
Can We Survive the Next Financial Crisis? - chollida1
https://www.bloomberg.com/graphics/2018-lehman-anniversary/
======
y-c-o-m-b
The definition of "we" and "survive" needs to be established clearly first and
I don't think all those fancy graphs and market trends will define them.
There's a lot of people that ended up bankrupt, in a bottomless depression,
turned to drug abuse or committed suicide because of the last crisis. Wages
are still relatively low while prices continue to climb. Many people are
working 2-3 jobs and having trouble affording rent across major cities in the
U.S.

A glimpse at American's savings accounts shows a single healthcare incident
can wipe out most anyone, let alone financial crisis:
[https://smartasset.com/checking-account/savings-account-
aver...](https://smartasset.com/checking-account/savings-account-average-
balance)

~~~
crazynick4
If you have an extreme health care incident, why pay the bill? Sure it would
hurt your credit score not to, but if it's between that and tens/hundreds of
thousands, I think it is worth it to take the hit for 7 years. I know health
care workers who give this 'unofficial' advice to their patients and I've had
friends and family members do the same thing - people who had no health
insurance but still got health care and paid nothing for it.

~~~
jandrese
It's not just the 7 years on your credit score, it's having collection
agencies hound you incessantly. It's having people constantly trying to scam
your bank to drain your account. It is legal threats against you, your family,
your friends, your employer, etc...

You're basically dropping you bloody name to a pool of sharks who have little
respect for what is legal or ethical.

~~~
sigfubar
What does it mean to be "hounded" by collection agencies? I've allowed some of
my debts to go unpaid because I considered repayment to be a poor deal. Yes,
I've received phone calls, which I answered and calmly informed the caller
that (a) the conversation was being recorded; and (b) this was the last time
they called me because I was invoking the FDCPA. I've never had to repeat this
more than twice.

Yes, I've received things in the mail, which I simply threw into paper
recycling. Eventually, these stopped as well.

A debt collector has yet to physically come to my home, however, having grown
up in 1990s Russia, I'm prepared to take care of them in a swift, permanent,
and legal way.

~~~
beaconstudios
> I've allowed some of my debts to go unpaid because I considered repayment to
> be a poor deal.

Could you elaborate on this? I don't know if it's what you intended but it
just comes off like you defrauded a company.

~~~
vkou
If defaulting on a debt is fraud, then why do lenders charge a premium for
credit risk?

They do it because, in most cases, it is not fraud - defaults are just a fact
of business. Being a lender is not a ticket to free, zero-risk money.

Both parties in a lender/borrower transaction understand that there is a risk
of default, as well as consequences for a default. In a secured loan, the
borrower loses the secured item. In an unsecured loan, more of the risk falls
to the lender (which is why unsecured loans have much higher interest rates.)

~~~
beaconstudios
of course, but my interpretation of OP's comment was that they went into a
purchase with the intent of defaulting. To me, that's fraudulent - IANAL but
that would seem to be legally fraud too. It's really no different from
chargeback scams.

~~~
spacehome
It's only fraud if you take out the loan with the intention of not repaying
it. sigfubar never says when he came to the conclusion that repaying the loan
is a bad idea. If it's any point after he took out the loan, it's not fraud.

------
briatx
Yes.

The lesson of 2008-9 is that TBTF and bailouts will be applied in case of any
financial crisis. Not much has been done to rein in moral hazard and so
institutions will continue to offload risk to the public when they can.

This works as long as the Treasury and Fed can absorb the shock and will
create near term stability, at the potential cost of a currency crisis if the
shock is too big to be absorbed.

~~~
gdubs
Part of the story of 2008-9 was that congress nearly _didn 't_ act, with
Paulson famously getting down on bended knee to beg Pelosi to whip the
necessary votes. The government has the capacity to act – but there's no
guarantee that they'll make the correct choices in a timely manner.

~~~
wrycoder
I'm pretty sure that Hank was part of the decision to let Lehman go, so he
knew he screwed up.

~~~
yborg
That was just GS thinning out the competition.

