11 ms·

The next recession

150 points by briatx 8y ago

marsrover 8y ago
> The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals I'm not an economist but I feel like when a country is in a situation where they have to give money to citizens to stave off a market collapse, said country's economy is fucked.
- TuringNYC 8y ago
  > The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals For one thing, QE was a massive handout to debt holders (banks, asset managers, hedge funds) which took (essentially public funds c/o inflation) and indirectly gave it to the wealthy by purchasing assets at prices way higher than "market" at the time. Perhaps it worked, but it also created a lot of resentment. In some ways, giving money directly to individuals would have been more fair, perhaps we wouldn't have the current radical shift right in the US, resulting from people fed up with the elite coastal beneficiaries of the past system. Unfortunately, giving money directly to individuals would not have solved the past crisis because a lot was about the downward spiral of asset prices and how that forced more collateralization and reduced bank equity. However, a more balanced approach that solved the mortgage issues for the common person would have been better. As for the country's economy being screwed. In some ways, we are now. Just that there are winners and losers. Holders of real assets won (massive home inflation continues.) And paycheck-to-paycheck individuals / renters / youngsters lost. Speak to a young person now [who doesnt work at a FAANG] and you'll find someone coming to terms they may never own a home or put down roots. Its a massive turn away from the classic American dream and social contract. Thats pretty screwed up.
  - mceoin 8y ago
    Difficult to prove impact but during 08 global recession the Australian (Labor) Govt gave everybody money with the directive “to spend it”. Also pumped money into system through govt projects and rebates (schools building, solar rebates, etc). On the other hand, Australia was also exporting coal and iron ore to insatiable (at the time) India and China. We also didn’t have the same real estate bubble (at the time). Hard to prove either way, but Aus did move first and injected a lot of capital into the system, we didn’t enter a recession (unlike rest of OECD), and we didn’t end up having to bail out banks.
    - madskillsmonk 8y ago
      Everyone used the money handed out to buy property, and now your real estate prices have gone up an enormous amount, to the point where it's been pointed out as one of the biggest property bubbles, and young people will have an incredibly hard time affording a home.
      - jddj 8y ago
        This seems pretty unlikely. The handout mentioned was a one-off 900 Australian dollars per individual earning less than $AU100k, and a one-off "back to school" bonus per school-aged child. 900 dollars, or even $2100 for a small family isn't the sort of cash that would inflate an auction for a home anywhere, let alone in one of the australian cities affected by the current bubble.
        analyst74 8y ago
        Those 900 dollars don't just stay in everybody's bank account, they get spent, and start circulating the system and eventually consolidated into fewer hands, who in turn buys properties or other assets.
        jddj 8y ago
        Yeah ok, I don't have anything to point to which refutes that. An analysis of the breakdown of the contributors to the Australian housing bubble in 2018 would be cool to see, though. Probably some kind of even split between significant foreign investment in property, negative tax gearing, zoning laws, transport infrastructure issues and a one-off $900 payment that went to middle and low-income earners a decade ago. Damned trickle-up economics.
        ksec 8y ago
        I think AUS housing bubble has much more to do with Chinese buying it all up than those money government gave out.
  - Diggity 8y ago
    I want to tack on this comment by adding that everyone seems to ignore the fact that QE is essentially just printing money. Historically this is usually coupled with run-away inflation, however since it was isolated to the wealthy sectors of the economy (rather than the typical economy as a whole) there is only inflation among goods in that sector (housing etc). The big red flag is that stocks and VC are in that pool as well. So while there was 20 trillion dollars of growth over the last 10 years, there was also 21 trillion dollars of debt generated. The way I see it, QE successfully generated economic growth, however none of that economic growth was "real" growth. There were new innovations, particularly in the tech space, but a huge swath of them have no method to generate real sustainable profit. All this means we should see a MASSIVE correction in markets. Due to financial rules, banks likely won't exit the market like 2008, but the massive number of companies that took out cheap debt will be at risk. Basically we have a potential repeat of 2008, but swap out sub-prime homeowners with corporations.
    - AnthonyMouse 8y ago
