etc). The QE and stimulus programs from 2008 were sign…

Every HN thread on economics has a bunch of comments like these that are earnestly misinformed about economics. When commenting on something outside of your wheelhouse, please recall Socrates from the Apology: "I observed that even the good artisans fell into the same error as the poets; because they were good workmen they thought that they also knew all sorts of high matters, and this defect in them overshadowed the…

"a bunch of comments like these that are earnestly misinformed about economics. "

" savings outpaces investment opportunities for many reasons (aging populations, growth in countries with stronger saving cultures, etc.), which pushes up the premium on assets."

The savings rate is not correlated with stock prices. [1]

"All other developed economies have lower interest rates, more QE, and slower growth than the US. "

No, they have similar rates per capita. US grows because it brings in more bodies [2]. Moving warm bodies from A->B implying a loss somewhere and again somewhere else isn't exactly growth. (I mean - yes, they probably can be more productive in America). But this is not an economic marvel.

The OPs statements concerning inflation of financial assets is very, very reasonable economics.

[1] https://www.statista.com/statistics/246234/personal-savings-...

[2] All other developed economies have lower interest rates, more QE, and slower growth than the US.

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#89
post #83

Earlier quoted context omitted.

QE never really worked, bailed out a bunch of corrupt and broken companies that should have gone bankrupt, and kicked the can down the road. They were supposed to unwind QE1 but they never did. And $4T in toxic QE1 assets sat on the Fed's balance sheet going into this mess. The Fed is propping up the bond market and toying with the idea of buying equities. We just had 17 million people file for unemployment in 3 week…

QE1 worked well and the banks are not corrupt. It's in the later years, while stocks and the economy were on a tear, that the Fed at. al. refused to raise interest rates ... this perpetuated the housing bubble among other things, which is the #1 source of inequality (hint, it's not between the billionaires and the rest of us, it's between the propertied and the unpropertied).

QE1 did not work at all. And the Fed's 0 percent interest rates have distorted capital markets causing corporate debt to skyrocket. That alone is propping up zombie companies and this overleverage is what will make the coming recession / depression even worse than 2008. Note: the Fed is violating the Federal Reserve Act by using BlackRock as a proxy for bond purchases. So please do not tell me they are not corrupt. They're beyond corrupt.

Re: Seen everywhere in last U.S. crisis, moral hazard is nowhere in this one

#90

Earlier quoted context omitted.

The shutdown is the government’s fault, period. The damage it is causing is far worse than what would have happened if the government had started taking action in January and ramped up testing capacity. Instead the government did close to nothing and now the lockdowns are the last resort. Other countries handled this better. South Korea and Taiwan are good examples of countries that ramped up testing and did not need…

Disagree. There’s no guarantee earlier government action would have eliminated the need to shut down businesses or ban gatherings. I do think more should be done to support workers. $1200 single payments are not even peanuts.

We know for a fact that some countries didn't need to shut down. Again, South Korea and Taiwan are examples. They are also denser than the United States, and less wealthy, and closer to the source of the virus outbreak. Yet they handled it much better.

By contrast, the United States is less dense than those countries, significantly farther away from China, the richest country in the world, and had months to prepare.

I find it unconvincing that the United States could not have rolled out broad testing and tracing if it had started back in January when the virus was known to be a threat. Even if you're right and all it did was buy time before an inevitable shutdown, shortening the shutdown would have hugely helped to limit the economic damage.

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