The Looming Bank Collapse • Hacker News Board

Re: The Looming Bank Collapse

#51

Post by atemerev » Wed, Jun 10, 2020, 8:58 PM UTC

Diederich wrote: post #46

throwaway_jobs wrote: post #28

Earlier quoted context omitted.

> The United States Government prints money all the time. This money has value because there is a world-wide consensus that it has value. No the Government borrows against future taxes (consider that an accounts receivable), the borrowed money doesn’t have value because of consensus it has value because it is backed by future tax revenue. If the government did as you say and borrowed a trillion per taxpayer the syste…

The current US federal debt is roughly 110% of GDP. In a few weeks, I'm going to borrow about 350% of my yearly income in the form of a home loan. I'm currently paying about 30% of my pre-tax income on rent, and this future mortgage will be about 22% of my pre-tax income, so on that basis alone it makes a lot of sense. Less than 10% of the total federal budget goes into debt payments. The absolute numbers don't reall…

Of GDP in the largest economic boom, enabled by past borrowings.

Re: The Looming Bank Collapse

#52

Post by rufusroflpunch » Wed, Jun 10, 2020, 8:58 PM UTC

We never "righted" the system after 2008 (or 2001). We just kicked the can down the road, making the problem worse for ourselves when we eventually do finally lose control. Our system is 100% entirely dependent upon ARTIFICIALLY low interest rates driven by Central Banks. It's the only still keeping this zombie of an economy moving, and it's the entire world, not just the United States.

Central banks are doing everything in their power to keep interest rates low because if they were to tick up even a little bit, the whole house of cards will come toppling down. They can't do it forever and we're all just playing chicken with hyperinflation.

Re: The Looming Bank Collapse

#53

Post by QuesnayJr » Wed, Jun 10, 2020, 8:59 PM UTC

burlesona wrote: post #42

mdorazio wrote: post #27

Earlier quoted context omitted.

Think you nailed it. The thing is, in order for capital flight to be a risk there needs to be somewhere else of comparable size and upside opportunity to the US that doesn't rhyme with "China" and it sure as hell isn't Europe. So we're back to square one in which absolutely massive sums of money are chasing returns with nowhere else to put money than the same places it already is. It's madness on a global scale.

This is the insanity of zero interest rate policy. It’s so hard for me to understand why the economists and fed officials don’t see this.

It's not that we don't see it, but we don't agree. I honestly don't have the energy to try to explain it here anymore -- the conversation always turns unpleasant, and I need a place on the Internet where I can avoid thinking about economics for a while.

Re: The Looming Bank Collapse

#54

Post by whatok » Wed, Jun 10, 2020, 8:59 PM UTC

dia80 wrote: post #34

Meh, the article doesn't mention recovery rates. If a loan defaults it's not usual you are getting 0 back. Typically 30-40% is the assumed rate. That means if all the loans default then the top 30% of tranches shouldn't take a loss. So now consider, most of the underlying loans have to default and the recovery rate has to be below battle tested assumptions before the top tiers get risky. This is very very unlikely to…

Cov-lite loans are at the largest percentage of issuance of all-time. 30-40% with a complete lack of meaningful covenants in a lot of cases is wishful thinking.

Additionally, what's new about this cycle is tech companies being a massive percentage of issuance. What's the recovery value of a tech company with little to no real assets? Additionally, what's the recovery value of an energy company when oil has dropped as much as it has? Both of those sectors make up a huge portion of outstanding and will move the needle meaningfully even if other sectors are fine.

I probably agree with your overall point about the Fed and and govt but you really cannot use historical assumptions for recovery rates this cycle.

Re: The Looming Bank Collapse

#55

Post by rmrfstar » Wed, Jun 10, 2020, 9:00 PM UTC

mycl wrote: post #45

dia80 wrote: post #34

Meh, the article doesn't mention recovery rates. If a loan defaults it's not usual you are getting 0 back. Typically 30-40% is the assumed rate. That means if all the loans default then the top 30% of tranches shouldn't take a loss. So now consider, most of the underlying loans have to default and the recovery rate has to be below battle tested assumptions before the top tiers get risky. This is very very unlikely to…

It says this: > We already know that a significant majority of the loans in CLOs have weak covenants that offer investors only minimal legal protection; in industry parlance, they are “cov lite.” The holders of leveraged loans will thus be fortunate to get pennies on the dollar as companies default—nothing close to the 70 cents that has been standard in the past.

Also, a lot of people make 10x levered bets on AAA instruments, which means even a 10% loss can wipe you out.

The trick is "repo", or repurchase agreements.

(1) Buy bonds

(2) Use those bonds as collateral for a low-interest loan

(3) Use the loan money to buy bonds

(4) goto 2

See, e.g [1]

[1] https://www.bloomberg.com/news/articles/2020-04-15/how-repo-...