      > I want to tack on this comment by adding that everyone seems to ignore the fact that QE is essentially just printing money. This is actually inherently necessary and the fact that the government hasn't been doing it more has been the cause of the debt crisis. Money is created both by the government (directly) and by banks (whenever they make loans with less than 100% reserves, i.e. whenever they make loans). As the economy expands, the money supply needs to increase with the demand for currency to use for transactions, or there would be deflation (very bad). When that money is created by banks, it necessarily leads to an increase in outstanding debt. And paying the debt back destroys the money that was created by borrowing it, so the only way to maintain the money supply at that level without the government creating any is for the amount of outstanding debt to never go down. Which, of course, means that it only goes up. If you print unlimited money at some point it causes inflation, especially when people use it to buy stuff. But if, instead, they use it to pay down debt -- which is what happens when people have a high debt load -- all it does is replace the bank/debt money with the government money. Which is actually really healthy, because it it gives people the few bucks back in interest-not-paid on the debt they no longer have. That has a much smaller immediate effect on prices (interest-not-paid per year is only a fraction of the principal paid down), but a very beneficial long-term effect because it leads to more wealth in the hands of people rather than lenders. It also has immediate positive knock-on effects because with less debt, people are more financially stable. If you're leveraged to the hilt and an emergency comes up, no one will lend you anything more. You also pay lower interest rates if you can e.g. make a bigger down payment, which reduces the lender's risk (the asset is worth the whole loan amount even if it depreciates some), enhancing the positive outcome of people paying less in interest.
  - BenoitEssiambre 8y ago
    This is really the opposite of what happened. The wealthy did not sell assets at above market prices, they in fact sold them at bellow market prices. Remember when they were trying to sell assets, they were exchanging these for cash. The problem was that the cash that they were getting in exchange had above market returns. What was happening during the financial crisis is that even the safest private assets were risky illiquid and had low expected returns. Some estimates say that marginal "safe" private assets had a expected real returns of around -4% after adjusting for risks and liquidity. But since central banks were not aggressive enough, not creating enough inflation and unwilling to use negative interest rates, the returns on cash was like -1.8%, way above what you could get with safe and liquid private stores of value. Investors wanted to get their hands on this government paper having above market returns so they attempted to sell private assets and stockpile cash. This is clearly visible in the shooting up of excess reserves in banks. Investors were hoarding cash. The low inflation and relatively high 0% interest rates (compared to market rates) was a huge subsidy to those who wanted to get out of the private markets, stop investing in the real economy and hold government paper to protect their savings. Destruction of the economy, throwing workers to the curb was basically subsidized. Investors were being shielded from the markets by the government. They kept their government paper promises to be redeemed in the future when private markets looked more favorable. Central banks allowing cash to have returns above market put the private investment markets in a gridlock and economic activity slowed down significantly. Cash is effectively an IOU from non cash holders to cash holders. This means that the above market returns investors got by hoard cash was a implicit subsidy from poor unemployed to rich savers. The unemployed and underemployed effectively subsidized the destruction of their own jobs. When jobs returned and workers could buy stuff again, the savers' cash, now worth above what they could have gotten in the private markets, also flowed back into the asset economy and bid assets prices up and made them more expensive to those who were just starting to have money again, at just the time when they were buying again. People who had been the poorest during the crisis were effectively paying the bill for the subsidy that destroyed their past careers. It is crucial that central banks run a counter cyclical monetary policy and that inflation is kept higher than usual during a crisis to avoid all this from happening. It is crucial that cash doesn't become a subsidy to divestment and crowd out private investment like it did. When the private markets return -4% (risk and liquidity adjusted), government paper should return less than -4%.
- dragonwriter 8y ago
  Policies closer to giving money directly to citizens are not, as the article suggests, more radical; targeted fiscal stimulus has long been understood to be more powerful than broad monetary stimulus, it's just usually in the hands of the government proper not central banks, which has become a problem as economic conservatism which opposes fiscal stimulus has taken an increasing hold in major governments, leaving central banks alone (or worse, as fiscal anti-stimulus is often applied alongside monetary stimulus) to handle problems which don't respond well to monetary policy alone.
  - Latteland 8y ago
    A big part of the recession danger was that if several of the too large wall street banks failed, there would be chaos and cascading failures, because you wouldn't be able to get your money from them for a while, it would take months or maybe years to figure out what really was owned or loaned. If I was say retired, my 401k might be 25% bonds and 25% cash and x% stock but if the company that held the records failed (say fidelity) and the stock market crashed, and the value of the bonds was unclear since so many companies went out, you can't easily get your money to live on - that was the danger of the 'cascading series of failures' scenario.
