[HN Gopher] Savings and Loan Crisis 1980-1989
___________________________________________________________________
Savings and Loan Crisis 1980-1989
Author : everybodyknows
Score : 110 points
Date : 2023-05-01 17:04 UTC (5 hours ago)
(HTM) web link (www.federalreservehistory.org)
(TXT) w3m dump (www.federalreservehistory.org)
| Aloha wrote:
| What's crazy to me - There was more than one Condo complex
| demolished - and they're still empty land today!
|
| https://www.dallasnews.com/photos/2013/03/24/today-in-dallas...
|
| https://www.google.com/maps/place/32deg50'56.0%22N+96deg34'01.8%.
| ..
|
| and
|
| https://www.google.com/maps/place/32deg50'53.1%22N+96deg34'53.8%.
| ..
| robocat wrote:
| From article: "the FSLIC decided it was cheaper to actually
| burn some unfinished condos that a bankrupt Texas S&L had
| financed rather than try to sell them".
|
| That doesn't sound crazy. Especially if the condos were rubbish
| (as we see happen on many countries speculating on houses -
| unused properties with little intrinsic value).
| Aloha wrote:
| I mean they're in Garland, which has not had the growth of
| other northern edge NTX suburbs. But that the land is still
| empty boggles for me.
| bwanab wrote:
| The wikipedia article
| (https://en.wikipedia.org/wiki/Savings_and_loan_crisis) is much
| more informative.
|
| Given that this is a financial sector that no longer exists, it's
| hard for people who weren't around then to understand what a huge
| deal this was at the time.
| sroussey wrote:
| One of the biggest things that had material impact on people at
| the time was the Resolution Trust Corporation that was dumping
| real estate into the market over seven years.
|
| https://en.wikipedia.org/wiki/Resolution_Trust_Corporation
| usefulcat wrote:
| The article mentions that about half of all mortgage loans at
| the time (by $$ value) were held by S&Ls, which should help to
| give some perspective.
| SilasX wrote:
| The sector no longer exists? Well, nothing under that _name_
| exists, but I 'm struggling to see the substantive difference
| between an S&L and a credit union, even after checking out the
| Wikipedia page on that:
|
| https://en.wikipedia.org/wiki/Savings_and_loan_association?u...
| everybodyknows wrote:
| Credit unions do issue home loans:
|
| https://www.sdccu.com/loans/home-loan-mortgages/
|
| How much of that debt they keep on their own balance sheet
| seems the critical question.
| c5karl wrote:
| Credit unions are not-for-profit companies that operate like
| a co-op or a mutual insurance company. The depositors are the
| owners. S&Ls were for-profit businesses.
| JumpCrisscross wrote:
| > _I 'm struggling to see the substantive difference between
| an S&L and a credit union_
|
| S&Ls focussed on residential mortgages. Credit unions can
| issue credit cards, business loans, HELOCs, _et cetera_.
|
| Historically, S&Ls had time deposits/CDs which they used to
| finance mortgages. Credit unions were like banks, but tied to
| a group, _e.g._ a church or fraternal organization. Over
| time, S &Ls started taking demand deposits and credit unions
| broadened the definition of a member to the point of
| meaninglessness.
| SilasX wrote:
| Yeah, that's exactly what I'm talking about: "well,
| substantively they're the same, but, uh, well, S&L's
| _emphasized_ mortgages more ". Um, okay. But, at the end of
| the day, I'm not seeing the substantive financial
| relationship I can't have today that I could during the S&L
| era. Or, by extension, what's so different today, now that
| that "sector" of finance is gone, as suggested in the
| original comment[1]. What do I not _get_ as a result of not
| having lived through that time?[2]
|
| I don't feel like I've learned anything more than a factoid
| I can repeat now. We "have S&Ls". We "didn't have S&L's"
| then. Okay. We still put savings in a financial
| institution. Those FI's still lend the money out. Many are
| still mutuals.
|
| Aha! But back in the day, you'd have to be a _member_ of a
| selective organization to be part of a mutual that doesn 't
| all of that!
|
| >Over time, S&Ls started taking demand deposits and credit
| unions broadened the definition of a member to the point of
| meaninglessness.
|
| Oh. So not that, either.
|
| I guess I just have different standards for what a
| meaningful difference looks like?
|
| [1] "Given that this is a financial sector that no longer
| exists, it's hard for people who weren't around then to
| understand what a huge deal this was at the time."
|
| https://news.ycombinator.com/item?id=35776271
|
| [2] I mean, I did, but was too young to get what was going
| on for adults.
| 1123581321 wrote:
| S&L were forced to be focused on long-term residential
| loans and to offer a vulnerable, narrow savings product
| offering and weren't allowed to significantly diversify
| with other kinds of lending.
