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Central Banks Have Few Options to Deal With Another Crisis

66 points by wolfgke 8y ago

burfog 8y ago
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.
- hopfscotch 8y ago
  Christ let's talk about "who really did 9/11" next.
  - JewsDidIt 8y ago
    See my username for the answer.
- ergothus 8y ago
  There's an argument to be made that if you cant raise rates much above the incredible low rate this far into a recovery, then your economy has bigger problems to deal with. Without denying your statements of the power the Fed has, I havent seen anything odd about the timing, frequency, nor quantity that the fed has raised rates lately. You didn't address the argument of the quote you made (that the rate needed to raise) nor did you supply evidence to support your implication that the fed was willing to tank the economy to hurt Trump.
  - disgruntledphd2 8y ago
    Like, I don't really get why people are so worried. Wages are going up, employment is going up, and the price of assets are coming down. This is pretty good for most of the population. It's really only the small fraction (of which I am a member) that have equities that have really lost anything. Inflation is still reasonably low, so PPP is going up. I just don't get it. Mind you, a few years back I didn't really understand how unemployment was bad, wages were poor, asset prices were too damn high and everyone was talking about this "recovery". I probably just don't understand macroeconomics, I guess :)
    - charlesdm 8y ago
      Prices of assets coming down means margin debt gets called, and investment loans secured by, for example, shares as collateral, leading to defaults and ultimately to bankruptcy of companies with sizeable amounts of debt on its balance sheets. Now, the argument might be that it's their own fault, but that will likely leads to tens of thousands of jobs lost. And we're not talking tech jobs.
    - OGMayo46 8y ago
      > Wages are going up, employment is going up, and the price of assets are coming down Huh? Sources?
      - josefresco 8y ago
        Most likely, OP was referring to reports like this: https://www.bloomberg.com/news/articles/2018-02-02/u-s-added-200-000-jobs-in-january-wages-rise-most-since-2009 https://www.bloomberg.com/news/articles/2018-02-02/u-s-added... I'm not agreeing with the point, was just curious like you and searched.
      - phildawes 8y ago
        https://tradingeconomics.com/united-states/wages https://tradingeconomics.com/united-states/wages https://tradingeconomics.com/united-states/employment-rate https://tradingeconomics.com/united-states/employment-rate https://tradingeconomics.com/spx:ind https://tradingeconomics.com/spx:ind
- zozbot123 8y ago
  > Um yeah. The Fed hiked the rates and thus crashed the economy. Some are speculating that they crashed it on purpose Seriously? I mean, look at inflation expectations - they're not that low! Late 2018 does not look anything like late 2008 - you may think that the Fed should be a bit more dovish still, but they're muddling through.
- api 8y ago
  Rates have been near zero forever. They were still extremely low. The fed is trying to get back to something resembling normal.
  - burfog 8y ago
    There is no justification for choosing to have a poor economy be normal. This "normal" is a choice, and a bad one at that. The low interest rates of the past decade are proper.
- notfromhere 8y ago
  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 8y ago
    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.
- cromwellian 8y ago
  You don't do stimulus in a recovery. The Trump administration wants to keep stimulating, keeping rates low and enacting a massive tax cut while deficit spending to the tune of over $900 billion. Now, normally when there's a recession, revenue drops, automatic stabilizers kick in, and the deficit goes through the roof. But ours is already high now. Normally, in a recession, we cut rates, but rates are already historically low. Normally, in a recession we try to use fiscal policy (cutting taxes, increasing spending) to offset the drop in consumption, but we already enacted a massive tax cut. So when the recession comes in 2019-2020, what will we have left? We've kept no powder dry. The government put mid-term elections over fiscal health. They raced through a bunch of policies to make them look good to their voters in the last election, still lost the House, and now we are stuck with the predictable consequences. It's not like we don't know a recession was coming anyway. If you look at 200 years of NBER data, the average business cycle averages 6-9 years before another recession. Hence recessions in 81, 90, 2000, 2008. We were due for another one anyway and the government should have been planning for this.
- AnimalMuppet 8y ago
  They didn't crash it on purpose to make Trump look bad. They did the responsible thing, which was to raise rates slowly once the recovery was somewhat robust. That dampened the recovery to some degree, which (presuming the timing is right) is a good thing - an undampened recovery often turns into a bubble. What the Fed did, though, in dampening the recovery a bit, is not make Trump look as good as Trump wanted. Trump wanted the economy roaring to help in the midterms, and he didn't get it. Trump may feel like that's the Fed punishing him, but it's not.
hopfscotch 8y ago
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.
- api 8y ago
  Put the two together. I don't think it's the end of civilization but I'm not sure how our society will deal with another 2008. We could be in for serious turmoil.
- janekm 8y ago