------
acconrad
One of the few times Bettridge's Law of Headlines doesn't apply. "Survive" is
an extreme word here, but I do see a big issue w/ index funds. Perhaps an
unpopular opinion - but I believe index funds will be the next major bubble
that cripples the financial system.

It's one massive way to persist the same inequality status quo. You know what
made Bezos so rich in spite of a company that doesn't make much accounting
sense? When everyone is betting on his success by blindly investing in index
funds.

Bet on the winners (because they're in the S&P 500 or some total market fund),
even if they aren't performing that well by their accounting metrics. Everyone
will be so invested in propping up the largest companies (or at least the
US/China economic moneymakers) that when a few big players seem to be doing
something egregious, it will be a tsunami of sells as opposed to a small wave.

When everyone is playing and _no one knows how to play_ (because why do I care
what the market does? I just let the index fund manage for me), it just
reminds me of the advice "if it seems too good to be true, it probably is".
The current narrative is: you don't need to know how to invest (neither does
your investment fund manager). Just bet on everything, and we'll all win. And
by we, we mean the fat cats who are taking in that investment money you're
giving us. You'll make a meager return, but we'll make oh so much more.

~~~
darawk
This is a real misunderstanding of how markets work. An index fund invests in
everything, market-cap weighted (usually). This means that your investment
merely reinforces the prices _already determined by the other participants in
the market_. There are still huge numbers of active managers, not to mention
quants and others. They, collectively, determine the prices of assets. When
you invest in an index fund, you're just saying "I'll have what they're
having", basically. It doesn't _cause_ amazon to rise in price. Lots of
companies are in the S&P 500, they don't have returns like Amazon does. Amazon
has those returns because people allocate capital _specifically_ to them, i.e.
non-index investors.

> And by we, we mean the fat cats who are taking in that investment money
> you're giving us. You'll make a meager return, but we'll make oh so much
> more.

Index funds are the least fat-cat-remunerating route you have available to
you. They have lower expense ratios than you'd be able to achieve on your own,
unless you're using a free service like Robinhood (and if you do that, you're
probably paying in other ways, like poorer execution prices).

~~~
djrogers
> basically. It doesn't cause amazon to rise in price.

Yes, it does - you cannot add capital to a market without raising the market
cap. It doesn't cause it to raise higher or faster than it's index peers, but
it absolutely does cause it to rise.

~~~
darawk
It doesn't cause it to rise in price relative to others in the same index.

~~~
cm2187
But these strategies do have all sorts of side effects on the market.

It pushes the correlation between stocks up. Investors might be more hot
handed as their investment is more liquid, which may result in more selling in
a dip. There are all sort of algorithmic strategies that are pro-cyclical. And
also it reduces discrimination between stocks which results in weaker stocks
benefiting from just being in the index and being overpriced.

~~~
darawk
> It pushes the correlation between stocks up.

Citation needed. I seriously doubt that this is true.

> And also it reduces discrimination between stocks which results in weaker
> stocks benefiting from just being in the index and being overpriced.

Not really. Retail investors allocating their money to index funds just leaves
the price-setting power to the professionals, which, on net, ought to be
better for price discovery anyway.

~~~
cm2187
First result on google:

[https://www.bloomberg.com/news/articles/2018-09-09/asia-
stoc...](https://www.bloomberg.com/news/articles/2018-09-09/asia-stocks-point-
to-drop-dollar-holds-advance-markets-wrap)

But it is kind of intuitive anyway. ETFs are becoming significant in volumes,
so when net volumes buy or sell them, they force the sponsor to buy/sell the
whole market reducing price discrimination. To have any price setting power
you need large volumes.

~~~
darawk
I don't see anything in that article that supports your point. Can you snippet
out the part that you think does?

------
darawk
> The leveraged loans are now being packaged into collateralized loan
> obligations and sold to investors. Sound familiar? And the CLO market has
> grown to match the size of the CDO market at its pre-crisis peak. Yet one
> major difference makes the CLOs of today less scary: The loans that comprise
> them are backed by collateral, and if one of the companies in the mix
> defaults, an investor can find recourse through the sale of that collateral.
> Pre-crisis CDOs built on mortgage-backed securities had no such backstops.

Maybe this is just my ignorance of the terms of CDO agreements...but weren't
they collateralized by the homes? I mean, it's in the name: Collateralized
Debt Obligation. And wouldn't that make this CLO market exactly identical to
the CDO market?