|
| Calling it an emphasis makes it sound like an S&L
| could've just started looking like any diversified bank
| to stay alive, but it wasn't an option for them without a
| change to their regulatory environment--and couldn't have
| happened quickly enough anyway once the crisis was
| rolling.
|
| If unchecked, the interest rate changes at the time
| would've eventually come for all banking, but the damage
| was limited.
| hinkley wrote:
| Credit unions used to have extremely tight criteria for
| membership. You had to be a former or current employee of
| the company or things of that sort.
|
| If your dad was a member you could start an account, but
| IIRC not if they were a former employee.
|
| If memory serves loosening the rules on CUs was part of
| solving the S&L crisis. So BECU (Boeing Employees' CU)
| could serve any Washington residents for instance.
| lucas_membrane wrote:
| In 1988 the newspapers showed a list of the 100 S&L failures that
| were designated by the feederal authorities as highest priority
| for investigation and prosecution. This article did not mention
| that list. Since that time, I have never been able to find a
| scorecard on how many of those 100 cases led to legal
| consequences for the perps. Anyone here have any such info?
| throw0101b wrote:
| > _The savings and loan debacle was one-seventieth the size of
| the current crisis, both in terms of losses and the amount of
| fraud. In that crisis, the savings and loan regulators made
| over 30,000 criminal referrals, and this produced over 1,000
| felony convictions in cases designated as "major" by the
| Department of Justice. But even that understates the degree of
| prioritization, because we, the regulators, worked very closely
| with the FBI and the Justice Department to create a list of the
| top 100 -- the 100 worst fraud schemes. They involved roughly
| 300 savings and loans and 600 individuals, and virtually all of
| those people were prosecuted. We had a 90 percent conviction
| rate, which is the greatest success against elite white-collar
| crime (in terms of prosecution) in history._
|
| * https://billmoyers.com/2013/09/17/hundreds-of-wall-street-
| ex...
|
| It would take some digging to go through press releases and
| such:
|
| > _NEVIS was convicted in 1989 of 24 felony bank fraud charges
| in the District of Oregon arising from the collapse of State
| Federal Savings and Loan of Corvallis. He initially was
| sentenced to a term of imprisonment for two years, to be
| followed by probation for a period of five years, with
| restitution in the amount of $2 million to be paid in annual
| installments of $400,000 as a condition of probation._
|
| *
| https://www.justice.gov/archive/opa/pr/Pre_96/November95/584...
|
| I'm sure there's a body of research on it, but you'd have to
| have decent search-fu to know which keywords for particular
| academic articles and such.
| themagician wrote:
| Keating is the name that is known, but I do believe it was
| hundreds of people. Like, hundreds of people did (some) jail
| time. But as Martin Shkreli would say, "I just want to let you
| know, jail is not that bad. So don't fret - I hope it doesn't
| happen. If it does happen...it's not that bad."
| jimt1234 wrote:
| The name I remember was Neil Bush, who escaped any real
| consequences, and it was just a coincidence that his dad was
| George W. Bush, Vice President, and later the President of
| the United States.
| dukeofdoom wrote:
| Digital Currency will save us. Think what imaginary numbers did
| for math.
| tenebrisalietum wrote:
| Explain.
| dukeofdoom wrote:
| When imaginary numbers were first introduced, they were
| viewed with skepticism and even derision by some
| mathematicians. However, over time, they proved to be an
| invaluable tool in solving complex mathematical problems,
| such as those involving electrical circuits and quantum
| mechanics.
|
| CBDC will help resolve the difficult mathematical problem
| when politicians overspend (or steal) money they took from
| the public, and the accounts don't balance. They can just
| create more money instantly. And no one will know.
| cs702 wrote:
| The parallels with today's banking problems are eerie. Instead of
| "savings and loan" community banks that loaded up on risky high-
| yield bonds that could not be repaid in full, today we have local
| and regional banks that have loaded up on (a) loans to office
| buildings that cannot be repaid in full, and (b) long-term
| treasury and agency bonds whose present value has declined well
| below par due to rising long-term interest rates. The clock is
| ticking.
| jmyeet wrote:
| > The parallels with today's banking problems are eerie.
|
| No, no they're not. Not even close. Please read up about this
| before propagating outright falsehoods.
|
| The S&L industry in the 1980s was doing FTX type nonsense:
| using depositor funds for very risky investments. This worked
| great when the markets were going up. Not so much when the
| market crashed in 1987.
|
| Banks now are holding excess liquidity and funds they otherwise
| can't lend out (within their risk limits) in US government
| bonds. The problem is they took long term bonds for slightly
| higher yield at a time when interest rates were near-zero. And
| then interest rates went up and created a loss if it were
| realized. Many companies have been undone by this kind of
| penny-pinching. It's bad risk management.
|
| Even in the case of SVB, it had more assets than depositor
| funds and despite the vast majority of deposits (by value)
| being uninsured, every depositor got their money back and it
| cost the taxpayer nothing.