    - rossdavidh 8y ago
      All of that was a good reason to bail out the banks, but not a reason to bail them out and then not break them up into the smaller banks that they had been, not so many years before. The banking industry had just gone through a long series of mergers. That the banks were "too big to fail" was a reason for the bailout, but also a reason to break them up again; only one of these was actually done.
      - Latteland 8y ago
        agreed, we definitely should have forced them to split, but there are limited powers in a democracy (a good thing :-)). Imagine if this happened today.
      - 8y ago
- topspin 8y ago
  > said country's economy is fucked Indeed. It's the road to currency collapse. The precedent was set in a big way during the last debt crisis; the US government used QE money to buy bad debt, recapitalized institutions and buy treasuries bonds to fund deficit spending. So now the question[1] is; is it possible for the US to suffer a recession without US politicians resorting to the virtual printing press? [1] https://news.ycombinator.com/item?id=17954531 https://news.ycombinator.com/item?id=17954531
  - JumpCrisscross 8y ago
    > It's the road to currency collapse This is overly simplistic. QE led to neither rampant inflation nor dollar depreciation. Money velocity fell and monetary policy responded. (Fiscal policy’s relative non-responsivensss meant monetary policy had to overcompensate.)
    - deleted 8y ago
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    - topspin 8y ago
      > This is overly simplistic. No, it isn't. Print enough and the currency fails. The lesson has to be learned over and over again, in part because there is an endless supply of deniers whispering magical thinking into the ears of the powers that be. QE didn't lead to this only because they stopped. That time. We're still left with the precedent however; giveaways like "cash for clunkers," bailing out UAW and public sector pension funds... all those supposedly "good" things done with magic money from Washington, enabled in part by QE funded deficit spending. What evidence can you cite that they won't turn to QE again to try to paper over whatever bump in the road comes next? What assurance do you have that they'll stop printing next time? You don't have either. That's why it's a question.
      - JumpCrisscross 8y ago
        > Print enough and the currency fails. The lesson has to be learned over and over again Another lesson: refuse to print in a deflationary spiral and a recession turns into a depression. > What assurance do you have that they'll stop printing next time? This is a slippery slope argument. Central banks could always print. Deciding how much to print is their entire job. QE simply meant instead of using printed money to buy Treasuries, as the Fed has always done, it would also buy other assets. > bailing out UAW and public sector pension funds... all those supposedly "good" things done with magic money from Washington, enabled in part by QE funded deficit spending QE didn't monetize the bailouts. Buying Treasuries is something the Fed has always done. QE meant buying other assets, e.g. agency debt.
- FabHK 8y ago
  It's not really such a dire ("it's fucked") situation, or desperate prescription. The (Keynesian) idea is that close to the zero rate boundary, you have a "multiplier" > 1, so that fiscal stimulus leads to even larger GDP growth (thus, it partially finances itself). Furthermore, this works best when people spend, not save said stimulus, and it is uncontroversial that poor (ie most) people have a higher propensity to spend than the super rich (which are main beneficiary of QE). So, it should be an effective (and relatively orthodox, unless you consider standard Keynes totally off-limit) measure. EDIT for clarity.
- deleted 8y ago
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- jellicle 8y ago
  Well, "everyone" accepts that we "need" to give lots of money to the richest citizens to stave off market collapses, so it doesn't seem like a very big leap to give money to poor citizens as well. But somehow it's politically impossible. For instance, in the last crash, the US government could have chosen to bail out homeowners instead of just banks.
- mempko 8y ago
  where exactly do you think money comes from? there are two kinds of money, debt money and non debt money. Banks create most money which is debt based. Government creates non debt based. If government didn't give money, there would be no money!
  - marcosdumay 8y ago
    Money is always debit based. It can be private debit, or government debit. Some government debit is also interest free. But it's always debit.
- JauntTrooper 8y ago
  The US does fiscal stimulus like this fairly often. In January 2008, Congress & President Bush sent $600 checks to each individual ($1,200 for joint tax filers) to stimulate the economy. I remember getting my check in the mail. They also did this in June 2001 ($300-$600 'rebate' checks). The American Reinvestment and Recovery Act in February 2009 included $400 per worker payroll tax credits for 2009 and 2010, immediately available in W-2 paychecks through lower withholdings. It was a classic Keynesian fiscal stimulus, clumsy but likely effective at speeding up our recovery. I agree with the article's concerns that we've built an unsustainable hole in our ongoing budget, especially after the most recent tax cuts. We should not be operating at a deficit at this point in the economic cycle. We should be at a surplus, like we were in 1999/2000, in order to preserve some flexibility for the next downturn. Will it tie our hands in the next recession? I don't think anyone really knows. I suspect we'll weather it better than most other global economies. US Treasuries remain the global safe asset of choice, which should keep borrowing costs down. We'll probably just emerge with an even more enormous debt burden.
