
Larry Summers Calls Fed Bank Stress Test Results ‘Absurd’ - atlasunshrugged
https://www.bloomberg.com/news/articles/2018-09-08/larry-summers-calls-latest-fed-bank-stress-test-results-absurd?srnd=premium
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jcbrand
> Summers made the comments after a presentation at the Federal Reserve Bank
> of Boston on the persistence of low interest rates in global economies, a
> phenomenon which he explained as excess savings pursuing a shortage of
> investments.

So central banks printing trillions of dollars (aka Quantitative Easing) to
prop up asset prices (and thereby drastically increasing income inequality in
developed countries) had nothing to do with record low interest rates?

These people sure have a way of "explaining" things without really explaining
anything at all.

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compcoffee
> _These people sure have a way of "explaining" things without really
> explaining anything at all._

It's hard to explain things to laymen, especially in subjects like economics,
where everyone thinks they've got a complete understanding of the mechanics
after watching a couple YouTube videos.

The supply of financial capital is high, so borrowers are not willing to pay
high interest rates. I see nothing wrong with the explanation of why low rates
_persist_.

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jcbrand
Nowhere in the article is it explained WHY the supply of capital is so high.

Here's a hint. Trillions of dollars were printed (and are still being printed)
by central banks.

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jlawson
I thought it was because capital has been building up since WW2 without any
giant destructive events to reduce it. Kind of like how things had been just
before WW1.

This is a central part of Piketty's case in _Capital in the Twenty-First
Century_. Capital just builds up over time, unless something happens to
destroy it.

Of course I can't argue against money printing being a cause; I don't know the
numbers. It seems there are likely several significant contributing causes.

~~~
village-idiot
Eh, several countries have proven that monetary, tax, and welfare policy can
absolutely reduce wealth disparity within a nation. The US is currently
proving that some policies can increase disparity.

Certainly major catastrophic events has a larger effect, but you don’t _need_
one.

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jlawson
Is be interested in specific examples of these 'several countries'.

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village-idiot
Denmark and Canada come to mind. Both have flattened their inequality curve in
the past decade or so.

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jlawson
Canada had a pro-business conservative government up until a few years ago. I
don't have the numbers to say if any inequality curve was flattened or not,
but if something did happen it seems very unlikely it was a result of policy.

Denmark and Canada also share a property: They are small (population-wise)
nations with heavyweight neighbors. Any effect you see is likely to be totally
confounded by interactions with those neighbors. E.g. Canadian billionaires
may tend go to America, so Canadian inequality "falls". But obviously this
isn't doable for the world as a whole.

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endymi0n
“If cyclical pressures continue to build and financial vulnerabilities
broaden, it may become appropriate to ask the largest banking organizations to
build a countercyclical buffer of capital to maintain an adequate degree of
resilience against stress,” Brainard said.

This is probably going to be too little, too late. Anyone with half a brain
should be able to see the downturn coming soon. Simply looking at global
macroeconomic indicators like Shiller P/E, Yield Curve, stock market indices
against GDP or unemployment rate over the last two decades makes it clear the
market has run extremely hot and is running on hot air by now.

I won't know what will be the final trigger — 45 playing with fire in the
pseudo trade wars or the upcoming cryptopocalypse: All I know is that once the
downward spiral has been triggered, everything will happen very fast.

Whatever the "stress tests" might have predicted in a bull market: I don't
think anyone will have cared to predict tipping points and negative feedback
loops once the underlying assets get worthless. There's just way too much
disincentive for banks to building up capital (especially with negative
interest) vs. speculating with it in order for this scheme being able to work.

If you want my 2 cents: Hope for the best, but brace for the worst.

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Symmetry
If it were true that anybody with half a brain could see a downturn coming now
then they would have already taken short positions, causing the downturn to
have already arrived. It's really hard to try to time the market, people
regularly lose their shirts trying to do it. Don't tell people it's easy.

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sthu11182
I think inverted yield curve is interesting. In my simplistic understanding,
isn't it just a global bet that short term yield is going better than the long
term based on investor sentiments. So in essence, when the inversion happens,
the smart money is on a downturn/recession. I believe that the 10 year bond
and the 2 year bond yield have been close recently feeding fears of an
inverted yield curve and recent talk of a downturn.

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gimmeThaBeet
It's the correct results, but it's sort of the backwards interpretation. If
you think that interest rates are going to go down a la 2008, there is going
to be less demand for short term debt (price goes down, yield goes up), and
demand for long term debt goes up (price goes up, yield goes down).

That is to say, if people are willing to take a lower rate for 10 years
because they think interest rates won't be nearly as high in say 3 years.

Another aspect to it is that the shorter the maturity, the more the yield is
determined by set rates, whereas the longer you go out, the more it's just the
auction process of markets setting the yield. This is part of where you get
the idea that raising rates too fast can potentially be troublesome, you can
end up inverting the curve that way.

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CompelTechnic
This may be my "this time it's different" rationalization, but I can see an
argument for valuations staying larger in the future.

Real interest rates have been decreasing in the long run over hundreds of
years. This reflects the institutions of society becoming more permanent and
less risky. In a world of low interest rates, P/E multiples naturally become
high. Over the last couple of decades in particular, the financial world has
become globally intertwined, and it has become increasingly unlikely for any
event to truly upset the status quo. Institutions are more fixed than ever, so
valuations should be as well.

If the high valuations remain high, then a lot of financial wisdom developed
in the last 100 years will have to be rethought. Saving for retirement is a
different calculation when your returns are dominated by P/E expansion rather
than dividends and earnings growth.

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Retric
It's hard to say how much is reduction in risk vs increase in capital vs
bubbles deflating. The stock market has seen a massive influx of capital from
401k's, but this is mostly new money without nearly as many people with 401k's
in retirement.

Over the next 30 years that balance shifts. As people will be taking more
money out of the stock market due to cashing in 401k's than they put into the
stock market which will have significant impact.