| lamontcg wrote:
| > (b) long-term treasury and agency bonds whose present value
| has declined well below par due to rising long-term interest
| rates.
|
| Apparently 10y US T-bills are now financial weapons of mass
| destruction according to the HN hivemind.
|
| > (a) loans to office buildings that cannot be repaid in full,
|
| This is a big problem with CMBS but I'm not aware of those
| being significantly involved in any of the recent blow ups.
| AFAIK this is still next-year's financial crisis that is only
| just starting to simmer.
| mjevans wrote:
| B] The bonds themselves aren't risky, they're just long term
| securities that don't fully appreciate in value for a long
| time. A very quick change in environment, much higher interest
| rates, result in immediate liquidation only at far less desired
| prices. A buyer can still hold them to term and get their full
| value; it's just there are better investments.
|
| A] I can't really speak to real-estate, but generally as a
| consumer I find the market incentives are misaligned to what
| should be socially desired results. There's too much darn rent
| seeking.
| dragontamer wrote:
| B was also true in the Savings and Loan Crisis of 1980.
|
| The mark-to-market decline of long-term loans wiped out an
| entire category of financial services (the Savings and Loans
| service). Remember "A Wonderful Life??" George Bailey? That
| was "Savings and Loans".
|
| Gone, the entirety of the entire sector was wiped out,
| despite the 30+ year bonds still being "good on their money".
| skybrian wrote:
| While it's true that the future cash flow from the bond
| hasn't changed, it is quite literally worth less money now,
| because better investments are available.
|
| For a bank, these better investments are available to its
| depositors if they leave. The bank's borrowing costs have
| gone up (or will soon) and that's the difference between
| profits and losses. The losses will happen sometime (unless
| interest rates go down again), but when they get recognized
| is a matter of accounting.
|
| So the bonds were risky, as is any fixed-income investment
| when your borrowing costs are variable. (Though it's clearly
| not as bad a loss as it would be if the bonds defaulted.)
| thefounder wrote:
| Well..imagine if you as a trader would never get the "margin-
| call" and you would be able to defer the currebt payments
| until you cash in your future bets. Here we have the banks
| simply bailed out by the gov(i.e the tax payer gets the short
| stick while JP Morgan gets the long stick).
| onlyrealcuzzo wrote:
| > There's too much darn rent seeking.
|
| It's kind of hard for the American Dream to be a rent seeker,
| and for their not to be a lot of rent seeking...
| baggy_trough wrote:
| Yes it's hard to see how the office mortgage market can escape
| a catastrophic outcome.
| latchkey wrote:
| https://www.bloomberg.com/news/articles/2023-04-30/munger-
| wa...
| jmclnx wrote:
| I remember this, IIRC one of the Bush Brothers almost got
| arrested for what he did. But his farther was president at the
| time, so no arrest. I forgot the details.
| buescher wrote:
| There was a president after that who was in a partnership that
| bought an S&L in the eighties and gave itself bad loans, but it
| was made out to be so complicated that no one could ever
| understand it. Everyone else involved in the partnership
| besides the president and first lady went to prison, though.
| aidenn0 wrote:
| After investigation, the independent counsel was unable to
| find any charges it thought were provable beyond a reasonable
| doubt other than perjury though. If Starr could have hung
| fraud charges on Clinton, surely he would have?
| [deleted]
| zafka wrote:
| Silverado Savings and Loan.
|
| Neil Bush was the chosen one to be the next president in the
| dynasty, but the flack from the S&L scandal forced the family
| to back George W instead.
| quickthrowman wrote:
| Neil Bush is the guy you're thinking of, Silverado Savings and
| Loan was the institution. His dad (George HW Bush) was the Vice
| President (for Reagan) at the time.
|
| https://en.m.wikipedia.org/wiki/Savings_and_loan_crisis#Silv...
|
| > Silverado Savings and Loan collapsed in 1988, costing
| taxpayers $1.3 billion. Neil Bush, the son of then Vice
| President of the United States George H. W. Bush, was on the
| Board of Directors of Silverado at the time.
| babyshake wrote:
| He was too Bush to fail.
| AnotherGoodName wrote:
| One thing that i feel people really aren't getting right now is
| that rates are still extremely low and they are moving slowly too
| compared to previous financial shocks. The fed rate today is 5%.
| The historical average is 7.5%. They are moving by the smallest
| amount they can each meeting.
|
| There was a post earlier today with comments of the form "why are
| Meta selling bonds right now when rates are so high shouldn't
| they sell bonds when it's cheap?"
|
| But there's no reason to think rates are high right now except
| for a comparison to the weird run of near 0% that went on for too
| long.