fnord77 8y ago
the economist didn't even see the 2008 crash coming. their prognostications are useless
- deleted 8y ago
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- louthy 8y ago
  I remember reading articles about the subprime problem in the Economist way before the crash. I think they're pretty good on the whole at being informative and not sensationalist. Here's one from 2006 [1] that I found relatively easily. But there's one in my head that I remember about an HSBC owned bank that was flailing and could potentially start a crisis, but I can't find it right now - I just remember reading it at the time, it was the reason I decided to wait for a downturn in the housing market. I wish I'd ignored it and bought at the time, but with the benefit of hindsight ... [1] https://www.economist.com/finance-and-economics/2006/12/13/subprime-subsidence https://www.economist.com/finance-and-economics/2006/12/13/s...
  - sremani 8y ago
    I clearly remember NPR was talking about the subprime in Feb-Mar of 2007. That does not mean that NPR foresaw 2008 great recession. Most people saw a dip, but very very few people saw a Valley that it truly was.
    - louthy 8y ago
      The scale was unclear, the problem wasn't.
  - GarrisonPrime 8y ago
    Yup. I’m always amazed when people say nobody saw the recession coming, because I distinctly remember multiple news stories about the subprime mortgage brouhaha for a year or two before the bubble burst. People hear what they want to hear, and remember what they want to remember, I suppose.
wonderwonder 8y ago
A recession is inevitable if one looks at the state of average people and certain economic facts. Eventually a domino will fall. 1. Consumer debt is at an all time high. 2. Consumer savings rates are lower than the mid 2000's and ~35% of adults could not handle a $400 emergency. 3. Inflation is eating already low wage growth. 4. Soaring rental prices for homes 5. High home prices 6. business consolidation and Ch. 11's are up 63% Sources: https://www.americanbanker.com/news/consumer-debt-is-at-an-all-time-high-should-banks-be-worried https://www.americanbanker.com/news/consumer-debt-is-at-an-a... https://www.businessinsider.com/rental-prices-are-soaring-around-the-us-2018-7 https://www.businessinsider.com/rental-prices-are-soaring-ar... https://www.businessinsider.com/chapter-11-bankruptcies-are-up-63-from-a-year-ago-2018-4 https://www.businessinsider.com/chapter-11-bankruptcies-are-...
- geezerjay 8y ago
  > and ~35% of adults could not handle a $400 emergency. That is observed in the US, but in some european countries the outlook is even more bleak. Sovereign and consumer debt is skyrocketing and governments are considering growth rates below 2% to be an economic boom.
- gdubs 8y ago
  There's been a flashing indicator light in the subprime auto loan sector for a while now: https://www.bloomberg.com/news/articles/2018-02-02/never-mind-defaults-debt-backed-by-subprime-auto-loans-is-hot https://www.bloomberg.com/news/articles/2018-02-02/never-min...
- nostromo 8y ago
  A number of your indicators are signs of a booming economy. Rents go up when people can afford higher rents. Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects. Inflation was below healthy rates for a number of years, and is now where the Fed likes it. Wages aren't booming, but they're up, and up more than inflation. Chapter 11s were at the same level in 2011 -- were you predicting a recession then too? There are also reasons to be optimistic, for example, US corporate earnings are way up -- 2018 is up 20% over 2016 alone -- that's huge. https://tradingeconomics.com/united-states/corporate-profits https://tradingeconomics.com/united-states/corporate-profits I think that the article is right: while the US seems very healthy, there are lots of international issues that could form the next recession (China specifically).
draw_down 8y ago
Somehow I suspect that the people who have attributed the economic performance of a year ago to the US administration will not similarly attribute a downturn...
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DyslexicAtheist 8y ago
one bubble in the making is fracking, it's built on debt and has no chance of making profits anytime soon https://www.truthdig.com/articles/death-by-fracking/ https://www.truthdig.com/articles/death-by-fracking/
wilkystyle 8y ago
Not related to the article, but I was overwhelmed by popups on first visit. The amount of screen real estate they took up [0] was obnoxious. [0] https://i.imgur.com/GwkHKT1.png https://i.imgur.com/GwkHKT1.png
paulgrant999 8y ago
we never left the recession. ignore that twaddle about the "jobless recovery". point is, they had a depression II slated. so they did what any cunt would; they punted. could have been 8-9 years of pain; ex-rich people throwing themselves out of windows. instead, they screwd the next four generations. it only looked like a recovery, because it stopped collapsing for a brief period. reality they've screwed the entire country for decades. all this nonsense about growth? is what happens when you reinflate the bubble with QE. classic keynesian garbage.