~~~
travisoneill1
Yeah, that doesn't make any sense. The reason CDO's were underwater is because
the price of housing dropped and left the collateral worth less than the
principal of the loan. Loans to companies follow the same principal. If the
value of companies suddenly drops same thing. It's a weird statement and is
directly contradicted by the next paragraph in the article.

------
adiusmus
Short answer: Yes.

Survival is a very low bar. Going bankrupt qualifies as surviving since being
alive along with having faith in the future can be enough to rebound
successfully. Plenty of millionaires exist now because they learnt from
failure from bad luck or poor execution of a plan.

Whether we taxpayers will be able to bail out various institutions that should
have failed dismally last time is another matter. According to the article,
banks are better off now but that remains to be seen. Nothing like reality to
expose a gap in planning or regulations. Multiple institutions have likely not
learnt their lesson and are probably unbalanced or unstable _right now_.

The downturn is likely already happening in some sectors in some obscure way
and what the flashpoint will be is anyone’s guess. Possibly student loans but
that’s a slow burn safely covered by the government and people who can’t
escape paying so it’s effectively already bailed out. Might be the unpaid
pensions which are already hitting the budgets of multiple states. Petrodollar
consequences may be a factor since it might cause moneyprinting to be less
effective.

Interesting times ahead I’m sure.

------
adreamingsoul
Just my opinion, but...

Our survival depends on local farms and businesses that are able to produce
real value for people.

I define "real value" as resources having the ability to be bought, sold, and
traded for other resources. For example, one hour of labor is worth X pounds
of produce from a local farmer.

Our culture has too much of a dependence on global supply chains that will
become increasingly expensive and scarce in the coming years.

So yeah, the next financial crises will be just the beginning. Add to it
climate change, trade wars, unstable governments, and I start to see a
troubling future that will affect us all in some way or another.

~~~
gruez
>Our survival depends on local farms and businesses that are able to produce
real value for people.

"real value" \- that's a vague term. can you expand on that more? how does
$6/lb (random guess at the price) bananas from california , provide more "real
value" than $0.4/lb bananas from central america?

>Our culture has too much of a dependence on global supply chains that will
become increasingly expensive and scarce in the coming years.

so globalized stuff is going to get more and more expensive, relative to more
local stuff. isn't that supposed to be good, given how much you like local
goods?

~~~
adreamingsoul
Yes, in the long term having less of a dependence on the global supply chain
is better for the local economy, climate, and people. But during that
transition, a lot of people are going to be negatively affected.

Today, it's my opinion that our culture has an unhealthy fascination and
addiction towards products and goods that have a cost that is not reflective
of the real value to sustainable supply the demand. Too many things these days
are subsidized to create consumer demand and those dependencies are unhealthy
and unsustainable.

"Like the links in a chain, one by one they will start to give until the chain
collapses."

Ideally, consumers will have to pay the real value for those products and
goods or go without until they can afford it.

It's entirely possible that in your example, both prices are reflective of the
real cost to grow, maintain, and distribute bananas.

As a consumer, the price of $0.4/lb is cheaper and will keep more money in my
pocket (or does it?) when compared to the $6/lb price.

However, as a consumer I should take into account the other factors of that
cost, for example, how much did it cost to ship those bananas to my local
store? How much does it cost for the farmers to support their families? Should
I even be eating bananas right now? Can I take a break from bananas and save
up to afford the bananas that are closer to me? Is it better to support the
local farmers in my region, or the farmers across the world? Maybe both?