~~~
gok
401k’s are only about $5 trillion total. Even if half of them were in US
stocks (it’s less than that), that would be less than 10% of the stock market.

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ummonk
That's enough to drive up the stock market by a lot (trillions of dollars of
new money drive up market prices for stocks, and the value of exsiting
investments, most of which are never sold to the 401ks by existing investers,
goes up a lot).

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tomrod
Eh, a big part of that has to do with unlikely scenarios. Garbage in, garbage
out.

I cut my teeth building the scenario response models. I think the best
improvements resulting from these exercises have been structural. Many banks
have used it as an opportunity to improve their data and reporting
infrastructures, which were often stuck in spreadsheets.

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intended
What did they shift to?

Also how does better data infra make for better crisis response for a bank?

I can’t see how it would make a huge difference..... unless of course it means
that the reporting structure is giving critical information to decision makers
which it wasn’t before.

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village-idiot
Assuming that they _want_ to know what’s actually on their books. Given the
moral hazard of bailouts sans consequences, there’s a lot of incentive to look
away while the traders do shady shit during the good years and then plead
ignorance before congress while asking for a bailout.

~~~
tomrod
As an economist I understand this issue 100%. But I rarely see the shady/seedy
items in practice. Morale really sucks in places where illegitimate moves
happen. And devs aren't idiots, they speak up and even whistle blow if
something looks off. My experience in this world is that folks at the top and
supporting roles want to operate in good faith.

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misja111
Since the majority of the FED members are the largest US banks, it is not
really surprising that the stress tests they devised gives those banks a
favorable result.

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kchoudhu
Is this the same Larry Summers that lost a billion dollars for no reason by
forcing the Harvard endowment into a bunch of shitty IRS trades?

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gepi79
Yes, the Larry Summers that lost 1.8 billion dollars.

[http://blogs.reuters.com/felix-salmon/2009/11/29/how-
larry-s...](http://blogs.reuters.com/felix-salmon/2009/11/29/how-larry-
summers-lost-harvard-18-billion/)

~~~
kadendogthing
>Update: Brad DeLong, in the comments, does some back-of-the-envelope math and
reckons that Harvard came out ahead of the game, on net, even after accounting
for that $1.8 billion loss.

And the comments are closed. Neat.

~~~
gepi79
It is unfortunate indeed because I would like to read the comments in the blog
as well.

Despite the recovery of the "lost" or invested 1.8 billion, the story gives no
good impression of Larry Summers.

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jessaustin
Perhaps this is explained by the "stopped clock hypothesis", but if Summers
thinks that all of the hubbub about strengthening banks is meaningless window
dressing, then he is certainly correct. They don't _have to_ survive
inevitable downturns without help from USA government in order for their
executive teams to make lots of money and stay out of prison, so they _won
't_.

