5 ms·

2008 was an accounting and leverage problem. Every product in 2008 was completely viable which is why the Federal Reserve bought everything. Only 7% of the bo

2008 was an accounting and leverage problem. Every product in 2008 was completely viable which is why the Federal Reserve bought everything. Only 7% of the borrowers defaulted by then, there wasnt mass irresponsibility on the people with mortgages as suggested, this alone blew up some institutions because they were leveraged nearly 50x and one month of missed mortgage payments would cause a massive drawdown on their portfolio. Without leverage, a portfolio where 93% is going to pay a lot in interest over 5-30 years is a good portfolio. So there is no reason to get uncomfortable or anxious by seeing the words “subprime” “CDOs” or more, as it comes down to whether the accounting is done properly and the leverage is low. Which, I believe is being done. The "big crash" always comes from a different and unexpected (or less expected) angle, where some completely different sector has too much leverage and flimsy accounting.

tootie 4y ago
And as much as Dodd-Frank was watered down, the orderly liquidation provisions survived and that means regulators have full authority to stop a situation like Bear Sterns or Lehman collapsing and taking down a sector of the economy with them.
jjoonathan 4y ago
Yes, a disappointing fraction of armchair generals are fighting the last war. What are the big speculative candidates for next crash? Contagion from the Chinese real estate market?
- antisthenes 4y ago
  Generally speaking there aren't fears of a hard crash. The main concern is stagflation due to rising energy prices. It seems like the market is now finally starting to price in the externalities of abating climate change, which results in higher energy prices across the board (which in turn raises prices of everything else, with inflation due to QE piled on top of it). This means that output roughly stays the same, but there are more dollars competing for it.
- r00fus 4y ago
  The last war is continuing to be fought by big finance to remove any of the (even partial/basic) regulations and remediations that were put in place.
- dv_dt 4y ago
  imho, labor shortages and productivity drops due to a Covid policy causing mass long Covid cases.
- sveme 4y ago
  As suggested in that famous substack post [1], a venture capital crisis? I guess everyone on this site is fucked then. [1]https://pivotal.substack.com/p/minsky-moments-in-venture-capital?s=r https://pivotal.substack.com/p/minsky-moments-in-venture-cap...
  - SkyMarshal 4y ago
    Good article but weird chart, “Bond Markets Over Time”. Both axes are reversed to make it look like something is increasing (y-axis) over the size of the opportunity (x-axis), when instead he’s making the point that Alpha (y) decreases as size of opportunity (x) increases.
- brazzy 4y ago
  Cryptocurrencies. In the runup to the 2008 crisis, a commonly heard mantra was "yeah, subprime lending is fucked up, but it's a small fraction of the economy, it can't cause that much damage". Turned out that it could, via the CDO shenanigans. I would not at all be surprised if someone has already cooked up a similar leveraged dependency from the "real economy" to crypto markets.
  - komaromy 4y ago
    I'd be more open to this if we hadn't already seen wild swings in the crypto market (BTC is down ~50% from its 12-month peak) without much in the way of broader implications.
  - SkyMarshal 4y ago
    It depends entirely on how much cryptocurrencies are being used as collateral for leverage, which was the main factor that amplified the GFC. MBS’s and MBS-based CDO’s were used as collateral for massive amounts of leverage (up to 30:1 for the commercial banks, and 100:1 for Fannie & Freddie). Since the housing market had never crashed, that collateral was considered reliable enough for significant amounts of leverage. Turns out it wasn’t. But cryptos have never been considered remotely that reliable by the broader financial system. Thus there is probably little to no leverage using cryptos as collateral. Crypto is currently crashing, but it will only take down itself and not 30 to 100 times as much leverage with it.
- vmception 4y ago
  Yeah the contagion is important and it also needs to be several trillion dollars in value. Given that the Federal Reserve wants unemployment numbers to rise, they're specifically trying to make share capital worth less, and borrowing capabilities cost more, making revenue-poor corporations stop being so optimistic. so I would just expect lower valuations with much lower revenue multiples (or price to equity ratios), for that reason alone. Slowed growth in China is always a threat because thats a key revenue driver for many large western companies. Then sure, there is the leverage and accountability problem with Chinese real estate, but I don't get the impression that contagion is that big because nobody thinks that is a safe bet and also avoid too much exposure to the domestic chinese lenders involved. The rumors behind Tether just aren't big enough to matter for this, could only be a slight sting to the commercial paper market and a moderate "finally" for the crypto market as a tether implosion would probably increase confidence there after steep selloffs. Oil/gas volatility is probably going to have some casualties.
  - mywittyname 4y ago
    > Oil/gas volatility is probably going to have some casualties. The Oil Glut of the 2010s killed off all but the strongest players in this sector. So I doubt it will be a pillar that collapses. If anything, they will probably do very well in the near-term.
    - vmception 4y ago
      the producers won't have the issue, I was thinking just speculators that have over/unexpected exposure to the wrong direction of the oil/gas derivatives market
  - jjoonathan 4y ago
    Yeah, the commodities markets are opaque to me and between food and energy it sounds like they have a major test on the way this winter. Re: Chinese real estate, the contagion mechanism I've heard the most about isn't West->East investment, it's East->West investment that gets pulled to survive a bear market. I have no idea if it's big enough to matter.