We need to be asking more questions about the big picture.

~~~
gruez
>However, as a consumer I should take into account the other factors of that
cost, for example, how much did it cost to ship those bananas to my local
store?

It's factored into the price, so I'm not sure why we should pay special
attention to it.

>How much does it cost for the farmers to support their families?

>Can I take a break from bananas and save up to afford the bananas that are
closer to me? Is it better to support the local farmers in my region, or the
farmers across the world? Maybe both?

Again, I'm not sure how this is relevant. Farming bananas probably pays better
than whatever other business they can do, otherwise they'd switch over to the
higher paying business. If you want to help lift people out of poverty, donate
to aid organizations, don't not buy their bananas (which is what keeps them
fed in the first place!). Buying "local" bananas might not even be the most
environmentally friendly solution, considering you might be growing them in
sub-optimal climate conditions. Furthermore, choosing inferior (in price or
quality) products just to support your clan sounds a lot like protectionism.

~~~
adreamingsoul
I'm sorry, I didn't intend to offend. My previous reply was just a glimpse
into some of the thinking behind my opinions.

In addition to working in the tech field, I also work with farmers and my
opinions are from my own experiences, research, and study.

From what I understand, the price of 90% of what you buy in a grocery store is
not the real cost to produce and delivery that item to the grocery store.

That price is heavily influenced by what the market value is of the commodity,
which at the moment is mostly driven by industrial farming operations.

Industrial farming relies on their massive scale to make a profit, and they
also rely on predictable growing conditions to obtain those results, which is
also a tangential problem.

Non-industrial farming operations (local farmers, family famers, etc...) rely
on multiple sources of income, resources, and commodities to break even.
Typically, one of the partners of the farm has a full or part time job to
cover OPEX, and any profits made from farming is used for CAPEX. At the end of
the day, the farmer has to decided to either compete with the industrial
farmers and unrealistic market values, or they bypass that and sell straight
to consumers.

Another issue, is that for everyone else who doesn't live near farmers, they
are accustomed to market values that are not reflective of the real cost to
produce those goods.

As of right now, the market value is reflective of industrial operations that
use both scale and subsidies to produce cheap food.

My entire point, is that this trend is not sustainable for consumers, farmers,
or nature.

So in addition to the next financial crisis, we will also be seeing a dramatic
change in our food production and distribution system.

~~~
gruez
>I'm sorry, I didn't intend to offend.

None taken.

>From what I understand, the price of 90% of what you buy in a grocery store
is not the real cost to produce and delivery that item to the grocery store.

>That price is heavily influenced by what the market value is of the
commodity, which at the moment is mostly driven by industrial farming
operations.

>Industrial farming relies on their massive scale to make a profit, [...]

>Non-industrial farming operations (local farmers, family famers, etc...) rely
on multiple sources of income, resources, and commodities to break even.
Typically, one of the partners of the farm has a full or part time job to
cover OPEX, and any profits made from farming is used for CAPEX. At the end of
the day, the farmer has to decided to either compete with the industrial
farmers and unrealistic market values, or they bypass that and sell straight
to consumers.

I don't get what you're saying. Large farms have larger economies of scale, so
they can out-compete smaller farms on commodities. This is basic economics.
How is this increased efficiency intrinsically bad? Why should consumers pay
more for food that's produced by inefficient small scale operations?

You say that the price you pay doesn't represent the "real cost", but
obviously it does, otherwise the farm will go out of business operating at a
loss. The only other explanation is externalities, but you haven't really
explained what negative externalities big farms are producing that small farms
aren't.

>[...] and they also rely on predictable growing conditions to obtain those
results, which is also a tangential problem.

Is there a reason why industrial farms are more reliant on predictable growing
conditions than a smaller farm? If anything large farms can weather shocks
better than small operations because they have better expertise to mitigate
the negative effects and bigger bankroll to avoid bankruptcy.

>Another issue, is that for everyone else who doesn't live near farmers, they
are accustomed to market values that are not reflective of the real cost to
produce those goods.

disagree. in the same way that living next to a GM plant doesn't accustom me
to the the real cost in producing a car.

>As of right now, the market value is reflective of industrial operations that
use both scale and subsidies to produce cheap food.

scale: as I said earlier, I don't see anything intrinsically wrong with
economies of scale associated with large scale operations. If anything,
they're a net benefit to society because they have higher efficiency.

subsidies: this mainly hinges on whether large scale operations get more
subsidies (relative to size) compared to small scale operations. I haven't
done any research on this so I won't comment either way.

------
brianpgordon
> The leveraged loans are now being packaged into collateralized loan
> obligations and sold to investors. Sound familiar? And the CLO market has
> grown to match the size of the CDO market at its pre-crisis peak. Yet one
> major difference makes the CLOs of today less scary: The loans that comprise
> them are backed by collateral, and if one of the companies in the mix
> defaults, an investor can find recourse through the sale of that collateral.
> Pre-crisis CDOs built on mortgage-backed securities had no such backstops.

Wait, what's the difference here? Mortgages had collateral- the homes. That's
the C in CDO. The problem was that when home prices fell, the collateral
wasn't enough to cover the loan defaults. It seems like the same thing could
happen for a structured product based on other types of debt if the collateral
turns out to not be as valuable as we thought.

------
bogomipz
The article states:

>"Leverage has shifted to companies from consumers, and some risk has migrated
to shadow banks from traditional lenders."

Can someone explain this statement to me. The banks _were_ the one's that were
too heavily leveraged before. This is why the required the bailout. What am I
missing?

