
A new credit bubble gets ready to burst - nabla9
https://www.greenwichtime.com/business/article/A-new-credit-bubble-gets-ready-to-burst-13911193.php
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not_a_moth
Really seems like Wall Street is in love with the term "shadow banking",
because it implies "can't regulate it".

Yet we know exactly who the participants are, the types of firms, and their
practices.

Step 1 to better regulation of creative rent seeking is to stop treating it
like it's nebulous.

~~~
jasode
_> Really seems like Wall Street is in love with the term "shadow banking",_

Actually, the hedge fund and private equity fund people hate that term because
it implies something nefarious is happening. In reality, the new post-2008
crisis bank regulations in both Europe and USA to ensure stability causes a
new phenomenon to emerge: Non-banks lending money to companies that banks are
not allowed to lend to.

Every economist and financial regulator knows this became a side-effect of the
more stringent financial regulations. So the "too big to fail" banks will
still lend millions to big companies like Microsoft and Apple, but the $50m
companies are too small and too risky to bother with.

Look how these "shadow" lending transactions keep emerging...

\- a billion dollar pension fund is woefully short of its obligations to
pensioners and needs a higher yield on its money. Buying safe US T-bills that
yield 1% interest is not enough. They need to look at _alternative asset
classes_ that gets them in that ~8% range.

\- a medium-size company needs $50 million loan to expand its business and is
willing to pay a higher interest rate than 1% T-Bills. (That makes sense since
the company doesn't have the same credit worthiness as the US Government.)

\- If the pension fund (needing to put their money to work) and the company
(needing a loan) can match up with each other, they can help each other's
goals. But the pension fund isn't in the business of analyzing credit risk or
providing loans directly. Likewise, the owner of the company doesn't have the
time to fly all over the country and meet with 100 different pension fund
officers.

That's where middlemen like private equity come in. They're the ones with the
staff of credit analysts. The "back office" of the private equity fund that
analyzes a company's credit worthiness does much of the same work that the
credit analysts at JP Morgan, Bank of America, Wells Fargo, etc did. They
become the "shadow bank". Of course, they also charge management fees and a %
of the profits for their "financial intermediary" services.

The middle market's _underlying need for credit_ never disappeared. The new
bank regulations just inevitably shifted the loan transactions to a different
set of players.

~~~
Despegar
The shadow banking is fine. The taxpayer isn't responsible if a PE fund
engaged in direct lending to the middle market loses all their money.

But shadow banking can and should be scrutinized, and potentially regulated,
if there are systemic risks that will lead to the taxpayer being on the hook
once again. If it's just isolated private actors losing money it doesn't
matter.

~~~
kgwgk
The “private actors” are not always so private: CalPERS is doing a lot of PE,
for example.

~~~
ericd
And I think this hits the nail on the head for where the problems are going to
come from. Low interest rates have made it very hard for pension funds to keep
up with their (overgenerous) past promises with safe assets, and a frothy
stock market seems like it’s been keeping them solvent.

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chiph
> And household debt has grown no faster than household income and is
> concentrated in households best able to pay it back.

I'm not so sure about this - what I'm thinking is that the next (current?)
bubble is in auto lending. I'm seeing tons of advertisements saying "We will
lend up to 72 months with very little down". With the average new car priced
around $37500 that's a payment in the mid $500's for someone with _good_
credit. And I suspect the people doing this only have an average credit score
so theirs will be higher.

~~~
StevePerkins
> _With the average new car priced around $37500_

That's absolutely jaw-dropping. I assumed that was a made-up Internet stat,
and was going to ask for a cite, but some quick web searching confirms it.

I'm a used car guy, typically buying vehicles 2-3 years old, and would never
contemplate paying above $20k. Even a brand new sedan (e.g. Nissan Altima,
Honda Accord) is around $23k MSRP. A crossover family vehicle (e.g. Nissan
Rogue, Honda CR-V) is around $25k.

What on earth are people purchasing, that the AVERAGE price is a low-to-mid
range Mercedes?

~~~
jstarfish
Pickups and SUVs with insane markups and profit margins.

A Ford F150 Raptor's MSRP is something like $60-70k.

~~~
gruez
>Pickups and SUVs with insane markups and profit margins.

dumb question: why do pickups/suvs have insane markups/profit margins?

~~~
rdtsc
There's a demand for them. SUV are quite popular for families who don't want
to "drive minivans" but they still want a large vehicle to fit in everyone.
Others buy it because of the perceived safety, larger vehicle so they feel
more "protected".

Trucks are just what you drive in rural areas. And there are a lot of small
towns and rural areas. Companies noticed that people are shelling out $40k for
them, so they started selling them for $50k. $50k and they are being bought
still? Ok, time to charge $60k, and so on.

~~~
apta
> Others buy it because of the perceived safety, larger vehicle so they feel
> more "protected".

It's not just perceived safety though. Heavier cars are objectively safer when
crashing into a lighter car. IIHS did several tests on this. The fact that
SUVs are higher means that they have an advantage if crashing head on with a
sedan.

~~~
blackbrokkoli
It also means less safety for everyone, though. Especially pedestrians and
people on motor(bikes) are endangered by heavier, bigger cars. Not counting
emissions and climate change from moving a ton of decorative metal around.

~~~
apta
I don't disagree. But I don't see a better solution. Why would someone with a
family take a risk for instance? I know that Volvo are taking safety very
seriously, and want to have 0 fatalities (even pedestrians) sometime this
coming decade.

I think emissions can be improved with things like hybrid drive trains and
electric motors.

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temp129038
If SF, I'm seeing ads all over for 1) Brex (corporate credit cards for
startups) and 2) Zerodown (pitching no down payment for homes).

It would be quite something if tech and not banks caused the next great
recession.

