Central Banks Have Few Options to Deal With Another Crisis
bloomberg.com
bloomberg.com
My n=2 experience with the late 1990s stock bubble and the early 2000s real estate bubble have taught me something:
When there's a real bubble, one whose collapse truly threatens to bring down an entire economy, the only people yelling "bubble" will be cranks and nutjobs.
Everyone else will be so wrapped up in the rarefied air they're breathing, impressed by their financial acumen, the way they've made a fortune so easily, the rich prospects for the future, that they'll ignore any signs pointing the other direction.
As the saying goes, if the wind is strong enough, even turkeys can fly. Except those turkeys actually think they're flying and therefore can't detect the wind blowing them.
Here's an alternative hypothesis:
The bubble forms by progressively beating the pessimism out of almost everyone. With each correction, the bubble-sayers come out of the woodwark (this article is an example). Then, quite unexpectedly, things turn around, and markets head to higher highs. The next time a decline happens, there are fewer bubble-sayers, and so on.
Eventually, the only bubble-sayers are the permabears. When the inevitable happens and the year-after-year lack of a wipeout convinces investors to buy any dip, the permabears finally get their place in the spotlight.
At that point, it's all bears, all the time.
The difference, as the article notes, is that government response to bubbles has varied. And strong enough measures have certainly decreased the severity of downturns.
At this point in time there aren't a lot of remaining options, were the world economy to seriously get into trouble.
(One reason it was asinine for the US to cut taxes and deficit spend in an economic expansion)
- I lost my first home and my dog, and was forced to live out of my car for a month. The news told me it was because I was foolish and tried to get too much for my home loan. Id say a 41k loan on a mobile home is pretty lavish, and I was a fool to ever barter so unwisely.
- My boss paid me overtime to pour mud into running engines and actually destroy working cars. it was called "cash for klunkers" and the idea was that people would be better off with a 45k car payment instead of a running car. The smoke from the engines closed a local elementary school playground.
- Then president George W Bush cut me a "stimulus check" for about seven hundred dollars. I figure the idea was I would take that money and spend it on something nice...you know...treat myself after having to wash my clothes in a truck stop bathroom because some bank that was too big to fail couldnt fail this year.
- I cashed that check and paid off some money i borrowed from a friend. George went on to paint weird portraits of veterans and world leaders. And the banks, well today im told theres another crisis....
But towards the end he seems to be saying he thinks this might end in the downfall of civilization as we know it, which, come on. A little overdramatic, and about a dozen steps over the horizon of what you can even speculate about.
After all, it's not like societal collapse is without precedent in human history. Our latest global financial crisis arguably helped usher in a global wave of xenophobic populists opposed to any kind of evidence-based decision making - which, unfortunately, makes it yet harder to identify and address the root causes of really complex economic, environmental, and socio-political problems.
(I should add that I'm still optimistic here - just that we shouldn't offhand dismiss this possibility as totally incredible, and that instead the possibility should serve as a wakeup call.)
Imagining the unimaginable is much more important than most people give it credit for.
That's the one thing that, once it's gone, it's not coming back. So why are you trying to get more dollars or property? Especially when both would have to be guaranteed by the aforementioned collapsed civilization?
This entire discussion only means something if civilization is not collapsed. If civilization is collapsed, then the only thing that has any real long term value would be passage to Asia. (Assuming that, like the last collapse, the Eastern half of civilization would chug along happily without the Western half of civilization.)
But yeah, for the rest of us, it's just gonna be a slightly more modern version of the dark ages. (ie - More of us will be killed by raids and disease because the weapons tech will be a little better and there are more of us to spread contagion.)
I thought the government did a good job with the first few institutions rescued in 2008. Their shareholders got nothing (or pennies), the management got kicked to the curb, but the institution itself survived, and took care of depositors. That's the way it should be done... except that it's disruptive, and the disruption helps further the crisis. (Jobs were lost, even if deposits weren't. Not all of the lost jobs were in the financial industry. That kind of crisis hurts little people in many different ways.) It seems to be better, even for the little people, to help before things get that far, even if it doesn't wipe out all the people we'd like to see pay for the mess they made.
https://www.nytimes.com/2008/10/01/business/smallbusiness/01...
Credit Crunch. As banks fail, they closed credit-cards and other loans. My personal credit card dropped to $5,000 line (down from $10,000) for example. I don't rely on my credit card, so it wasn't a big deal.
But there were lots of businesses and factories which relied upon credit to make payroll. The fundamental business was solid, but remember that Businesses in America are typically Net90 (paid 90-days after delivery).