|
| So we have banks failing due to shock at the recent rate rises
| but the recent rate rises haven't actually been that extreme or
| fast. We seem to have got into a phase where there was an
| assumption that near 0% rates were here to stay. Banks even
| gambled on this assumption. If anything you should be leaning
| towards "wow rates are really cheap right now!" because they are
| historically.
| GalenErso wrote:
| I am here for $12,000 new houses in good school districts:
| https://www.pinterest.ca/pin/232639136978161240/
| futhey wrote:
| With nearly 1000% inflation since 1958, that's $125k in
| today's money.
| brvsft wrote:
| This is part of why I don't trust CPI data. Take Warren
| Buffett's house as another example from 1958:
| https://www.cnbc.com/2023/03/03/warren-buffett-lives-in-
| the-...
|
| > The Berkshire Hathaway CEO still resides in the five-
| bedroom home in central Omaha, Nebraska, he purchased for
| $31,500 in 1958, which is about $329,505 in today's
| dollars.
|
| But the house clearly isn't worth only $329,505 in "today's
| dollars." Sure, it's more modest than a full-blown mansion,
| but it's still worth a lot more than that, closer to about
| a million dollars. And that's including if you were to try
| buying the house with zero knowledge or context that Warren
| Buffett once lived in it.
|
| Of course, these things are all 'worth' what someone will
| actually pay for them, but unless we believe that that
| housing market is so screwed that Buffett's house would
| sell for ~$330k if the housing market crashed down to
| reality (which would actually imply potential deflation and
| a CPI that would result in the home being worth much lower,
| per "real" dollar figures), that house is never selling for
| less than $330k. Not even less than $660k, in my opinion.
| The only way these homes would come close to their price in
| CPI is if something catastrophic happened to the
| neighborhoods in which they exist.
| kmonsen wrote:
| Redfin has it at $818,954
| https://www.redfin.com/NE/Omaha/5202-Underwood-
| Ave-68132/hom...
|
| Not a million, but closer to that than to #329k.
| switch007 wrote:
| But your car now has bluetooth, digital radio and tire
| pressure monitors, so it all balances out in the magic
| basket of goods.
| brvsft wrote:
| My car from 2010 will forever have tire pressure alerts
| because I am not shelling out $1k to replace the broken
| tire pressure monitors. As an example, they're more of an
| annoyance to me. I don't use bluetooth or digital radio
| either, but yes, my car does have bluetooth. Don't see
| the point in it myself.
|
| The only new feature I wish my car had is a nice display
| that is hooked up to a backup camera, or even better, the
| ability for the car to automatically park itself,
| especially parallel parking in tight spots.
| jrochkind1 wrote:
| All things I don't want, and can't really buy a car
| without.
|
| But yeah, I think the fact that Americans, at all income
| levels, have _more stuff_ than they did 40 years ago, is
| part of understanding the macro picture. More stuff does
| not always mean more quality of life.
| lottin wrote:
| Prices of articles can vary due to changes in the price
| level and due to other causes (such as obsolescence,
| changes in consumer preferences, and so on). CPI only
| informs us about changes in the price level, it doesn't
| tell us anything about anything else. So the fact that
| the price of a particular article hasn't changed exactly
| according to CPI is completely normal, and not a reason
| to believe that the CPI is "wrong".
| brvsft wrote:
| Then the CPI should never be used to say, "This home
| worth ~$30k in 1958 is worth ~$300k today," when such a
| statement is so blatantly inaccurate.
| GalenErso wrote:
| _Cries in Bay Area_
| kmonsen wrote:
| LOL, it is mind boggling that my shitty Sunnyvale house
| is like 2x the price of the house Warren Buffett live in!
| onlyrealcuzzo wrote:
| > The fed rate today is 5%. The historical average is 7.5%.
|
| Population growth and the natural birth rate was much higher,
| too.
|
| 7.5% isn't going to be normal somewhere like Japan with
| declining population.
|
| It's not going to be normal in the US with barely any
| population growth.
| 0000011111 wrote:
| How does a declining population within a country relate to
| interest rates?
| slv77 wrote:
| High interest rates incentivize people to save now to spend
| more in the future and low interest rates incentivize
| people to spend now and spend less in the future.
|
| Young people tend to be in the spend now camp as they
| purchase homes, cars and other big ticket items that they
| will pay with based on increasing incomes. Older people
| tend to save now so they can purchase what they need in the
| future when they have declining incomes.
|
| The ratio of going to old influence interest rate demand.
| speeder wrote:
| When population is increasing you get bigger and bigger
| workforce and also more and more consumers.
|
| When it is decreasing your workforce not only get smaller,
| but get smaller faster than the older population. And in
| total you get less consumers too.
|
| So in a growing population situation, you can take loans
| with high interest rate and open business knowing you will
| have cheap labor, thanks to all new young people becoming
| adults, and over time lots of new consumers, so your
| business has guaranteed growth.
