The current economic system is fundamentally flawed. Unless someone has the courage to ban interest/usury, things will stay the way they are. We have known this for thousands of years now, but unfortunately greed and exploitation persists.
The Looming Bank Collapse
61–70 of 135 posts
Re: The Looming Bank Collapse
#62We 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 woul…
> There is no such thing as "artificial" or "natural" rates of interest.
That is not entirely true.
https://en.wikipedia.org/wiki/Natural_rate_of_interest
Whether the natural rate of interest is real, or is a unvariate value is a matter of some debate among economists.
Re: The Looming Bank Collapse
#63We 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 driven by Central Banks.
It's the other way around: the entire reason why everything is so screwed is because of interest. It's an evil and exploitative practice that has destroyed so many people, only for a relative few to become wealthy. It's obvious today how this works out, but it's been going on for thousands of years, which is why it's banned in many religions, and for good reason.
Re: The Looming Bank Collapse
#64Earlier quoted context omitted.
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-...
Aha. Is this how folks actually attain worthwhile rates of return on very low-return, low-risk investments?
[EDIT] well no that can't be it because it requires even more money coming in for those loans, which can't provide more expected return than the bonds they're buying or the whole thing would be pointless.
Re: The Looming Bank Collapse
#65We 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 woul…
>There is no such thing as "artificial" or "natural" rates of interest.
In a sense this is semantically correct, there is no one true interest rate, in a hypothetical pure market there are many rates for many different types of transactions.
But to say that wildly misses the point that the rates for all transactions are hugely skewed, all in the same direction, because a single player, who writes the laws, and prints the money, is putting enormous pressure on rates.
So yes, there is no objective one natural rate. But all rates right now are extremely artificially skewed.
> Why would, or should, they "tick up"? Capital is abundant.
Capital is abundant for the sole purpose of keeping rates low. You are confusing the causality here. If they weren't being suppressed, and actors were setting rates on a per transaction basis, then they would drastically tick up as many of the underlying entities economy wide have riskier default profiles than they have in the past. This isn't conspiratorial or speculative. This is widely understood to be true by mainstream economists, even those who support the rate suppression.
Re: The Looming Bank Collapse
#66We 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 woul…
It's artificial if the entity loaning you the money and setting the rate has no associated risk.
If I loan you money there's risk you won't be able to pay me back. So I decide what interest you would need to pay me for it to be worth it for me to take that risk. Lots of other people do that, and you get a "natural" rate of interest as you call it. Everyone offering you the loan has skin in the game.
But if the entity that prints the money says they'll loan you money, it doesn't matter to them if you can't pay it back. They set the money supply. If you don't pay back, they can take the value from everyone dealing in their money by printing more. This lack of risk allows them to undercut the rates of entities who would be taking on risk. Now you have an "artificially" low interest rate.
Re: The Looming Bank Collapse
#67Earlier quoted context omitted.
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.
Yup, all true.
I'm not necessarily defending past or present fiscal policy. I'm pretty concerned about this stuff as well.
Re: The Looming Bank Collapse
#68Earlier quoted context omitted.
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-...
The "haircut" on risky assets stops you leveraging it too much. I think it's about 5% for US treasury bonds. So for every 100 I want to finance I need to have 5 cash on hand. Itsuch higher for riskier assets and that keeps leverage down. Also when things start to get edgy banks demand a bigger haircut further reducing the available leverage forcing you to delever (e.g. March)
Re: The Looming Bank Collapse
#69It doesn’t matter if CLOs collapse. The capital requirements that banks operate under will ensure that they will withstand it.
That's sarcasm right? The capital requirement has recently been dropped to zero. Edit for source: https://www.federalreserve.gov/monetarypolicy/reservereq.htm
Reserve requirements != capital requirements. Reserve requirements are vs deposits, capital requirements are vs balance sheet items. Big difference between the two.
Re: The Looming Bank Collapse
#70Meh, 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.
My bad, I missed that. Still I don't think your are going to see a meaningful fraction of highly rated CLO tranches default.