So if you had a very successful month selling things, you wouldn't be paid until 3 months later. So what do you do? You put it on a credit card, so that you can pay your workers.
Too bad those credit cards failed and closed up, and all those workers had to be fired instead.
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If you let banks fail, then innocent businesses / people who rely upon those banks will also fail. In effect, banks hold the American People themselves hostage, as people are reliant on financial services to make payroll.
Sometimes, one must pick the lesser of two evils.
In sum total it:
- Purchased preferred stock or warrants in banks, insurance companies, and auto companies, recapitalizing them, then subsequently selling that stock
- Directly purchased troubled assets to remove them from bank's books and reduce uncertainty
- Made a variety of loans around the financial system to encourage financial institutions to continue operations
- Directly bailed out homeowners by modifying and adjusting mortgage balances and terms via HASP, HAMP, & HARP (to the tune of 32 B$USD)
Afaik, the majority of those actions recouped their investment or suffered slight losses, with the exception of the last... which was designed to pay out to homeowners.
The accounting off all TARP programs can be found in the CBO's annual report to Congress: https://www.cbo.gov/system/files?file=115th-congress-2017-20...
You can't wring blood from a stone.
So if the federal government does something about underperforming student debt, it's going to have to address the root cause of students being unable to service their debt.
A voting system that supports pluralism. Then a representative system in which some proportion of those serving (e.g. 1/3) are randomly selected from within their winning party.
There's a lot to be said for having more engine mechanics, farmers, teachers, etc in legislature.
I fear that the coming bear market is going to be very very bad for all of us.
The primary differences between ETF's and mutual funds are:
- You can invest any amount of money into a mutual fund (above some initial minimum), where ETF's require you to purchase a whole number of shares.
- ETFs can be traded like stocks. Intraday trading works just fine. All mutual fund trades get executed typically once or twice per day (before opening / after closing hours). For long term investors, this difference is pretty unimportant.
That's not how recessions work.
When a general recession happens, there is a high chance you will lose your job. So when the stock market goes down, you are forced to withdraw money from your stocks to pay your mortgage / rent, or other living expenses.
And that's why people hold onto bonds: so that you have something to sell during a recession. If you are 100% into stocks, you won't have anything to sell when the recession starts. Bonds often go up during a recession (but not always: 2008 Municipal Bonds + Corporate Bonds went down. But US Treasuries did go up, so anyone holding onto Treasuries in 2007ish would have done well during the recession)
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Lets start with a hypothetical recession, where the general unemployment rate increases from (currently) 3.7%, to 10%. With 3x as many unemployed people as right now, a measured drop in enetertainment services (Netflix, Movies, Cruises, Vacation spots, etc. etc.) usually happens.
So expect Netflix, Disney (vacations + movies), AMC, Sysco (Restaurant company), malls, shopping areas to all ALSO lay off staff.
Which will eventually have an impact on the tech industry: Netflix buys fewer computers from Amazon. Microsoft slows production / maintenance of Windows. Tech Companies start to fire free-lancers and contractors (and focus on core staff only).
The hardest hit places lose lots of people. Ex: Detroit had a MILLION people leave the city and surrounding area during the 2008 recession. Property values drop dramatically, rents fall. Landowners lose their income streams and are unable to sell homes or find new tenants.
THAT is a recession. A huge number of things (stocks, real estate, even employees) in the USA loses value and are shed off. If you're worried about your stock account numbers, you aren't really in a recession yet. People are worried about their actual jobs and daily livelihood during recessions. In effect, the ones who can afford to buy up the stocks were the lucky ones, who weren't hit by the recession.
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By definition, a recession is over after a year or two. Which is why people say you need to keep your emergency savings in cash.
A depression may last longer than that: several years or even a full decade. (Ex: the entire 1930s)
So the only way you have money to spend on the Stock Market, is if you saved up money beforehand. IE: You have some bonds to sell, or you managed to predict the recession and hold onto cash. Your job income isn't necessarily safe during a recession (or worse: a depression)
I have quite a bit of emergency savings in cash, but you shone a light on the whole long-term vs. short-term, high-risk vs low-risk thing that I had previously understood on a mathematical level, but not how it would apply to, well, me.
There are short term debt cycles and long term debt cycles.
I'm saying the next recession hasn't even started yet, let alone being nearly finished.
Our response to 2007 was functionally just stopping the bleeding and tying a tourniquet. We never actually managed to push through many of the substantive economic reforms we needed, so we're functionally in an even worse position now to address a future contraction.
We didn't replace the steady jobs, we replaced them with contractor and gig work which will fall away much more rapidly if the economy slows down.