~~~
sschueller
What are shadow banks? Sounds to me the risk was just moved off the books
using some financial trickery into "shadow banks" and when those blow they
take the regular banks with them.

~~~
airstrike
Shadow banks were already a thing in 2007-2008

[https://www.philadelphiafed.org/-/media/research-and-
data/pu...](https://www.philadelphiafed.org/-/media/research-and-
data/publications/business-review/2014/q2/brQ214_shadow_banking.pdf)

------
HashThis
The surprise that is coming is that the working class won't tolerate being
robbed in the next financial crisis.

Working American's had to financially absorb the 2008 Mortgage crisis. 2008
was a direct robbery because Mortgage Orginators KNEW the mortgages would blow
up, because their own Underwriting equations said they would. That is why they
did fraud on the customer's income levels or worked with politicians to allow
ignoring customer's income.

It caused a $5 trillion in transfer from the wealthy away from the working
classes to the investor class in that 2008 Mortgage crisis.

The 2008 Mortgage crisis robbed the working classes, and transferred to the
investor classes. Homes lost because of unemployment. Savings gone via rigged
economy unemployment. Bail outs. Banks offloaded their worthless assets with
government buying them. Wall Street over leveragged had huge wealth handed to
them in money printing that was giving directly to their balance sheets.

The surpise will come the next time a Financial Crisis comes and the
government works to sell out the working class

~~~
craftyguy
> The surprise that is coming is that the working class won't tolerate being
> robbed in the next financial crisis.

If that's true, then why is the current government working hard to remove any
protection (however meager it is/was) to prevent the same mistakes from
happening all over again?

If the working class has no tolerance for these things, then it definitely
isn't reflected in the people the working class has elected to 'represent'
them.

~~~
prolikewh0a
>If that's true, then why is the current government working hard to remove any
protection (however meager it is/was) to prevent the same mistakes from
happening all over again?

I find your average worker doesn't really pay attention to the day-to-day
news/politics (especially regulations & individual votes, media doesn't cover
this either and nobody watches CSPAN) but by now knows that in 2008 the
bankers & wall street — the people who put us in such predicament in the first
place — got an enormous bail out that went to already super rich executive &
CEO bonuses, but the working class lost their homes & jobs and received
absolutely nothing.

I don't think think it will go that way the next time it happens.