|
| But if your population is declining, labor become expensive
| as each year there are less young people and less workers
| in total, while total demand also gets smaller but not fast
| enough. So taking a high interest loan is stupid idea, you
| have guaranteed high costs, and less sales long term, thus
| your business profits will never be bigger than the
| interest and you will eventually go bankrupt.
| onlyrealcuzzo wrote:
| Growth = productivity growth + population growth
|
| Interest rates are arguably a derivative of growth.
| hn_throwaway_99 wrote:
| > So we have banks failing due to shock at the recent rate
| rises but the recent rate rises haven't actually been that
| extreme or fast.
|
| This is just patently wrong. I guess "extreme" is an opinion,
| but the speed at which they've raised rates is the higher than
| (debatedly, depending on the metric you use) any time in
| history, certainly any time in many decades.
|
| And the thing that makes these rate raises more impactful is
| the fact that we were starting from near 0. Take a look at this
| 5-year treasury rate graph:
| https://www.macrotrends.net/2522/5-year-treasury-bond-
| rate-y.... If you held a 5 year bond at the low of 0.26% in
| Sept 2020, the decrease in value that bond would incur between
| then and now due to the rise in rates is worse than practically
| any other ~30 month period shown on that graph.
| croutonwagon wrote:
| >We seem to have got into a phase where there was an assumption
| that near 0% rates were here to stay.
|
| We have and that was caused by the Fed as well. After the 08
| crisis the Fed kept the rate at 0% during what was basically
| the biggest 10 year bull run in history. It was insane and even
| many bankers I spoke with mentioned the causes of the original
| 08 scare/crash werent fixed, they were just band-aided heavily.
| toast0 wrote:
| > They are moving by the smallest amount they can each meeting.
|
| Moving each meeting means going from 0.08 in Feb 2022 to 4.57
| in Feb 2023. It may not be quick compared to previous financial
| shocks, but it is much faster than recent interest rate
| increases (2015-2018 was 3 years to go up half as much;
| 2004-2006 went up 4% in two years). Additionally, a decade of
| basically zero interest rate, followed by 3 years of slow
| increases and then another two years of zero, followed by a
| steep climb is kind of unexpected and shocking. You can hardly
| blame people for not expecting a rates to rise so quickly when
| there hasn't been anything similar in the past 30 years.
| nologic01 wrote:
| risk management is not based on expectation but exactly the
| opposite: managing the deviations from expectation. this is
| even in the ISO definition of risk.
|
| some risks are hard to estimate and manage. interest rate
| risk is not one of them. actually it is supposed to be the
| most tractable risk of them all, being a single macro
| variable. a bank's books are readily repriced under different
| scenarios
|
| the SnL crisis was the cataclysmic period that ushered a new
| era. there is a large contingent of actors that profit
| handsomely by helping banks manage interest rate risk.
| somehow all this machinery failed but there isn't yet a clear
| explanation why. lack of regulation would be more convincing
| if there was something more unusual (an unknown unknown)
|
| not learning from disasters starts becoming the pattern. e.g.
| what has changed globally in response to the covid pandemic?
| autokad wrote:
| > they are moving slowly
|
| I think maybe they were too slow to act, but once they did this
| has been among the fastest rate hikes in history except for the
| early 1980s. they have a chart here:
| https://fred.stlouisfed.org/series/FEDFUNDS You can just draw a
| red line matching the slope of the current hikes then move that
| red line to previous rate hike cycles
| werlrndkis wrote:
| [dead]
| CoorsLightCEO wrote:
| _structurally_ lower growth and inflation (even if inflation is
| high right now). Can 't use an average of whatever long-length
| time series you're using when that's just not how rates work.
| theK wrote:
| Agreed. But I think there is one thing that is not being
| considered here, that is that the markets are priced to the
| previous era with almost 0% rates.
|
| This means that you now have to pay for the thing that is
| priced to be sort of affordable to you with 0% interest but the
| interest you can get is more like 5%.
|
| Best example of this is the current housing market (regardless
| whether building or buying). If your previous monthly to a mil
| was 3k$ now it is over 5k$. This immediately prices you out and
| will probably lead to a lot of stagnation in 20-30 months.
|
| NFA.
| eatonphil wrote:
| A graph of fed fund rate over the last 60 years:
|
| https://www.macrotrends.net/2015/fed-funds-rate-historical-c...
| lamontcg wrote:
| > If anything you should be leaning towards "wow rates are
| really cheap right now!" because they are historically.
|
| This is likely extraordinarily bad advice to listen to.
|
| The Fed is still following an inflation target of 2% and they
| are very willing to crash the economy in order to get it.
| They've been fondly invoking the name of Paul Volker.
|
| The rates we're at today are probably sufficient to crash the
| economy. As the maturity dates of loans hits and their rates
| adjust upwards we're going to see a lot of bad economic bets
| and loans that were predicated on 0% interest rates fail and
| see the fallout into the broader economy.