The deficit is higher and the tax base is lower, meaning we have less room to do spending programs to give the economy a boost.
We didn't address the massive pile of consumer debt, and we now sit on a $1 Trillion+ student loan bomb coupled with unsustainably high rents and home values in most of the largest job markets. This means much of the working class has limited savings and no cushion for when a crisis hits.
At this point the risks of a recession aren't just losing investment value. We're risking pretty serious cases of social breakdown. I would expect rioting in the streets.
A recession is a decrease in the GDP of the USA. This means people are LAID OFF, as companies don't have enough money to keep everyone on staff. Because people are laid off, there are fewer people buying stuff, which causes more people to be laid off.
The stock market can go up during a recession. Its a bit unusual, but it isn't unheard of. Usually, the stock market goes down because people start to lean on their emergency savings, and are forced to sell off stocks while they're in between jobs. That, combined with lower profits (from the overall recession) makes people retreat towards safer investments, like Bonds.
But otherwise, the stock market isn't really "the economy". Its just that Americans TEND to sell stocks and buy bonds when they see the signs of a recession. When you're worried about your job prospects, you act differently. When a lot of Americans are worried about their job, you can see it in various indicators.
Cannot upvote this enough. We don't spend nearly enough time teaching economics (and to a lesser degree, finance) in the US.
1. Company financial performance (aka earnings)
2. Multiple at which the stock is valued (aka P/E)
These are two independent features. Investors, for a variety of reasons, may change what multiple they value stocks at. Regardless of the company's actual performance.
This can cause the price of the stock (and usually the market as a whole) to rise or fall, even if nothing changes about economic performance.
Consequently, you can see the stock market deleveraging (the multiple decreasing) even while earnings (somewhat "the economy", ignoring tax impacts) remain strong.
"Yet, even after recent U.S. interest rate hikes, the Fed has nowhere near enough room to cut rates that much without going negative."
"Fiscal policy doesn’t offer much of an alternative. ... The U.S. government deficit is forecast to rise to $1 trillion as a result of tax cuts and higher public spending, ... Most economies are pushing against high and rising government debt levels"
"Ultimately, central banks might have to resort to QE variations such as “helicopter money.” Originally a thought experiment of Milton Friedman, the government would print money and distribute it to the public to stimulate the economy... Helicopter money would at least deflect criticism of QE programs as favoring the wealthy and exacerbating inequality, as benefits would accrue to a wider spectrum of the population."
Helicopter money is nothing other than a particular combination of fiscal policy and monetary policy. It is populist government deficit spending financed with money rather than debt. So a couple points:
- There are proposals for money-financed government deficits: http://bilbo.economicoutlook.net/blog/?p=31715
- Why give the money away for nothing? There's still unemployment, let's get something out of it. Let's use helicopter money to pay people to do things for the public good
- There are proposals for public jobs financed by government deficit spending: http://bilbo.economicoutlook.net/blog/?p=23719
We have a long history of data that suggests that in the long run the stock market is the good investment to get returns from. Picking an index fund protects you from one of the companies in the index going to zero and removes the randomness of stock picking from the equation.
Considering returns compound, even modest returns are better than just sitting in cash. What would you suggest as an alternative?
Returns don't compound if it's all made up of fairy dust and repeatedly bailed out by issuing more money to do quantitative easing. That's a sign of trouble, and harmed societies all over the world. You can't just keep bailing the banks in order to make sure 'returns compound'. At some point it's too ridiculous and things break.
But that data is cherry-picked, as far as I'm concerned. It's only using about 100 years of American stock market performance. During those 100 years American stock exchanges changed from hosting regional companies to hosting the largest international companies.
Obviously that same market growth cannot recur over the next 100 years; once you're at #1 you can't go higher.
So a true measure would be a basket of stock markets. And that basket 100 years ago would have included a large portion in the Frankfurt Stock Exchange, whose history has not been as favorable as the NYSE...
The article is fairly dramatic, however the silver lining I see is that, it would seem the wealth inequality will kill the economy before we end up with riots from the poor and working class and it'll be in the incentives of the rich to solve the problem..
If you think that the dumbos running the show are going to ruin everything, consider that we've had dumb humans running things since the beginning.
Pessimism can masquerade as grizzled realism. It can make you blind to opportunity. It is your opportunity to lose.
Vanguard Total World Stock has returned 6.42% annualised over the past 5 years.
Out of curiosity, what kind of returns a) were you expecting and b) count as non-modest for you?