150 points by briatx 8y ago

> The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals I'm not an economist but I feel like when a country is in a situation where they have to give money to citizens to stave off a market collapse, said country's economy is fucked.

TuringNYC 8y ago
> The efficacy of QE is debated, but if that does not work, they could try more radical, untested approaches, such as giving money directly to individuals For one thing, QE was a massive handout to debt holders (banks, asset managers, hedge funds) which took (essentially public funds c/o inflation) and indirectly gave it to the wealthy by purchasing assets at prices way higher than "market" at the time. Perhaps it worked, but it also created a lot of resentment. In some ways, giving money directly to individuals would have been more fair, perhaps we wouldn't have the current radical shift right in the US, resulting from people fed up with the elite coastal beneficiaries of the past system. Unfortunately, giving money directly to individuals would not have solved the past crisis because a lot was about the downward spiral of asset prices and how that forced more collateralization and reduced bank equity. However, a more balanced approach that solved the mortgage issues for the common person would have been better. As for the country's economy being screwed. In some ways, we are now. Just that there are winners and losers. Holders of real assets won (massive home inflation continues.) And paycheck-to-paycheck individuals / renters / youngsters lost. Speak to a young person now [who doesnt work at a FAANG] and you'll find someone coming to terms they may never own a home or put down roots. Its a massive turn away from the classic American dream and social contract. Thats pretty screwed up.
- mceoin 8y ago
  Difficult to prove impact but during 08 global recession the Australian (Labor) Govt gave everybody money with the directive “to spend it”. Also pumped money into system through govt projects and rebates (schools building, solar rebates, etc). On the other hand, Australia was also exporting coal and iron ore to insatiable (at the time) India and China. We also didn’t have the same real estate bubble (at the time). Hard to prove either way, but Aus did move first and injected a lot of capital into the system, we didn’t enter a recession (unlike rest of OECD), and we didn’t end up having to bail out banks.
  - madskillsmonk 8y ago
    Everyone used the money handed out to buy property, and now your real estate prices have gone up an enormous amount, to the point where it's been pointed out as one of the biggest property bubbles, and young people will have an incredibly hard time affording a home.
    - jddj 8y ago
      This seems pretty unlikely. The handout mentioned was a one-off 900 Australian dollars per individual earning less than $AU100k, and a one-off "back to school" bonus per school-aged child. 900 dollars, or even $2100 for a small family isn't the sort of cash that would inflate an auction for a home anywhere, let alone in one of the australian cities affected by the current bubble.
      - analyst74 8y ago
        Those 900 dollars don't just stay in everybody's bank account, they get spent, and start circulating the system and eventually consolidated into fewer hands, who in turn buys properties or other assets.
        jddj 8y ago
        Yeah ok, I don't have anything to point to which refutes that. An analysis of the breakdown of the contributors to the Australian housing bubble in 2018 would be cool to see, though. Probably some kind of even split between significant foreign investment in property, negative tax gearing, zoning laws, transport infrastructure issues and a one-off $900 payment that went to middle and low-income earners a decade ago. Damned trickle-up economics.
        ksec 8y ago
        I think AUS housing bubble has much more to do with Chinese buying it all up than those money government gave out.
- Diggity 8y ago
  I want to tack on this comment by adding that everyone seems to ignore the fact that QE is essentially just printing money. Historically this is usually coupled with run-away inflation, however since it was isolated to the wealthy sectors of the economy (rather than the typical economy as a whole) there is only inflation among goods in that sector (housing etc). The big red flag is that stocks and VC are in that pool as well. So while there was 20 trillion dollars of growth over the last 10 years, there was also 21 trillion dollars of debt generated. The way I see it, QE successfully generated economic growth, however none of that economic growth was "real" growth. There were new innovations, particularly in the tech space, but a huge swath of them have no method to generate real sustainable profit. All this means we should see a MASSIVE correction in markets. Due to financial rules, banks likely won't exit the market like 2008, but the massive number of companies that took out cheap debt will be at risk. Basically we have a potential repeat of 2008, but swap out sub-prime homeowners with corporations.
  - AnthonyMouse 8y ago