|
| Even if they're not sufficient to crash the economy, the Fed
| has announced that it will do whatever it takes. So if the
| economy heats up and inflation comes back then the Fed will
| just jack up rates even more.
|
| We aren't going to get a 70s style decade of stagflation or
| hyperinflation or any of that nonsense. That happened during a
| period when the Fed "grew up" in the shadow of the Great
| Depression and WWII and was worried about crashing the economy
| so it ran hot and inflation was high and long term interest
| rates were high. Post-Volker we are not in that kind of policy
| regime.
|
| The most likely outcome is that we will hit a serious recession
| and unemployment will spike again above 6%, and without much
| government support the recovery will be gradual like post-2008
| and not like the crazy V-shaped post-2020. And the Fed will
| once again wind up cutting rates down to zero again. The CPI
| will fall like crazy due to the high unemployment, while asset
| bubbles will inflate again and the rich will once again use
| cheap money to buy up everything on a firesale.
|
| If you showed me a Fed that was actually worried about tanking
| the economy, or a Fed that set a higher inflation target, then
| I'd agree that higher long term interest rates were on the
| horizon.
|
| This time is different from what we've seen before because this
| is the first real inflation scare since maybe the early 90s, so
| it seems wildly different to most Millennials, but the game at
| the Fed fundamentally hasn't changed. We're heading back to
| ZIRP again a lot sooner than we're heading for 10% rates, but
| it might be a bumpy ride in the middle.
|
| And I guarantee you that all the tough talk about ZIRP being
| bad is going to evaporate once the recession hits and rich
| people need to be able to borrow cheaply again.
| TheMagicHorsey wrote:
| The amount of malinvestments made in the economy during this
| run of nearly free (0%) money is something that will haunt
| returns (and retirements) for decades to come. Many of the
| excesses (and confusing financial incentives) in Wall Street
| and Silicon Valley have their upriver source in the free-money
| fountain which was pumped by the Fed. Similarly, we see
| downstream effects in housing bubbles and other asset bubbles.
|
| People say this is obvious only in retrospect, but people were
| warning about it forever. And if you don't believe that, just
| listen to Congress, the President, and Real Estate agents
| talking about Fed pumping more today ... they are still all for
| it.
|
| I'm not bullish about the US economy anymore. I think it has
| become politically untenable to run the economy without this
| free money pumping. There's too many parasitic sectors in the
| economy now. They require the economic body to continue to
| bleed to survive.
| rcme wrote:
| The federal funds rate hasn't been above 7% since 91. We're
| nearly at the highest rate in the last 30+ years.
| wiremine wrote:
| It's important to put that in context. The 80s and early 90s
| where abnormal going back to the 1700s:
|
| https://www.getloans.com/blog/220-year-history-of-
| interest-r...
|
| Conversely, extremely low rates in the 2010s were also
| abnormal.
| jrochkind1 wrote:
| That graph basically makes me think there is no "normal"
| and no trend, it appears to just jump all over the place,
| widely, continuously. i don't know if that's right, but
| that's my reaction to that graph!
| redblacktree wrote:
| One pattern I noticed was that the low-to-low was about
| 40 years. We should probably expect rates to continue to
| rise over the next couple of decades before subsiding
| again, if that graph is any indication.
| JumpCrisscross wrote:
| > _graph basically makes me think there is no "normal"
| and no trend_
|
| You're right. The data shows "across successive monetary
| and fiscal regimes, and a variety of asset classes, real
| interest rates have not been 'stable', and that since the
| major monetary upheavals of the late middle ages, a trend
| decline between 0.6-1.8bps p.a. has prevailed. A
| consistent increase in real negative-yielding rates in
| advanced economies over the same horizon is identified,
| despite important temporary reversals such as the 17th
| Century Crisis. Against their long-term context,
| currently depressed sovereign real rates are in fact
| converging 'back to historical trend' - a trend that
| makes narratives about a "secular stagnation" environment
| entirely misleading, and suggests that - irrespective of
| particular monetary and fiscal responses - real rates
| could soon enter permanently negative territory" [1].
|
| Basically, over the very long run, real rates go down 0.6
| to 1.8 basis points (1/100th of a percentage point) each
| year, and tend to be low. We've witnessed a few centuries
| of extraordinary growth, which mandated resource
| prioritization, which kept rates high. TL; DR Anyone
| talking about where rates "should" be based on looking at
| charts is often talking tripe.
|
| [1] https://economics.rutgers.edu/downloads-hidden-
| menu/news-and....
| rcme wrote:
| Interest rates have also been falling for 700 years:
| https://www.visualcapitalist.com/700-year-decline-of-
| interes...
| everybodyknows wrote:
| > According to the report, another trend has coincided
| with falling interest rates: declining bond yields.
