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The Looming Bank Collapse

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Re: The Looming Bank Collapse

#71

Post by onlyrealcuzzo »

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…

Generally, you don't get hyperinflation when asset prices fall.

If interest rates were to rise to normal levels, asset prices could fall 45%. It's hard to imagine anything but deflation.

Unless interest rates go to extreme negatives, you will not see another effect like the one we have already seen from interest rate manipulation. There's just not enough room for a big rate of change.

It would be completely separate if you had outrageous fiscal spending to try to prop up asset prices. Given that fiscal stimulus is much harder to pass than monetary, hyperinflation doesn't seem like the thing to worry about.

Re: The Looming Bank Collapse

#72

Post by rmrfstar »

dia80 wrote: post #68
rmrfstar wrote: post #55

Earlier quoted context omitted.

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)

If you step through the arithmetic, you see that a 5% haircut can take you to 20x leverage. It's a geometric series.

That means that investors' internal risk limits are the binding constraint, not repo haircuts.

It's another way of saying that the financial sector sets its own leverage. Historically, that has not turned out well. It's why Dodd-Frank included a leverage rule for large banks.

Re: The Looming Bank Collapse

#73

Post by baxtr »

Diederich wrote: post #67
atemerev wrote: post #51

Earlier quoted context omitted.

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.

What exactly are you concerned about?

Re: The Looming Bank Collapse

#74

Post by cm2187 »

Idiotic article. First a CLO is essentially a portfolio of loans. You can call that gambling, and in a way, every financial risk is gambling, but it is the very job of a bank to take credit risk, and to lend.

Then, I don't know about Wells specifically, but it is possible that these CLOs may not even be external transactions, that the bank securitised its own loans so that it stands ready to post them to the central bank as collateral to get short term funding in exchange, if a liquidity crisis hits. If it is the case, it is actually a good thing.

The banking system is increadibly strong vs 2008, the amount of capital banks hold is a multiple of what they held in 2008, while having reduced the size of their balance sheets at the same time (ex Chinese banks). They hold huge amounts of liquid assets and have limits on how much short term funding they can rely on. In addition the introduction of bailin should protect tax payers in the case of a bank failure.

I would be much more worried about the financial impact of money printing. The amount of QE that the Fed has introduced is unprecedented, both in size and velocity, and they keep printing. And we are only at the begining of this downturn. This will massively distord the markets. And I don't believe it will not create inflation ultimately, which is a much bigger threat to savers than their bank credit risk.

Re: The Looming Bank Collapse

#75

Post by jaredtn »

onion2k wrote: post #18
danielovichdk wrote: post #8

From an outsider living a long way from USA, for many years now I haven't understood how the financial instruments of USA work. It constantly looks like the country is merely printing more money to stay afloat.

for many years now I haven't understood how the financial instruments of USA work That's deliberate. If they're too complex for most people to understand then they're very hard to scrutinize.

I would say opaque rather than complex. The details of a CDS aren't complicated, nor is the Eurodollar system. But it can't be inspected from the outside, and even the Fed is reliant on running complex models in an attempt to model monetary policy impact.

Re: The Looming Bank Collapse

#76

Post by hpkuarg »

apta wrote: post #63
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 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…

A moral argument against the time value of money? Isn't that like legislating that the value of pi is 3?

Re: The Looming Bank Collapse

#77

Post by apta »

hpkuarg wrote: post #76
apta wrote: post #63

Earlier quoted context omitted.

> 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…

A moral argument against the time value of money? Isn't that like legislating that the value of pi is 3?

It's a moral argument against the inherent exploitation involved in usury. No one denies the time value of money, it's about how to extract that value morally and ethically, and not at the expense of the needy.

Re: The Looming Bank Collapse

#78

Post by mumblemumble »

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…

One interesting thing about the federal government's debt is that it behaves very little like an individual's debt.

A pretty decent 10-year student loan right now is at 4% interest. And you generally have to pay it back with actual money that you earn.

A 10-year treasury note is at more like 1%, and nobody bats an eye at the government covering payments by issuing more notes. Meaning that, in effect, the US government is getting an indefinite interest-only loan at a pretty low rate.

Actual humans don't get to do that because of a sticky problem: eventually we age out of our money-earning years, and (hopefully some time later) we die. Lenders, understandably, have an interest in getting their money back before that happens. Or at least in getting to the point where the loan is collateralized by assets that are worth more than the loan's balance by the time that happens. And that's the ultimate reason why revolving debt gets worrisome: It's running down the clock.

The US government, on the other hand, is theoretically immortal. There's a risk that it might become insolvent at some point in the future, but there's not the same reason to worry about handling debt by endlessly revolving it, because there's no proverbial clock for it to run out.

Re: The Looming Bank Collapse

#79

Post by whatok »

rmrfstar wrote: post #72
dia80 wrote: post #68

Earlier quoted context omitted.

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)

If you step through the arithmetic, you see that a 5% haircut can take you to 20x leverage. It's a geometric series. That means that investors' internal risk limits are the binding constraint, not repo haircuts. It's another way of saying that the financial sector sets its own leverage. Historically, that has not turned out well. It's why Dodd-Frank included a leverage rule for large banks.

> That means that investors' internal risk limits are the binding constraint, not repo haircuts.

While part of risk, expected return is a larger binding constraint in most cases over risk limits. I'm probably not going to lever up 20x for an tiny expected return. On the other hand, I may very well lever up 5-10x on something 50x more risky than treasuries if the 10yr is yielding 0.725%.

Re: The Looming Bank Collapse

#80

Post by linuxftw »

cm2187 wrote: post #74

Idiotic article. First a CLO is essentially a portfolio of loans. You can call that gambling, and in a way, every financial risk is gambling, but it is the very job of a bank to take credit risk, and to lend. Then, I don't know about Wells specifically, but it is possible that these CLOs may not even be external transactions, that the bank securitised its own loans so that it stands ready to post them to the central…

> but it is the very job of a bank to take credit risk, and to lend.

This used to be true, but isn't. The job of the bank to is play the spread. They take 0% interest loans from the Fed, loan the money to you, and then resell the loan into the market (aka, your 401k). This is why the subprime mortgage crisis was a crisis. Banks had almost 0 risk. Just let the credit rating agencies stamp AAA on the CLO, push it into the state of California's pension fund as AAA securities, profit.

If any bank is not selling the loan, they're taking a completely unnecessary risk.

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