  I'm not as sanguine as you. We are witnessing the breakdown of effective governing in Western democracies, in part triggered by active intervention by Russia, both in the UK in the case of Brexit and in the US with the Trump election. And in both cases the democratic system is now in complete disarray, with the U.K. government so far unable to stop devastating losses to their economy with politicians either grandstanding or walking off the stage. And in the US you have an individual who despises any form of fact-based consensus building in favour of deciding the literal fate of the world based on his (granted bigly substantial) gut. Literally one person decides to pull the US out of the Paris accord, starts a trade war at the worst possible economic time, pulls military support out of Syria over the consensus of military leadership, and shuts down the US government for good measure. And in both cases members of Congress and parliament are debilitated by infantile infighting and power grabbing from doing anything about it. Combine a minor slow-down of the world economy with that powder kegg and the world could absolutely look completely different from today in a few years time.
- candu 8y ago
  I'd definitely agree that it's overdramatic, but not that it's unthinkable / un-speculatable. After all, it's not like societal collapse is without precedent in human history. Our latest global financial crisis arguably helped usher in a global wave of xenophobic populists opposed to any kind of evidence-based decision making - which, unfortunately, makes it yet harder to identify and address the root causes of really complex economic, environmental, and socio-political problems. (I should add that I'm still optimistic here - just that we shouldn't offhand dismiss this possibility as totally incredible, and that instead the possibility should serve as a wakeup call.)
kqr 8y ago
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.
- orev 8y ago
  Make sure to keep an eye on the fees for mutual funds. They usually are not worth it and you’re probably better off with ETFs that cover the same sectors and have lower fees.
  - the_gastropod 8y ago
    The distinction isn't so much mutual funds vs ETFs, as active vs passively managed funds. There are actively managed ETFs with gigantic fees just like there are actively managed mutual funds with gigantic fees. The primary differences between ETF's and mutual funds are: - You can invest any amount of money into a mutual fund (above some initial minimum), where ETF's require you to purchase a whole number of shares. - ETFs can be traded like stocks. Intraday trading works just fine. All mutual fund trades get executed typically once or twice per day (before opening / after closing hours). For long term investors, this difference is pretty unimportant.
    - hunter2_ 8y ago
      Different transaction fees, too. On Schwab IRAs for example, there is a whitelist of mutual funds and ETFs with no fee to buy/sell (including their own funds, which have really good expense ratios for passively managed, like .02% for SWPPX) but ones not on that list are a typical few-dollars commission for ETFs but many-tens-of-dollars for mutual funds.
    - hartator 8y ago
      Tax treatment is different. You pay capital gains every year on mutual funds while you paid only on transactions wirh etf.
ciconia 8y ago
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 8y ago
  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 8y ago
    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 8y ago
      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.
mylons 8y ago
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.
- singularity2001 8y ago
  honey, you haven't witnessed deep recessions.
  - mikestew 8y ago
    One of the “words of wisdom” I filed away years ago was spoken by a guy who at the time was about my age, a middle-aged guy who had been investing for decades. In the early 2000s during during the dot bomb collapse, he said, “a lot of the problem is that younger people haven’t been through a true bear market.” As you said, you ain’t seen nuthin’ yet. But the lesson to be learned from us oldsters is, sit tight and buy cheap stocks for your 401K for a while. It’ll come back, it always does, and timing the market is a fool’s errand (DAMHIK). You’re not retiring tomorrow, and if like me it’s coming soon, absolute worst case is it gets put off for a few years. But losing a year’s worth of gains? Welcome to the stock market, it does that sometimes.
  - dang 8y ago
    Personal swipes aren't allowed here. Please review https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html and follow the rules.
- ceejayoz 8y ago
  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.
  - onlyrealcuzzo 8y ago
jondubois 8y ago
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 8y ago
  >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.
richardknop 8y ago
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 8y ago
  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 8y ago
    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 8y ago
      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/01CREDIT.html https://www.nytimes.com/2008/10/01/business/smallbusiness/01... 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.
nimbius 8y ago
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....
apo 8y ago
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.
- ethbro 8y ago
  Point. The difference, as the article notes, is that government response to bubbles has varied. And strong enough measures have certainly decreased the severity of downturns. At this point in time there aren't a lot of remaining options, were the world economy to seriously get into trouble. (One reason it was asinine for the US to cut taxes and deficit spend in an economic expansion)
- api 8y ago
  Maybe after several mega bubbles we are getting better at spotting them?
- segmondy 8y ago
  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.
jganetsk 8y ago
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