Re: The Looming Bank Collapse

#56

Post by devalgo » Wed, Jun 10, 2020, 9:06 PM UTC

solatic wrote: post #3

It doesn't matter if the banks crash again if the Fed will just bail everybody out again and push stock market inflation even higher than it is now. It's clearly unsustainable, but the question is, how and why will the bubble burst? The author posits one option, of political intervention precluding another bailout. But the Federal Reserve is non-political precisely to shield it from attempted short-term political mac…

> but the question is, how and why will the bubble burst?

I'd take the Black Swan approach. There are probably a dozen each unlikely events that could cause the bubble to pop but you're unlikely to actually predict which one will do it and when it will happen. Your optimal move is to assume something is going to happen at some point and just hedge yourself against that rather than try to predict. Taleb gets called an oracle but his entire philosophy is not to predict rare events that destabilize a system but just accept they will eventually happen and prepare accordingly

In this case having some portion of your net worth in BTC/Crypto seems like an obvious hedge

Re: The Looming Bank Collapse

#57

Post by ethbro » Wed, Jun 10, 2020, 9:07 PM UTC

throwaway_jobs wrote: post #28

Diederich wrote: post #20

Earlier quoted context omitted.

US native here. If I printed some $100USD bills, took them to the bank and tried to deposit them, they would have no value. The consensus is that you aren't allowed to print money. The United States Government prints money all the time. This money has value because there is a world-wide consensus that it has value. The simple fact is that there is and has been (for many decades) no safer place to park vast sums of mo…

> The United States Government prints money all the time. This money has value because there is a world-wide consensus that it has value. No the Government borrows against future taxes (consider that an accounts receivable), the borrowed money doesn’t have value because of consensus it has value because it is backed by future tax revenue. If the government did as you say and borrowed a trillion per taxpayer the syste…

> No the Government borrows against future taxes (consider that an accounts receivable), the borrowed money doesn’t have value because of consensus it has value because it is backed by future tax revenue.

This is one of two reasons it has value.

As other comments mention, the other reason is because it's by far the leading global reserve currency. Which is to say it's an attractive mix of liquid, stable, and available, compared to alternatives.

Furthermore, there are certain commodities (e.g. oil), for which dollars are required.

As a result, other countries / parties may believe the dollar is overvalued, but they will still have to acquire them, at the market rate, to execute transactions.

As a result of that ongoing demand, the dollar will tend to be valued both on its future tax revenue value AND as a result of a substantial, continuous demand.

Re: The Looming Bank Collapse

#58

Post by devalgo » Wed, Jun 10, 2020, 9:09 PM UTC

Answerawake wrote: post #17

solatic wrote: post #3

It doesn't matter if the banks crash again if the Fed will just bail everybody out again and push stock market inflation even higher than it is now. It's clearly unsustainable, but the question is, how and why will the bubble burst? The author posits one option, of political intervention precluding another bailout. But the Federal Reserve is non-political precisely to shield it from attempted short-term political mac…

> But to where? And under which circumstances? Can you give some guesses? I don't see any other place that would seem more attractive than the US. Every other place has its own problems whether it be lack of developed human capital, unstable government systems, etc. Maybe in the distant future if Mars transportation takes off that can be the next big thing?

Short of saying that a hyper inflation event in the US would probably break civilization and so allocating capital is irrelevant at that point, isn't the obvious answer Bitcoin or other crypto assets?

Re: The Looming Bank Collapse

#59

Post by jandrese » Wed, Jun 10, 2020, 9:11 PM UTC

gridlockd wrote: post #24

"There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs." To get some perspective, the FED recently added almost three trillion dollars of "not QE" to the balance sheet, mostly because of COVID-19. They'll be bailed out. "But this time, the bailout proposal will likely face stiffer opposition, from both parties" Doubtful. Everything can be blamed on the virus thi…

Debt only matters if there is a Democrat in the White House.

Re: The Looming Bank Collapse

#60

Post by itsoktocry » Wed, Jun 10, 2020, 9:13 PM UTC

rufusroflpunch wrote: post #52

We never "righted" the system after 2008 (or 2001). We just kicked the can down the road, making the problem worse for ourselves when we eventually do finally lose control. Our system is 100% entirely dependent upon ARTIFICIALLY low interest rates driven by Central Banks. It's the only still keeping this zombie of an economy moving, and it's the entire world, not just the United States. Central banks are doing everyt…

>Our system is 100% entirely dependent upon ARTIFICIALLY low interest rates

There is no such thing as "artificial" or "natural" rates of interest.

>Central banks are doing everything in their power to keep interest rates low because if they were to tick up even a little bit, the whole house of cards will come toppling down.

Why would, or should, they "tick up"? Capital is abundant. If rates were higher, things would be different, yes. But that is not the world we live in.

>It's the only still keeping this zombie of an economy moving, and it's the entire world

I love the idea that the entire global economy is fake, artificial and zombie-like, because it doesn't operate the way you think it should. A reasonable person would take a step back and question their premises and understanding.