    > I want to tack on this comment by adding that everyone seems to ignore the fact that QE is essentially just printing money. This is actually inherently necessary and the fact that the government hasn't been doing it more has been the cause of the debt crisis. Money is created both by the government (directly) and by banks (whenever they make loans with less than 100% reserves, i.e. whenever they make loans). As the economy expands, the money supply needs to increase with the demand for currency to use for transactions, or there would be deflation (very bad). When that money is created by banks, it necessarily leads to an increase in outstanding debt. And paying the debt back destroys the money that was created by borrowing it, so the only way to maintain the money supply at that level without the government creating any is for the amount of outstanding debt to never go down. Which, of course, means that it only goes up. If you print unlimited money at some point it causes inflation, especially when people use it to buy stuff. But if, instead, they use it to pay down debt -- which is what happens when people have a high debt load -- all it does is replace the bank/debt money with the government money. Which is actually really healthy, because it it gives people the few bucks back in interest-not-paid on the debt they no longer have. That has a much smaller immediate effect on prices (interest-not-paid per year is only a fraction of the principal paid down), but a very beneficial long-term effect because it leads to more wealth in the hands of people rather than lenders. It also has immediate positive knock-on effects because with less debt, people are more financially stable. If you're leveraged to the hilt and an emergency comes up, no one will lend you anything more. You also pay lower interest rates if you can e.g. make a bigger down payment, which reduces the lender's risk (the asset is worth the whole loan amount even if it depreciates some), enhancing the positive outcome of people paying less in interest.
- BenoitEssiambre 8y ago
  This is really the opposite of what happened. The wealthy did not sell assets at above market prices, they in fact sold them at bellow market prices. Remember when they were trying to sell assets, they were exchanging these for cash. The problem was that the cash that they were getting in exchange had above market returns. What was happening during the financial crisis is that even the safest private assets were risky illiquid and had low expected returns. Some estimates say that marginal "safe" private assets had a expected real returns of around -4% after adjusting for risks and liquidity. But since central banks were not aggressive enough, not creating enough inflation and unwilling to use negative interest rates, the returns on cash was like -1.8%, way above what you could get with safe and liquid private stores of value. Investors wanted to get their hands on this government paper having above market returns so they attempted to sell private assets and stockpile cash. This is clearly visible in the shooting up of excess reserves in banks. Investors were hoarding cash. The low inflation and relatively high 0% interest rates (compared to market rates) was a huge subsidy to those who wanted to get out of the private markets, stop investing in the real economy and hold government paper to protect their savings. Destruction of the economy, throwing workers to the curb was basically subsidized. Investors were being shielded from the markets by the government. They kept their government paper promises to be redeemed in the future when private markets looked more favorable. Central banks allowing cash to have returns above market put the private investment markets in a gridlock and economic activity slowed down significantly. Cash is effectively an IOU from non cash holders to cash holders. This means that the above market returns investors got by hoard cash was a implicit subsidy from poor unemployed to rich savers. The unemployed and underemployed effectively subsidized the destruction of their own jobs. When jobs returned and workers could buy stuff again, the savers' cash, now worth above what they could have gotten in the private markets, also flowed back into the asset economy and bid assets prices up and made them more expensive to those who were just starting to have money again, at just the time when they were buying again. People who had been the poorest during the crisis were effectively paying the bill for the subsidy that destroyed their past careers. It is crucial that central banks run a counter cyclical monetary policy and that inflation is kept higher than usual during a crisis to avoid all this from happening. It is crucial that cash doesn't become a subsidy to divestment and crowd out private investment like it did. When the private markets return -4% (risk and liquidity adjusted), government paper should return less than -4%.
dragonwriter 8y ago
Policies closer to giving money directly to citizens are not, as the article suggests, more radical; targeted fiscal stimulus has long been understood to be more powerful than broad monetary stimulus, it's just usually in the hands of the government proper not central banks, which has become a problem as economic conservatism which opposes fiscal stimulus has taken an increasing hold in major governments, leaving central banks alone (or worse, as fiscal anti-stimulus is often applied alongside monetary stimulus) to handle problems which don't respond well to monetary policy alone.
- Latteland 8y ago
  A big part of the recession danger was that if several of the too large wall street banks failed, there would be chaos and cascading failures, because you wouldn't be able to get your money from them for a while, it would take months or maybe years to figure out what really was owned or loaned. If I was say retired, my 401k might be 25% bonds and 25% cash and x% stock but if the company that held the records failed (say fidelity) and the stock market crashed, and the value of the bonds was unclear since so many companies went out, you can't easily get your money to live on - that was the danger of the 'cascading series of failures' scenario.
  - rossdavidh 8y ago