66 points by wolfgke 8y ago

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.

hopfscotch 8y ago
Christ let's talk about "who really did 9/11" next.
- JewsDidIt 8y ago
  See my username for the answer.
ergothus 8y ago
There's an argument to be made that if you cant raise rates much above the incredible low rate this far into a recovery, then your economy has bigger problems to deal with. Without denying your statements of the power the Fed has, I havent seen anything odd about the timing, frequency, nor quantity that the fed has raised rates lately. You didn't address the argument of the quote you made (that the rate needed to raise) nor did you supply evidence to support your implication that the fed was willing to tank the economy to hurt Trump.
- disgruntledphd2 8y ago
  Like, I don't really get why people are so worried. Wages are going up, employment is going up, and the price of assets are coming down. This is pretty good for most of the population. It's really only the small fraction (of which I am a member) that have equities that have really lost anything. Inflation is still reasonably low, so PPP is going up. I just don't get it. Mind you, a few years back I didn't really understand how unemployment was bad, wages were poor, asset prices were too damn high and everyone was talking about this "recovery". I probably just don't understand macroeconomics, I guess :)
  - charlesdm 8y ago
    Prices of assets coming down means margin debt gets called, and investment loans secured by, for example, shares as collateral, leading to defaults and ultimately to bankruptcy of companies with sizeable amounts of debt on its balance sheets. Now, the argument might be that it's their own fault, but that will likely leads to tens of thousands of jobs lost. And we're not talking tech jobs.
  - OGMayo46 8y ago
    > Wages are going up, employment is going up, and the price of assets are coming down Huh? Sources?
    - josefresco 8y ago
      Most likely, OP was referring to reports like this: https://www.bloomberg.com/news/articles/2018-02-02/u-s-added-200-000-jobs-in-january-wages-rise-most-since-2009 https://www.bloomberg.com/news/articles/2018-02-02/u-s-added... I'm not agreeing with the point, was just curious like you and searched.
    - phildawes 8y ago
      https://tradingeconomics.com/united-states/wages https://tradingeconomics.com/united-states/wages https://tradingeconomics.com/united-states/employment-rate https://tradingeconomics.com/united-states/employment-rate https://tradingeconomics.com/spx:ind https://tradingeconomics.com/spx:ind
zozbot123 8y ago
> Um yeah. The Fed hiked the rates and thus crashed the economy. Some are speculating that they crashed it on purpose Seriously? I mean, look at inflation expectations - they're not that low! Late 2018 does not look anything like late 2008 - you may think that the Fed should be a bit more dovish still, but they're muddling through.
api 8y ago
Rates have been near zero forever. They were still extremely low. The fed is trying to get back to something resembling normal.
- burfog 8y ago
  There is no justification for choosing to have a poor economy be normal. This "normal" is a choice, and a bad one at that. The low interest rates of the past decade are proper.
notfromhere 8y ago
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 8y ago
  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.
cromwellian 8y ago
You don't do stimulus in a recovery. The Trump administration wants to keep stimulating, keeping rates low and enacting a massive tax cut while deficit spending to the tune of over $900 billion. Now, normally when there's a recession, revenue drops, automatic stabilizers kick in, and the deficit goes through the roof. But ours is already high now. Normally, in a recession, we cut rates, but rates are already historically low. Normally, in a recession we try to use fiscal policy (cutting taxes, increasing spending) to offset the drop in consumption, but we already enacted a massive tax cut. So when the recession comes in 2019-2020, what will we have left? We've kept no powder dry. The government put mid-term elections over fiscal health. They raced through a bunch of policies to make them look good to their voters in the last election, still lost the House, and now we are stuck with the predictable consequences. It's not like we don't know a recession was coming anyway. If you look at 200 years of NBER data, the average business cycle averages 6-9 years before another recession. Hence recessions in 81, 90, 2000, 2008. We were due for another one anyway and the government should have been planning for this.
AnimalMuppet 8y ago
They didn't crash it on purpose to make Trump look bad. They did the responsible thing, which was to raise rates slowly once the recovery was somewhat robust. That dampened the recovery to some degree, which (presuming the timing is right) is a good thing - an undampened recovery often turns into a bubble. What the Fed did, though, in dampening the recovery a bit, is not make Trump look as good as Trump wanted. Trump wanted the economy roaring to help in the midterms, and he didn't get it. Trump may feel like that's the Fed punishing him, but it's not.

hopfscotch 8y ago

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.