|
| Huh? Those are two terms for the _same thing_.
| themgt wrote:
| Those are _real_ interest rates. The real rate currently
| is still extremely low. There 's still a huge difference
| between an economy where you get:
|
| * 2% mortgage, 2% real growth and 2% inflation
|
| * 7% mortgage, 0% real growth and 5% inflation
|
| If we wind up in stagflation we may still have low _real_
| interest rates but everyone will be having a bad time.
| ericmay wrote:
| I'm kind of curious what it means (and why) for real
| interest rates to be going down over time like that graph
| depicted (and assuming it's accurate).
|
| Is it a lack of global economic growth because of natural
| resource depletion?
|
| For example, you could probably get away with a loan for
| 18% real if you can sail to America and (leaving
| politics/historical atrocities aside for a moment) come
| back with a ship full of gold.
|
| If I had to take a loan with a rate that high I don't
| think I could possibly pay it back (if it's enough money)
| without multiple jobs or somehow getting lucky. I don't
| know that my labor could produce enough.
| jjoonathan wrote:
| "Global Savings Glut" is the term to search.
| ericmay wrote:
| Do you have any particular articles or blog posts or
| anything you'd care to share? I could search of course
| but I'm not sure if there's a canonical article.
| deltree7 wrote:
| Yep, this is the answer
| deltree7 wrote:
| real Interest rate is really a function of supply/demand
| of money.
|
| The world in increasingly having more supply of money
| (savings) than before.
|
| It doesn't look like from a median household perspective,
| but we have a glut of overall money
| bobthepanda wrote:
| These are the shockwaves of the Chinese economy slowing
| down. China has been a large source of new demand for
| years, particularly for resource extraction economies;
| zero-covid supply chain shocks were the first wave,
| China's property shock was a second, and economics are
| not quite back to solid yet either. For decades it has
| been easy to invest in China; it is not really so easy or
| cheap to develop in other areas, because postwar East
| Asia really focused on efficient infrastructure rollout,
| and now private companies have to pick between countries
| with cheap labor and countries with good infrastructure.
| parmenidean wrote:
| Yeah, there are a lot of interesting theories regarding
| this (which were far more common in the halcyon days of
| 2021, when it seemed like ZIRP was the new normal).
|
| I actually think an underrated piece of this is that
| investments have become far less capital intensive.
| Business in previous economic cycles required a huge
| amount of capital to begin and maintain: railroads, oil,
| manufacturing all require enormous sums of capital to
| continue. Conversely, the dominant businesses in this
| economic cycle are all Internet based. Google, Meta, etc
| could run for 1,000 years without substantial cash need,
| it's a far less capital intensive model. You can see this
| reflected statistically: the FCF yield of the S&P 500 is
| 2x what it was in 1990.
|
| If businesses need far less cash than before yet remain
| highly productive, it stands to reason real interest
| rates would drop: the demand for capital by economic
| drivers has gone down, while the supply of capital has
| increased through FCF gains.
| ericmay wrote:
| I wonder if something like space colonization/resource
| extraction would reverse or change the trend toward lower
| interest rates? I imagine (perhaps excluding some sort of
| sci-fi esque replicator robots) such endeavors would be
| _very_ capital intensive.
| thfuran wrote:
| On the other hand, you'd probably need a high interest
| rate to justify offering that loan in a time when a
| transatlantic journey was significantly less predictable
| and more dangerous.
| ericmay wrote:
| Good point - much more risky.
| cherrycherry98 wrote:
| There's also real yield to account for. If rates are 0% and
| inflation is 2%, real yield is -2%. If rates are 5% but
| inflation is 7%, real yield is still -2%. Buying power is being
| lost even if the numbers in your account are going up.
| pixelmonkey wrote:
| > One thing that i feel people really aren't getting right now
| is that rates are still extremely low and they are moving
| slowly too compared to previous financial shocks.
|
| Are you sure? This graph says otherwise:
|
| https://ibb.co/hW9TP0x
|
| It's true that this graph excludes the rate increases we saw in
| the 1970s and 1980s, but it's the fastest and highest raise of
| rates in the last ~30 years. See here for a full timeline:
| https://fred.stlouisfed.org/series/FEDFUNDS
| sroussey wrote:
| I agree that the rate increases are fast. Or at least were,
| they slowed.
|
| But overall, the last couple decades were the exception not
| the norm.
|
| Look at the 50s and 60s. That low in the 60s took 40 years to
| get to again!
|
| It will likely be another 40 years before we see those low
| low rates again.