    All of that was a good reason to bail out the banks, but not a reason to bail them out and then not break them up into the smaller banks that they had been, not so many years before. The banking industry had just gone through a long series of mergers. That the banks were "too big to fail" was a reason for the bailout, but also a reason to break them up again; only one of these was actually done.
    - Latteland 8y ago
      agreed, we definitely should have forced them to split, but there are limited powers in a democracy (a good thing :-)). Imagine if this happened today.
    - 8y ago
topspin 8y ago
> said country's economy is fucked Indeed. It's the road to currency collapse. The precedent was set in a big way during the last debt crisis; the US government used QE money to buy bad debt, recapitalized institutions and buy treasuries bonds to fund deficit spending. So now the question[1] is; is it possible for the US to suffer a recession without US politicians resorting to the virtual printing press? [1] https://news.ycombinator.com/item?id=17954531 https://news.ycombinator.com/item?id=17954531
- JumpCrisscross 8y ago
  > It's the road to currency collapse This is overly simplistic. QE led to neither rampant inflation nor dollar depreciation. Money velocity fell and monetary policy responded. (Fiscal policy’s relative non-responsivensss meant monetary policy had to overcompensate.)
  - deleted 8y ago
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  - topspin 8y ago
    > This is overly simplistic. No, it isn't. Print enough and the currency fails. The lesson has to be learned over and over again, in part because there is an endless supply of deniers whispering magical thinking into the ears of the powers that be. QE didn't lead to this only because they stopped. That time. We're still left with the precedent however; giveaways like "cash for clunkers," bailing out UAW and public sector pension funds... all those supposedly "good" things done with magic money from Washington, enabled in part by QE funded deficit spending. What evidence can you cite that they won't turn to QE again to try to paper over whatever bump in the road comes next? What assurance do you have that they'll stop printing next time? You don't have either. That's why it's a question.
    - JumpCrisscross 8y ago
      > Print enough and the currency fails. The lesson has to be learned over and over again Another lesson: refuse to print in a deflationary spiral and a recession turns into a depression. > What assurance do you have that they'll stop printing next time? This is a slippery slope argument. Central banks could always print. Deciding how much to print is their entire job. QE simply meant instead of using printed money to buy Treasuries, as the Fed has always done, it would also buy other assets. > bailing out UAW and public sector pension funds... all those supposedly "good" things done with magic money from Washington, enabled in part by QE funded deficit spending QE didn't monetize the bailouts. Buying Treasuries is something the Fed has always done. QE meant buying other assets, e.g. agency debt.
FabHK 8y ago
It's not really such a dire ("it's fucked") situation, or desperate prescription. The (Keynesian) idea is that close to the zero rate boundary, you have a "multiplier" > 1, so that fiscal stimulus leads to even larger GDP growth (thus, it partially finances itself). Furthermore, this works best when people spend, not save said stimulus, and it is uncontroversial that poor (ie most) people have a higher propensity to spend than the super rich (which are main beneficiary of QE). So, it should be an effective (and relatively orthodox, unless you consider standard Keynes totally off-limit) measure. EDIT for clarity.
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jellicle 8y ago
Well, "everyone" accepts that we "need" to give lots of money to the richest citizens to stave off market collapses, so it doesn't seem like a very big leap to give money to poor citizens as well. But somehow it's politically impossible. For instance, in the last crash, the US government could have chosen to bail out homeowners instead of just banks.
mempko 8y ago
where exactly do you think money comes from? there are two kinds of money, debt money and non debt money. Banks create most money which is debt based. Government creates non debt based. If government didn't give money, there would be no money!
- marcosdumay 8y ago
  Money is always debit based. It can be private debit, or government debit. Some government debit is also interest free. But it's always debit.
JauntTrooper 8y ago
The US does fiscal stimulus like this fairly often. In January 2008, Congress & President Bush sent $600 checks to each individual ($1,200 for joint tax filers) to stimulate the economy. I remember getting my check in the mail. They also did this in June 2001 ($300-$600 'rebate' checks). The American Reinvestment and Recovery Act in February 2009 included $400 per worker payroll tax credits for 2009 and 2010, immediately available in W-2 paychecks through lower withholdings. It was a classic Keynesian fiscal stimulus, clumsy but likely effective at speeding up our recovery. I agree with the article's concerns that we've built an unsustainable hole in our ongoing budget, especially after the most recent tax cuts. We should not be operating at a deficit at this point in the economic cycle. We should be at a surplus, like we were in 1999/2000, in order to preserve some flexibility for the next downturn. Will it tie our hands in the next recession? I don't think anyone really knows. I suspect we'll weather it better than most other global economies. US Treasuries remain the global safe asset of choice, which should keep borrowing costs down. We'll probably just emerge with an even more enormous debt burden.