api 8y ago
Put the two together. I don't think it's the end of civilization but I'm not sure how our society will deal with another 2008. We could be in for serious turmoil.
janekm 8y ago
I'm not as sanguine as you. We are witnessing the breakdown of effective governing in Western democracies, in part triggered by active intervention by Russia, both in the UK in the case of Brexit and in the US with the Trump election. And in both cases the democratic system is now in complete disarray, with the U.K. government so far unable to stop devastating losses to their economy with politicians either grandstanding or walking off the stage. And in the US you have an individual who despises any form of fact-based consensus building in favour of deciding the literal fate of the world based on his (granted bigly substantial) gut. Literally one person decides to pull the US out of the Paris accord, starts a trade war at the worst possible economic time, pulls military support out of Syria over the consensus of military leadership, and shuts down the US government for good measure. And in both cases members of Congress and parliament are debilitated by infantile infighting and power grabbing from doing anything about it. Combine a minor slow-down of the world economy with that powder kegg and the world could absolutely look completely different from today in a few years time.
candu 8y ago
I'd definitely agree that it's overdramatic, but not that it's unthinkable / un-speculatable. After all, it's not like societal collapse is without precedent in human history. Our latest global financial crisis arguably helped usher in a global wave of xenophobic populists opposed to any kind of evidence-based decision making - which, unfortunately, makes it yet harder to identify and address the root causes of really complex economic, environmental, and socio-political problems. (I should add that I'm still optimistic here - just that we shouldn't offhand dismiss this possibility as totally incredible, and that instead the possibility should serve as a wakeup call.)

kqr 8y ago

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.

orev 8y ago
Make sure to keep an eye on the fees for mutual funds. They usually are not worth it and you’re probably better off with ETFs that cover the same sectors and have lower fees.
- the_gastropod 8y ago
  The distinction isn't so much mutual funds vs ETFs, as active vs passively managed funds. There are actively managed ETFs with gigantic fees just like there are actively managed mutual funds with gigantic fees. The primary differences between ETF's and mutual funds are: - You can invest any amount of money into a mutual fund (above some initial minimum), where ETF's require you to purchase a whole number of shares. - ETFs can be traded like stocks. Intraday trading works just fine. All mutual fund trades get executed typically once or twice per day (before opening / after closing hours). For long term investors, this difference is pretty unimportant.
  - hunter2_ 8y ago
    Different transaction fees, too. On Schwab IRAs for example, there is a whitelist of mutual funds and ETFs with no fee to buy/sell (including their own funds, which have really good expense ratios for passively managed, like .02% for SWPPX) but ones not on that list are a typical few-dollars commission for ETFs but many-tens-of-dollars for mutual funds.
  - hartator 8y ago
    Tax treatment is different. You pay capital gains every year on mutual funds while you paid only on transactions wirh etf.

ciconia 8y ago

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 8y ago
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 8y ago
  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 8y ago
    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.

mylons 8y ago

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.

singularity2001 8y ago
honey, you haven't witnessed deep recessions.
- mikestew 8y ago
  One of the “words of wisdom” I filed away years ago was spoken by a guy who at the time was about my age, a middle-aged guy who had been investing for decades. In the early 2000s during during the dot bomb collapse, he said, “a lot of the problem is that younger people haven’t been through a true bear market.” As you said, you ain’t seen nuthin’ yet. But the lesson to be learned from us oldsters is, sit tight and buy cheap stocks for your 401K for a while. It’ll come back, it always does, and timing the market is a fool’s errand (DAMHIK). You’re not retiring tomorrow, and if like me it’s coming soon, absolute worst case is it gets put off for a few years. But losing a year’s worth of gains? Welcome to the stock market, it does that sometimes.
- dang 8y ago
  Personal swipes aren't allowed here. Please review https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html and follow the rules.
ceejayoz 8y ago
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.
- onlyrealcuzzo 8y ago

jondubois 8y ago

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 8y ago
>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.

richardknop 8y ago

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 8y ago
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 8y ago
  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 8y ago
    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/01CREDIT.html https://www.nytimes.com/2008/10/01/business/smallbusiness/01... 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.

nimbius 8y ago

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....

apo 8y ago

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.

ethbro 8y ago
Point. The difference, as the article notes, is that government response to bubbles has varied. And strong enough measures have certainly decreased the severity of downturns. At this point in time there aren't a lot of remaining options, were the world economy to seriously get into trouble. (One reason it was asinine for the US to cut taxes and deficit spend in an economic expansion)
api 8y ago
Maybe after several mega bubbles we are getting better at spotting them?
segmondy 8y ago
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.

jganetsk 8y ago

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