~~~
nugget
I just looked up Zerodown. How does their model account for the foreclosure
risk if there's a real estate recession?

~~~
mikeash
All they have to do is bundle these mortgages together with safer ones and
sell the resulting bundle as a security. The market will accurately assess the
risk of the combined product and set prices accordingly. Because of the way
this spreads out risk and incentivizes smart, objective analysis of the
products, this is guaranteed to work well.

~~~
peonicles
Isn't this bundling what caused the subprime crisis ? How is this time
"guaranteed to work well" ?

~~~
mikeash
Through the power of extreme sarcasm.

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duxup
Has there been a time when someone wasn't calling a bubble?

~~~
blackbrokkoli
Has there been a time where there was no bubble forming?

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cascom
The huge difference here is leverage.

The typical bank in the US is levered ~5-12x which means, many of these
"shadow banks" are unlevered, this creates an entirely different dynamic

~~~
RandomInteger4
Are there any ways to hide leverage?

~~~
miketery
Yes, by inflating asset values.

~~~
samsonradu
Can you please elaborate?

~~~
all2
I'm assuming the logic goes something like:

If we are leveraged at 100% when we take the real valuation of assets into
account, then, if we jack up the valuation on assets we hold, then we can chip
away at the leverage ratio and get it to go down.

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yardie
For those looking for a non-paywalled link:
[https://outline.com/yR7ZNK](https://outline.com/yR7ZNK)

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arisAlexis
has a bubble ever existed that was predicted beforehand by many and bursted
shortly after?

~~~
pascalxus
Look up CAPE Schiller index. It doesn't predict bubbles but does give a clue
on 10 year future returns

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lone_haxx0r
Are we still blaming deregulation for the problems generated by regulation?

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nabla9
Alternative source for the article here:
[https://www.greenwichtime.com/business/article/A-new-
credit-...](https://www.greenwichtime.com/business/article/A-new-credit-
bubble-gets-ready-to-burst-13911193.php)

~~~
dang
Switched to that from [https://www.washingtonpost.com/business/economy/the-
shadow-b...](https://www.washingtonpost.com/business/economy/the-shadow-banks-
are-back-with-another-big-bad-credit-
bubble/2019/05/31/a05184de-817a-11e9-95a9-e2c830afe24f_story.html).

------
btcbanking
Bitcoin will explode

------
Hnrobert42
I question the credibility of an “article” which calls people names, e.g. Wall
Street wiseguys.

------
RandomInteger4
Is this why I've been seeing signs advertising something like "learn how to
flip houses like a PRO! Call 555-555-5555" popping up around my little
suburban town? Also bank managers hitting up my elderly relatives for home
equity loans again.

It feels very much like we're in 2002-2005-ish again.

~~~
subpixel
I suspect that if you call the house flipping number someone will try to sell
you a course or seminar, not loan you money.

~~~
RandomInteger4
My point was that I'm seeing signals that we're repeating history. Why do
these home flipping courses pop up? You think they just come out of thin air?
No. It means that there are market conditions that would allow an entrepreneur
to sell their information.

What do we know about the pre-crash market in association with these signals?
We know that (1) these things sound like a get rich quick scheme and (2) that
they legitimately were a get rich quick scheme, because they actually worked
up until the crash where many people were left holding the bags (houses that
could no longer be flipped given the post-crash market conditions).

~~~
dang
Please edit the nasty bits out of your comments here, even if someone else
missed something you thought was obvious.

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

~~~
RandomInteger4
Done. Apologies.

~~~
dang
Thanks!

------
ilaksh
I suspect that there cannot be effective regulation of any industry without a
technological overhaul to money such as moving to cryptocurrency and smart
contracts.

Especially now with new technologies coming up all the time, companies will
just go around the laws.

Doing something like that is pretty far-fetched and would require a new type
of technological government. But to me there is a structural problem with the
relationship between money and government (in their current low-tech forms) in
society.

~~~
vageli
> But to me there is a structural problem with the relationship between money
> and government (in their current low-tech forms) in society.

Can you expand on this? Your comment intrigued me.

~~~
ilaksh
The primary motivator for people is money. Government attempts to regulate all
aspects of behavior, but it cannot effectively control or monitor the exchange
of money. The most obvious symptoms of this are usually called corruption. It
is less obvious (but still obvious to me) that corruption is just the tip of
the iceberg. The problem is structural. Government cannot be effective because
it is superceded or corrupted by the real motivator.

The solution is a high tech type of money that is integrated with government.

~~~
vageli
That makes sense, but is also a nightmare IMO. The lack of oversight of money
means that you cannot be totally barred from participating in the economic
system by the goverement.

If the government had even more control over money, they could arbitrarily
blacklist people from having access to currency. While this sounds like a good
tool to use against criminals, recall that, in America at least, there exist
things such as the no fly list [0], which impacts people's rights without due
process.

[0]:
[https://en.wikipedia.org/wiki/No_Fly_List](https://en.wikipedia.org/wiki/No_Fly_List)

~~~
ilaksh
The way governments actually work in practice these days, yes, it would be a
nightmare.

But the problem with the relationship between money and government is so
significant, a real solution would require dramatic changes all around. So
that would mean that government could not be anything like it is today.