fnord77 8y ago

the economist didn't even see the 2008 crash coming. their prognostications are useless

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louthy 8y ago
I remember reading articles about the subprime problem in the Economist way before the crash. I think they're pretty good on the whole at being informative and not sensationalist. Here's one from 2006 [1] that I found relatively easily. But there's one in my head that I remember about an HSBC owned bank that was flailing and could potentially start a crisis, but I can't find it right now - I just remember reading it at the time, it was the reason I decided to wait for a downturn in the housing market. I wish I'd ignored it and bought at the time, but with the benefit of hindsight ... [1] https://www.economist.com/finance-and-economics/2006/12/13/subprime-subsidence https://www.economist.com/finance-and-economics/2006/12/13/s...
- sremani 8y ago
  I clearly remember NPR was talking about the subprime in Feb-Mar of 2007. That does not mean that NPR foresaw 2008 great recession. Most people saw a dip, but very very few people saw a Valley that it truly was.
  - louthy 8y ago
    The scale was unclear, the problem wasn't.
- GarrisonPrime 8y ago
  Yup. I’m always amazed when people say nobody saw the recession coming, because I distinctly remember multiple news stories about the subprime mortgage brouhaha for a year or two before the bubble burst. People hear what they want to hear, and remember what they want to remember, I suppose.

wonderwonder 8y ago

A recession is inevitable if one looks at the state of average people and certain economic facts. Eventually a domino will fall. 1. Consumer debt is at an all time high. 2. Consumer savings rates are lower than the mid 2000's and ~35% of adults could not handle a $400 emergency. 3. Inflation is eating already low wage growth. 4. Soaring rental prices for homes 5. High home prices 6. business consolidation and Ch. 11's are up 63% Sources: https://www.americanbanker.com/news/consumer-debt-is-at-an-all-time-high-should-banks-be-worried https://www.americanbanker.com/news/consumer-debt-is-at-an-a... https://www.businessinsider.com/rental-prices-are-soaring-around-the-us-2018-7 https://www.businessinsider.com/rental-prices-are-soaring-ar... https://www.businessinsider.com/chapter-11-bankruptcies-are-up-63-from-a-year-ago-2018-4 https://www.businessinsider.com/chapter-11-bankruptcies-are-...

geezerjay 8y ago
> and ~35% of adults could not handle a $400 emergency. That is observed in the US, but in some european countries the outlook is even more bleak. Sovereign and consumer debt is skyrocketing and governments are considering growth rates below 2% to be an economic boom.
gdubs 8y ago
There's been a flashing indicator light in the subprime auto loan sector for a while now: https://www.bloomberg.com/news/articles/2018-02-02/never-mind-defaults-debt-backed-by-subprime-auto-loans-is-hot https://www.bloomberg.com/news/articles/2018-02-02/never-min...
nostromo 8y ago
A number of your indicators are signs of a booming economy. Rents go up when people can afford higher rents. Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects. Inflation was below healthy rates for a number of years, and is now where the Fed likes it. Wages aren't booming, but they're up, and up more than inflation. Chapter 11s were at the same level in 2011 -- were you predicting a recession then too? There are also reasons to be optimistic, for example, US corporate earnings are way up -- 2018 is up 20% over 2016 alone -- that's huge. https://tradingeconomics.com/united-states/corporate-profits https://tradingeconomics.com/united-states/corporate-profits I think that the article is right: while the US seems very healthy, there are lots of international issues that could form the next recession (China specifically).

draw_down 8y ago

Somehow I suspect that the people who have attributed the economic performance of a year ago to the US administration will not similarly attribute a downturn...

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DyslexicAtheist 8y ago

one bubble in the making is fracking, it's built on debt and has no chance of making profits anytime soon https://www.truthdig.com/articles/death-by-fracking/ https://www.truthdig.com/articles/death-by-fracking/

wilkystyle 8y ago

Not related to the article, but I was overwhelmed by popups on first visit. The amount of screen real estate they took up [0] was obnoxious. [0] https://i.imgur.com/GwkHKT1.png https://i.imgur.com/GwkHKT1.png

paulgrant999 8y ago

we never left the recession. ignore that twaddle about the "jobless recovery". point is, they had a depression II slated. so they did what any cunt would; they punted. could have been 8-9 years of pain; ex-rich people throwing themselves out of windows. instead, they screwd the next four generations. it only looked like a recovery, because it stopped collapsing for a brief period. reality they've screwed the entire country for decades. all this nonsense about growth? is what happens when you reinflate the bubble with QE. classic keynesian garbage.