~~~
HashThis
The average citizen not paying attention will stop when the next financial
crisis hits.

~~~
village-idiot
History repeats itself. The peasants, sorry workers, are peaceful and
complacent right up until they _really_ aren’t.

------
qaq
There is a lot of blame to go around but It would be nice for people to
actually realize what is obvious post-factum was not really obvious at the
time. I had friend who was VP at JPM and prior to crisis when all the banks
were posting record profits Jamie Dimon started unwinding some risky positions
and taking write downs, there was a lot of heat from shareholders and if it
was someone of lesser statue that person most likely would back down or even
get ousted.

------
bitxbit
People live too comfortably now for us to see anything significant. 2008 was
blatant and the Occupy Wall Street movement lasted a hot summer. I know a lot
of people are expecting the next crash right around the corner but it's not
gonna happen until the Chinese economy collapses which I don't see unfolding
without Xi putting up a fight.

------
m3kw9
Just because is human nature to think history could repeat itself, he is
looking at the next crisis from a similar angle, which is implying lighting
striking twice. I would look at polical or after shocks from a melt down from
another super power.

------
cm2187
The article dismissed bailin in a short sentence at the end when I think it is
one of the most significant difference between 2007 and now.

Bail-in is the right given to the regulator to declare a bank non viable and
to impose an instantaneous, extrajudicial, chapter-11. Basically writing down
bond holders over the course of a week end, and possibly any unsecured, non
deposit-guaranteed creditor of a bank, and in this way auto-recapitalising the
bank. It has been used a few times in Europe already, though not on major
institutions yet.

I am not aware that in the US only holdco debt is bail-inable, so I am not
sure why the article infers that the tightening in borrowing cost between
holdco and opco means investors don't believe in a bailin. I'd say that they
rather don't believe in a bailin of the holdco only.

In the UK the regulator stated its approach of bailin-ing the holding company
first before considering the operating company (bank), and you see a clear
spread between the two, particularly initially as banks are starting to issue
debt out of the holding company (and therefore a lot of bailin risk is
concentrated on a small amount of debt).

Another important difference is that unlike 2007, a default risk of banks is
priced in. The market has the capacity to absorb losses, in fact it is
designed for that. The issue comes when losses occurs in places where they
were not expected (money market funds, "AAA" MBS, bonds issued by major
financial institutions, these were what cause the 2008 run on the banks). Then
it gets really messy. But even now (in rather benign credit markets), bank
credit spreads are still significant.

What worries me is not banks themselves, but sovereign debt and central bank
capacity to react. We forget that as recently as 2011, investors were getting
seriously worried of a country like Italy defaulting. Italy has now even more
indebtedness, and a populist government that wouldn't think twice about making
a radical action on its foreign debt. And other countries like France aren't
that far behind, with a massive reliance on short term borrowing and no
political willingness to control public deficits. Central banks on the other
hands are still all-in on QE (at the current rhythm the Fed will have fully
retired QE well after the next cycle kicks in), and with very low rates. So
what levers are they going to use next?

And yeah if states collapse, the financial system under them will be wiped
out.

~~~
asdfasgasdgasdg
> And yeah if states collapse, the financial system under them will be wiped
> out.

That's not a thing that is foreseeable. Default? Perhaps. Collapse? Plenty of
states have defaulted and not failed.

~~~
cm2187
I mean collapses financially (default, hyper-inflation, etc). Then typically
the local banking system sinks.

------
based2
[https://en.wikipedia.org/wiki/Juglar_cycle](https://en.wikipedia.org/wiki/Juglar_cycle)

------
tmaly
I think its worth reading or getting the audio for the book Antifragility. It
raises some good points about the financial system.

------
solomondrix
Let's hope we don't have to 'survive'

------
acd
Yes we will survive the next crisis but we will have to switch to a green
crypto based currency. The Zero interest rate policy has made for ownership
accounting errors. We will also need to consume less and make use of more
recycled goods.

There is a leverage issue where young people are in debt, has less house
ownership compared to older people who own lots of the assets houses, stocks
and derivatives.
[https://researchbriefings.parliament.uk/ResearchBriefing/Sum...](https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7706)
[https://i2.cdn.turner.com/money/dam/assets/170808150752-char...](https://i2.cdn.turner.com/money/dam/assets/170808150752-chart-
stock-market-ownership-age-780x439.jpg)

There is an accounting error in the current market system of tragedy of the
commons where pollutions of common assets the polluter does not pay.

