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?<p>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 machinations. Congress will complain to the cameras and the Fed will go right back to "rescuing" the market.<p>No, the bottom will only well and truly drop out when there's significant capital flight - when the dearth of real investment opportunities relative to currency glut becomes so acute that capital leaves American borders in search of real return. But to where? And under which circumstances?
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.<p>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.
I've long read about the following still being a problem (post-2009):<p>- CDOs (although a new generation of them have a new name/initialism)<p>- Frank/Dodd was partially rolled back<p>- The definition of bank size-classes was changed to reduce the regulatory burden over most regional banks that were previously more regulated<p>- No significant adverse event happened after Standard & Poors was identified as having significantly inaccurate ratings on CDO / mortgage bond<p>- moral hazard all over the financial sector, multiplied by large QE rounds<p>- shadow inventory of housing (not sure if this was sold off or if banks still hold lots of houses off the market)<p>- lots of private unicorns have opted not to try to go IPO, despite Wall Street records over the past few years<p>(edit: I converted the indented list to individual paragraphs)<p>But given these assumptions, are the US financial markets really that healthy? It still feels like we have a few asset bubbles, especially in the assets which QE propped up.
> The federal government stepped in to rescue the other big banks and forestall a panic. The intervention worked—though its success did not seem assured at the time—and the system righted itself. Of course, many Americans suffered as a result of the crash, losing homes, jobs, and wealth. An already troubling gap between America’s haves and have-nots grew wider still. Yet by March 2009, the economy was on the upswing, and the longest bull market in history had begun.<p>This paragraph is conceding a point that should not be conceded. The system <i>did not</i> right itself if many Americans lost homes, jobs, and wealth. 12 years later, not everyone has recovered from the 2008 collapse.
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.<p>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 happen given the Fed and the US Govt. have done so much and are committed to do more to stave off a severe depression / recession. It's more like people were killing it buying the safer parts at distressed prices as over leveraged funds shed them on the back of margin calls in March.
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.
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.<p>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.<p>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.<p>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.
> I have a checking account and a home mortgage with Wells Fargo; I decided to see how heavily invested my bank is in CLOs. I had to dig deep into the footnotes of the bank’s most recent annual report, all the way to page 144... The total is $29.7 billion. It is a massive number. And it is inside the bank.<p>To put $29.7B that into context -- Table 4 of the most recent 10K says that Wells has ~1.7 trillion dollars of earning assets. Tables 1 & 2 indicate they hold around 180B of shareholder capital buffer.
Having just read both Liar's Poker and Barbarians at the Gates, the concept of CLOs sounds awfully familiar.<p>Loaning money to high-risk companies? Bundling a whole bunch of said loans into securities? High returns despite the risk of a significant fraction of defaults? Sounds like the world has been here before.<p>If this was a B-flick, it might well be called the return (or revenge) of the junk bond monster.
So what? There is only one game out there and its called printing money.<p>We have bad loans on the books? Oops, nothing we can do here and can't have so many foreclosed lower valued assets. Print.<p>If anyone looked at billionaire net worths, they would know that hyperinflation is rampant. The only reason it doesn't show up in the cost of Milk is because the peasants (we the people) fight for scraps and are willing to take smaller slice of the pie.<p>In other words, the Bernanke trick of inflating assets in 2008 did its job. It inflated assets and the size of the pie increased. But 90% of the participants still have a lower share of the pie.
How come no one is talking about the fact that a couple months ago our banks went from fractional reserve to zero reserve? If that doesn’t scream disaster is expected I don’t know what does. Literally anyone can form a banking org, get fdic insurance and print. money. out. of. thin. air.<p>If you aren’t doing it yourself already, maybe you should. I’m gonna try and maybe make a medium.com post about it.
> I ran my finger across the page to see the total for these investments, investments that Powell and Mnuchin have asserted are “outside the banking system.”<p>> The total is $29.7 billion. It is a massive number. And it is inside the bank.<p>What percentage of Wells Fargo's assets is that? It looks they they've 1.9 trillion in assets, so even they were worth nothing, would it have a material impact?
If the banks aren't paying interest on deposits anymore, does it now make sense to withdraw some of the money and store it under a mattress somewhere?<p>Obviously there are theft, fire, and police confiscation risks that need to be overcome first.
America can afford to prop it up for as long as the dollar is in demand for international trade, and she will use her naval superiority to make sure of that
> "I have a checking account and a home mortgage with Wells Fargo"<p>Casting literally every inch of his financial judgment into doubt.<p>Or maybe we've just been pranked
<i>"There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs."</i><p>To get some perspective, the FED recently added almost three trillion dollars of "not QE" to the balance sheet, mostly because of COVID-19.<p>They'll be bailed out.<p><i>"But this time, the bailout proposal will likely face stiffer opposition, from both parties"</i><p>Doubtful. Everything can be blamed on the virus this time.
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.
Buried lede warning.<p>><i>But there’s another threat to the economy, too. It lurks on the balance sheets of the big banks, and it could be cataclysmic.</i><p>(10 paragraphs later)<p>><i>I ran my finger across the page to see the total for these investments, investments that Powell and Mnuchin have asserted are “outside the banking system.”<p>The total is $29.7 billion. It is a massive number. And it is inside the bank.</i>