tootie 4y ago

And as much as Dodd-Frank was watered down, the orderly liquidation provisions survived and that means regulators have full authority to stop a situation like Bear Sterns or Lehman collapsing and taking down a sector of the economy with them.

jjoonathan 4y ago

Yes, a disappointing fraction of armchair generals are fighting the last war. What are the big speculative candidates for next crash? Contagion from the Chinese real estate market?

antisthenes 4y ago
Generally speaking there aren't fears of a hard crash. The main concern is stagflation due to rising energy prices. It seems like the market is now finally starting to price in the externalities of abating climate change, which results in higher energy prices across the board (which in turn raises prices of everything else, with inflation due to QE piled on top of it). This means that output roughly stays the same, but there are more dollars competing for it.
r00fus 4y ago
The last war is continuing to be fought by big finance to remove any of the (even partial/basic) regulations and remediations that were put in place.
dv_dt 4y ago
imho, labor shortages and productivity drops due to a Covid policy causing mass long Covid cases.
sveme 4y ago
As suggested in that famous substack post [1], a venture capital crisis? I guess everyone on this site is fucked then. [1]https://pivotal.substack.com/p/minsky-moments-in-venture-capital?s=r https://pivotal.substack.com/p/minsky-moments-in-venture-cap...
- SkyMarshal 4y ago
  Good article but weird chart, “Bond Markets Over Time”. Both axes are reversed to make it look like something is increasing (y-axis) over the size of the opportunity (x-axis), when instead he’s making the point that Alpha (y) decreases as size of opportunity (x) increases.
brazzy 4y ago
Cryptocurrencies. In the runup to the 2008 crisis, a commonly heard mantra was "yeah, subprime lending is fucked up, but it's a small fraction of the economy, it can't cause that much damage". Turned out that it could, via the CDO shenanigans. I would not at all be surprised if someone has already cooked up a similar leveraged dependency from the "real economy" to crypto markets.
- komaromy 4y ago
  I'd be more open to this if we hadn't already seen wild swings in the crypto market (BTC is down ~50% from its 12-month peak) without much in the way of broader implications.
- SkyMarshal 4y ago
  It depends entirely on how much cryptocurrencies are being used as collateral for leverage, which was the main factor that amplified the GFC. MBS’s and MBS-based CDO’s were used as collateral for massive amounts of leverage (up to 30:1 for the commercial banks, and 100:1 for Fannie & Freddie). Since the housing market had never crashed, that collateral was considered reliable enough for significant amounts of leverage. Turns out it wasn’t. But cryptos have never been considered remotely that reliable by the broader financial system. Thus there is probably little to no leverage using cryptos as collateral. Crypto is currently crashing, but it will only take down itself and not 30 to 100 times as much leverage with it.
vmception 4y ago
Yeah the contagion is important and it also needs to be several trillion dollars in value. Given that the Federal Reserve wants unemployment numbers to rise, they're specifically trying to make share capital worth less, and borrowing capabilities cost more, making revenue-poor corporations stop being so optimistic. so I would just expect lower valuations with much lower revenue multiples (or price to equity ratios), for that reason alone. Slowed growth in China is always a threat because thats a key revenue driver for many large western companies. Then sure, there is the leverage and accountability problem with Chinese real estate, but I don't get the impression that contagion is that big because nobody thinks that is a safe bet and also avoid too much exposure to the domestic chinese lenders involved. The rumors behind Tether just aren't big enough to matter for this, could only be a slight sting to the commercial paper market and a moderate "finally" for the crypto market as a tether implosion would probably increase confidence there after steep selloffs. Oil/gas volatility is probably going to have some casualties.
- mywittyname 4y ago
  > Oil/gas volatility is probably going to have some casualties. The Oil Glut of the 2010s killed off all but the strongest players in this sector. So I doubt it will be a pillar that collapses. If anything, they will probably do very well in the near-term.
  - vmception 4y ago
    the producers won't have the issue, I was thinking just speculators that have over/unexpected exposure to the wrong direction of the oil/gas derivatives market
- jjoonathan 4y ago
  Yeah, the commodities markets are opaque to me and between food and energy it sounds like they have a major test on the way this winter. Re: Chinese real estate, the contagion mechanism I've heard the most about isn't West->East investment, it's East->West investment that gets pulled to survive a bear market. I have no idea if it's big enough to matter.