The get rich quick schemes are highly risky, yet highly profitable if you get the timing right (see: cryptocurrencies, last year, which was basically what you get when smart investors manipulate the market in such a way that the masses join in and boost the prices even further).
Well somewhat crazy. I am invested heavily in various ways, but I've recently started keeping a somewhat outsize cash reserve.
Which I will use to buy things up cheaply once the market tanks.
3 month T-notes are called the risk-free rate for a reason...
"Tagesgeld" here is generally at 0%, excepting "switcher" offers that are limited in volume etc.
BUNDs are often negative these days.
> Do you have access to the US equity markets?
Sure. You just have the additional exchange-rate risk, to which I am already amply exposed, and quite a bit of regulatory overhead that I can do without.
I am not saying that cash is the 100% optimal strategy here, but so far I haven't seen any obvious/easy alternatives. And again, it's not a 100% cash strategy, cash is still a minority instrument right now, just larger than it would be in other climates.
Closer to home, one of my investments did quite a bit of hedging against risks last year, for threats that in the end failed to materialise, and due in large part to this underperformed significantly.
Well, rely on hope, if it brings you comfort. Just keep in mind that the big shot bankers are relying on political donations. So I wouldn't put any money on that "Hope" if I were you.
"Historically, central banks have needed to slash official rates as much as 4-5 percent in order to offset the effects of a financial crisis or an economic slowdown. That’s why former U.S. Federal Reserve Chair Janet Yellen talked about the need to raise rates in good times — to provide room to cut when necessary. Yet, even after recent U.S. interest rate hikes, the Fed has nowhere near enough room to cut rates that much without going negative."
Um yeah. The Fed hiked the rates and thus crashed the economy. Some are speculating that they crashed it on purpose, to make Trump look bad or to punish him for taking a stand against 1-sided tariffs that have been hurting the USA for decades.
It is interesting to think about the Fed having such tremendous and unaccountable power. This is deeply troubling. It's a bit like the Supreme Court, powerful yet unelected, except that it isn't a constitutionally defined branch of our government.
Without denying your statements of the power the Fed has, I havent seen anything odd about the timing, frequency, nor quantity that the fed has raised rates lately.
You didn't address the argument of the quote you made (that the rate needed to raise) nor did you supply evidence to support your implication that the fed was willing to tank the economy to hurt Trump.
It's really only the small fraction (of which I am a member) that have equities that have really lost anything.
Inflation is still reasonably low, so PPP is going up. I just don't get it.
Mind you, a few years back I didn't really understand how unemployment was bad, wages were poor, asset prices were too damn high and everyone was talking about this "recovery".
I probably just don't understand macroeconomics, I guess :)
Huh? Sources?
I'm not agreeing with the point, was just curious like you and searched.
(The latter is why the argument in the article does not even wholly makes sense, IMHO. You don't raise rates in order to get some "room" to slash them in the future; you do it because if you don't, and market rates of return ("natural" rates) are trending higher due to improved growth, inflation will eventually spiral out of control. It's a bit like trying to balance a pencil on your hand, and keep it from falling.)
Now, the argument might be that it's their own fault, but that will likely leads to tens of thousands of jobs lost. And we're not talking tech jobs.
Seriously? I mean, look at inflation expectations - they're not that low! Late 2018 does not look anything like late 2008 - you may think that the Fed should be a bit more dovish still, but they're muddling through.
Fact that the economy is starting to sputter with rates around 2-3% signifies some serious problems that we can't use zero interest rates to paper over forever.
Meaning having the ability to cut rates is even more important.
The low interest rates of the past decade are proper.
Now, normally when there's a recession, revenue drops, automatic stabilizers kick in, and the deficit goes through the roof. But ours is already high now. Normally, in a recession, we cut rates, but rates are already historically low. Normally, in a recession we try to use fiscal policy (cutting taxes, increasing spending) to offset the drop in consumption, but we already enacted a massive tax cut.
So when the recession comes in 2019-2020, what will we have left? We've kept no powder dry.
The government put mid-term elections over fiscal health. They raced through a bunch of policies to make them look good to their voters in the last election, still lost the House, and now we are stuck with the predictable consequences.
It's not like we don't know a recession was coming anyway. If you look at 200 years of NBER data, the average business cycle averages 6-9 years before another recession. Hence recessions in 81, 90, 2000, 2008. We were due for another one anyway and the government should have been planning for this.
What the Fed did, though, in dampening the recovery a bit, is not make Trump look as good as Trump wanted. Trump wanted the economy roaring to help in the midterms, and he didn't get it. Trump may feel like that's the Fed punishing him, but it's not.