
Central Banks Have Few Options to Deal With Another Crisis - wolfgke
https://www.bloomberg.com/opinion/articles/2018-12-15/central-banks-have-few-options-to-deal-with-another-crisis
======
apo
Maybe it is. On the other hand, I'm seeing way too many people calling
"bubble."

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.

~~~
segmondy
In that past, society was less informed. We are very much connected more than
any time in history. I'm no were near wall street, but I can access some
street gossip forums to find out how investment banks are doing, I can find
out which funds lost what and who is laying off who and how many. It's much
easier to pluck and sniff out these signals than in the past. I can run a
query and find out exactly how many houses sold in a city this month, compared
to last month or this time last year. I can see the price difference. I can
see how long houses are sitting before they sell, the vast amount of data the
ordinary man has access can't be discounted. My hypothesis is that in future
bubbles, we will know like we know now, but they will not have a big pop, but
rather a very slow deflation that goes on for months or even years. Because
people know about it, some will anticipate they can profit from it and keep
jumping in and out, whereas most would have stayed out if there was a big pop
instead of a slow deflation.

------
nimbius
as an engine mechanic, i remember the last time this happened and it was
absurd even now just thinking about it.

\- 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....

------
hopfscotch
I largely agree with the first half of the article -- the global economy is
showing cracks at the same time that Western politics is in disarray.

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.

~~~
jseliger
I recommend reading Taleb's _The Black Swan_.

Imagining the unimaginable is much more important than most people give it
credit for.

~~~
bilbo0s
I _think_ , maybe, his point is, why would anyone be worried about the stock
market or the banks if civilization collapses? (It may not be though. You
could read that comment a lot of ways.)

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.)

------
richardknop
I’m looking forward to too big to fail bankers being bailed out while little
people like me will be supposed to just applause the big banks not going
under.

~~~
AnimalMuppet
Unfortunately, banks going under _also_ ruins little people like us.

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.

~~~
richardknop
I wonder if little people are being hurt more by the current perpetuating
hegemony of the ruling class or if they would be better off if we let free
market take care of this for once and let the banks fail. It would hurt but
perhaps it would be better long term for the little people. All of the bad
debt and Wall Street Ponzi schemes would be cleared off and a new economy
which doesn’t rely on free money from government to the banks would form.

~~~
dragontamer
That was what Bush did at first during 2007 / 2008\. Bush let Bear Sterns and
Lehman Brothers go bankrupt. Then IndyMac went bankrupt. And then...

[https://www.nytimes.com/2008/10/01/business/smallbusiness/01...](https://www.nytimes.com/2008/10/01/business/smallbusiness/01CREDIT.html)

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.

\----------

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.

------
kqr
I have recently started saving in mutual index funds. I have no idea what I'm
doing, but it makes me happy whichever direction the economy is heading: when
things point up, I'm happy because it let's me withdraw more cash, should I
want to; when things point down, I'm also happy because I know that means I'm
about to get a really good deal on shares which I can later sell for lots.

~~~
dragontamer
> when things point down, I'm also happy because I know that means I'm about
> to get a really good deal on shares which I can later sell for lots.

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)

\--------------

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.

\--------------

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)

~~~
kqr
This was a very sobering and well-presented perspective. You bring up some
critical points I hadn't considered, and I'm very thankful for it.

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.

~~~
marketgod
Look up Bogleheads and their Lazy Portfolios, this may help you understand
some different scenarios.

[https://www.bogleheads.org/wiki/Lazy_portfolios](https://www.bogleheads.org/wiki/Lazy_portfolios)

------
mylons
am i nuts or did the bubble already lose all of it's air? MSFT, AAPL, AMZN,
NFLX, GOOG have lost 20+% of their market cap since the peaks at end of
august/mid september. S&P500 and DJI are at 52 week lows after people
proclaimed another 3-5 years of The Golden Bull Run on CNBC. the crash
happened, it just took months, not seconds.

~~~
ceejayoz
The 2008 recession saw the Dow retreat to a two _decade_ low. Losing a year of
market gains certainly doesn't indicate things are over. A recession hasn't
even started yet.

~~~
dragontamer
Say it with me: The stock market is NOT the economy.

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.

~~~
ethbro
The way I think about it is "the stock market" (by which we mean the total
value or price of stocks) is 2 different things.

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.

------
jganetsk
This article has an incoherent approach to monetary and fiscal policy:

"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](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](http://bilbo.economicoutlook.net/blog/?p=23719)

------
ciconia
Like many others here I've invested in index funds in recent years, just to
see modest returns. I doubt this kind of return is really worth the trouble,
even though all thouse "early retirement" people keep telling me I'll come out
on top in the long run. I don't really think it's a very good idea to trust
the global economy to do the right thing with my money, considering all those
dumbf __ __* running the show.

~~~
ThirdFoundation
Sorry, but I'm not understanding your point. Index funds are almost no trouble
at all. People harping on index funds typically suggest something akin to
'invest in an S&P 500 index fund and let it sit for 35 years.' So all you have
to do is buy the shares and leave them there. If it's in your 401(k) then it
can be essentially automated.

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?

~~~
Applejinx
If the system breaks, returns don't compound. That's an assumption that our
whole system is defined on, but globally the amount of leverage on money is
astronomical. Basel III set it to 3% (I'm aware the US is either 4% or 5%)

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.

~~~
skh
If things break as you say then it won’t matter what you’ve invested your
money in. In such a scenario the investments that pay off are in knowledge
that others find useful and physical fitness.

------
jondubois
I missed the last bubble in 2008 because I was studying so I look forward to
the next one. Hopefully no one is going to get bailed out this time. We need
to reset everything.

~~~
bilbo0s
> _Hopefully no one is going to get bailed out this time. We need to reset
> everything..._

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.

------
burfog
So close to understanding the cause...

 _" 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.

~~~
notfromhere
Rates were near zero for close to a decade. Fed needs to raise rates in order
to have room to respond to a crisis, otherwise we won't have many monetary
tools to use when another 2008 comes around.

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.

~~~
BoiledCabbage
Not to mention putting money in the hands of the middle class also is a way
out. Unfortunately the govt likely won't have that option since it just
strapped itself with 1 Trillion in debt giving money to people who mainly
purchase investable assets.

Meaning having the ability to cut rates is even more important.

