Anxiety Strikes $8 Trillion Mortgage-Debt Market After SVB Collapse (wsj.com) 162
Strains in the banking sector are roiling a roughly $8 trillion bond market considered almost as safe as U.S. government bonds. From a report: So-called agency mortgage bonds are widely held by banks, insurers and bond funds because they are backed by the mortgage loans from government-owned lenders Fannie Mae and Freddie Mac. The bonds are far less likely to default than most debt and are easy to buy and sell quickly, a crucial reason they were Silicon Valley Bank's biggest investment before it foundered.ÂBut agency mortgage-backed securities, like all long-term bonds, are vulnerable to rising interest rates, which pushed their prices down last year and saddled banks such as SVB with unrealized losses. Now that the Federal Deposit Insurance Corp. has taken over SVB, investors expect the bonds to be sold off in coming months, adding supply to the weakened market and pushing prices lower.
Last week, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October, when climbing interest rates turned global markets topsy-turvy. The move reflected fears that other regional banks might have to sell their holdings, bond-fund managers said. [...] When benchmark interest rates rise, bonds that were sold at times of lower rates lose value. Prices of such "low coupon" agency MBS started dropping about a year ago, when the Federal Reserve raised rates to fight inflation and indicated it might start selling MBS it owned. Some of the bonds lost 15% or more in a matter of months, trading as low as 80 cents on the dollar, according to data from FactSet.
Last week, the risk premium on a widely followed Bloomberg index of agency MBS hit its highest level since October, when climbing interest rates turned global markets topsy-turvy. The move reflected fears that other regional banks might have to sell their holdings, bond-fund managers said. [...] When benchmark interest rates rise, bonds that were sold at times of lower rates lose value. Prices of such "low coupon" agency MBS started dropping about a year ago, when the Federal Reserve raised rates to fight inflation and indicated it might start selling MBS it owned. Some of the bonds lost 15% or more in a matter of months, trading as low as 80 cents on the dollar, according to data from FactSet.
Cool (Score:4, Insightful)
This means nothing to me.
Re:Cool (Score:5, Insightful)
Re:Cool (Score:5, Interesting)
No, it doesn't. It only impacts people who need to cash out some bonds for their expense needs now. And even those should have divested when the Fed started warning about rate hikes 4 years ago. If your financial advisor has not been providing guidance to you over the last 4-5 years that people who need cash from their bonds in 4-8 years should reduce their exposure to rate increases... well congratulations, you found a Finance Advisor who can't read.
Those who have cash needs 5,10,15,25 years down the line... nothing has changed for you. Especially the 15-20 year people, go build up your Bond portfolio over the next 3 years.
Bond futures are heavily predictable because they are telegraphed so much. This transparency is the reason why they are considered the safest of securities.
Re:Cool (Score:4, Interesting)
Re: (Score:2)
No, it doesn't. It only impacts people who need to cash out some bonds for their expense needs now.
Not if your retirement fund goes under as a result.
Bond futures are heavily predictable because they are telegraphed so much. This transparency is the reason why they are considered the safest of securities.
You really haven't been paying attention the last 48 hours have you. The entire bond market is shaken up thanks to the Credit Suisse purchase upending decades of market norms about the security of bonds by writing $17 billion of bonds to zero while a bank was still liquid and paying out shareholders.
Yes there are some institutional investors with people's retirements which were hit hard by this and there's talks of taking the Swiss banking regulator to cour
Re: (Score:2)
My wealth manager gets 1.5% of my portfolio per year. Nothing else. No other product sales, no charges per transaction, no fees to answer questions... 1.5%. That works in my favour because they're incentivized to grown my portfolio, and that's the only thing they benefit from.
Re: Cool (Score:3)
Oh you sweet summer child. You realize 1.5%. a year works out to them confiscating around 20% or your retirement portfolio (assuming average market returns)? You could do just as well in the market paying .01% in a Vanguard total market ETF.
And AUM âoewealth advisorsâ have very little incentive to spend much time growing your money. Think about it: even if they get double normal market returns, itâ(TM)s still going to take roughly 5 years to double your money. Or, they could just recruit MORE
Re: (Score:2)
No, I didn't enter into it blindly. I know how I was managing my portfolio before, and I know how it's doing now. It's worth it.