| kmonsen wrote:
| That is not true (well we can argue how we get to likely I
| guess), markets expect the rate to be lower than today in
| 1-2 years: https://www.ustreasuryyieldcurve.com/
| ren_engineer wrote:
| historical rates don't matter because a significant chunk of
| the people making decisions weren't around for that time
| period. And even those who were around were still incentivized
| to make risky decisions to try and find yield with 0% rates
|
| we've got a lot of fake growth on paper fueled by 0% rates that
| never existed and has to be shaken out of the system. The
| fundamental problem is economists thinking they can twist dials
| on the financial system and play god to prevent recessions and
| depressions, which will just result in rarer but more extreme
| financial crises when reality hits them in the face
|
| the economy is fundamentally less efficient and less productive
| due to the covid pandemic(people not working) and the economic
| decoupling from China and Russia. Printing money doesn't change
| those fundamentals, the end result in the short term will be
| lowered living standards for everybody. More money chasing
| fewer goods equals inflation, not complicated
| ChuckNorris89 wrote:
| _> More money chasing fewer goods equals inflation, not
| complicated_
|
| It's not complicated, except those who missed out on the 0%
| rates are hit the hardest and want to catch a similar boom
| that isn't coming back.
|
| Those looking to buy a house now feel cheated. The prices are
| similar to ~2020-2022 but the rates are much higher. The
| rates being lower than historical average is irelevant for
| those looking to buy know because the current housing prices
| are also much higher than historical averages.
|
| Our entire economy is now addicted to cheap money so those
| who missed out on the cheap money will want it back.
| symlinkk wrote:
| The prices are not similar to 2022. I've seen prices drop
| by 15% already.
| at-fates-hands wrote:
| I was listening to a local real estate talk show this
| weekend.
|
| They said the largest generational group buying and selling
| houses pre-COVID were the Millennials.
|
| Now?
|
| Its the Baby Boomers. They can pay cash so they are immune
| to the interest rates and they tend to have more equity in
| their properties so they're in a very advantageous position
| to take advantage of really bad time for real estate.
|
| I live in Minneapolis. The inventory here has been
| historically low since Covid hit. Normally we should have
| around 15K properties for sale in the seven country metro
| area here. Right now, its closer to about 4,200 which is
| crazy. A lot of people are not even putting their houses on
| the market. They find an agent and within days they have
| several buyers. We've had three families just _POOF_ move
| out of our neighborhood. No "for sale" sign, no showings,
| just gone.
| hinkley wrote:
| In the era when the TV show Good Times existed, interest rates
| on loans were more like 17%. That's credit card and payday loan
| territory today.
| rurp wrote:
| The absolute rate isn't a problem right now, it's the Fed
| bouncing between extremes. Keeping rates extremely low for many
| years, followed by a very fast series of increases. If they had
| been more moderate with either of those factors things would be
| a lot less painful right now.
|
| None of this is all that surprising either, which makes it even
| more frustrating. A great many folks were critisizing the Fed
| for keeping rates so low when the economy was booming, and I
| don't think many are surprised that the rapid increases have
| created instability.
| everybodyknows wrote:
| Note that this happened more or less concurrently with the LDC
| (less-developed-country) debt crisis:
|
| https://www.fdic.gov/bank/historical/history/191_210.pdf
|
| While the pre-existing institutional fragilities were different,
| Fed tightening hit them both hard:
|
| > ... rising dollar ex-change rates in response to the high U.S.
| interest rates of the early 1980s increased the difficulty of
| meeting debt commitments.
| jmyeet wrote:
| What's happening now is an example of the system working, not
| broken. The comparisons are also made to 2008. Between that and
| the SnL crisis there are three important differences:
|
| 1. Unlike 2008, we don't have a whole host of risky borrowers and
| poor debt;
|
| 2. Rates are still historically low (as another commenter
| mentioned); and
|
| 3. The banks being taken over by the FDIC are _solvent_. That is,
| their assets exceed their depositor funds, even if they have to
| realize losses on long-term bonds by selling them.
|
| It's worth noting that accounting rules allow banks to keep bonds
| off the books and nominally kept at face valuew with the
| intention of holding them to maturity.
|
| We've had bank runs on banks that largely catered to a single
| vertical (eg SVB, Singularity) and were relatively small. This
| made them vulnerable. On top of that, you had poor risk
| management by holding long-term bonds instead of short-term
| bonds.
|
| Management chases short-term yield and if 10 year bonds are
| offering 1.75% (a couple of years ago) but 3 month bonds are only
| offering 1.69%, many banks will hold the long-term bonds instead,
| even though they open themselves up to rising interest rate risk.
| They are paying the price for now and depositors aren't left
| holding the bag. So the system is working.
| 0zemp2c wrote:
| > 1. Unlike 2008, we don't have a whole host of risky borrowers
| and poor debt;
|
| huh? student, auto, and credit card debt are all through the
| roof
|
| auto loans are the new subprime
| bugglebeetle wrote:
| Also, commercial real estate. You can't fill empty buildings
| with jeremiads in the Wall St. Journal demanding lazy,
| entitled workers get back to the office.
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