You're basing that number on the idea that I could match their performance. I cannot.
Re: Cool (Score:3)
Iâ(TM)m basing on the idea that statistically you will do much better yourself. Index and forget. Nobody consistently beats the market- certainly not your âoewealth manager.â
Re: (Score:3)
Re: (Score:2)
It will mean something to you if the FED keeps cranking up rates, causing more of these bonds to be unsellable, thereby causing more banks that are holding on to these things to be unable raise their liquidity.
You know, exactly how SVB got beshitted.
Yet more awesome unintended side effects of purposefully cranking up interest rates beyond the known problem of rising interest rates: rising unemployment.
Re: Cool (Score:2)
Banks only need to worry about liquidity if depositors start pulling out. It's not no-risk, but if a bank has competent risk management, it should be fine.
Paper losses aren't real until you make them so.
Re: (Score:2)
Disney hasn't learned shit. Those woke movie you are so up in arms about was just pure marketing of a terrible movie. They were trying to sell movie tickets to idiots. Seems like it worked. Disney is the most conservative media company there is. Have you seen there movie collection?
You are a complete tool sucking what ever comes from DeSantis' rotting dick.
Re: (Score:2)
Re: (Score:2)
I am sure some rich person somewhere is throwing a fit over this.
This means nothing to me.
Oh, Vienna!
Re: (Score:2)
The bonds aren't worthless, I am willing to pay $100, for all these bonds right now and wait till they mature in 10 years and take the 8 trillion then. Sure inflation will eat away at them a bit but I'll take that risk. See they are worth at least $100.
Hope you saved up! (Score:2)
The national real estate sale is almost here!
Not really (Score:3, Interesting)
We're about to have "interesting times". Rents are higher than most mortgages, but Jerome Powell is engineering a mass recession with minimum 3.5 million layoffs. He was asked what his plan was to stop the spiral of layoffs once it started. He didn't have one.
In 200
Re: (Score:2)
rents will come down in those places where unemployment actually ticks up. There is no point in charging so much rent your tenants are frequently delinquent and short paying because they can't earn enough to make the rent or having empty units because people have fled the locality for greener pastures and the remainers rent from your competitors because their rates are better.
Its better to lower your rates than have a bunch of bad debt you can't hope to collect or total loss of revenue on empty stock.
Some l
Re: (Score:3)
There is no point in charging so much rent your tenants are frequently delinquent and short paying because they can't earn enough to make the rent or having empty units because people have fled the locality...
Sure. Large enough companies use this to force a "loss" on certain properties and reduce their tax levels. [propublica.org]
Real life Stephen Ross, who founded Related Companies, a global firm best known for developing the Time Warner Center and Hudson Yards in Manhattan, was a massive winner between 2008 and 2017
What if it doesn't? (Score:5, Interesting)
If I have 3 Units I can rent for $2000/mo and I leave one empty, but to fill that Unit I have to drop the price to $1000/mo I'm losing money ($4k vs $3k). More, because it costs money to have a renter (albeit not all that much) and you save that money.
Meanwhile there's a software program that lets renters collude. [arstechnica.com]. So they know exactly how many units they can leave empty.
Big Data + zero anti-trust enforcement + right wing state gov'ts fighting rent control means none of this can be fixed by market forces or traditional gov't action. it's going to be a *mess*.
Re: What if it doesn't? (Score:3)
Large real estate investors who control whole markets (Arizona has a few places like this, for example), would rather see a property sit fallow than to lower prices, which leads to downward pressure on all their holdings.
It doesn't work long-term, but on a shorter horizon, this can keep the price floor from collapsing.
Re: (Score:2)
Re: (Score:2)
Highly doubt that's going to happen. He's only on the mass layoff bandwagon because he stupidly thinks that's what's required to solve inflation. In reality, he's wrong. The vast majority of inflation has been in goods and is still falling. The ne
Re: (Score:2)
On condos, mortgage + HOA fees can easily exceed rent prices for a similar unit.
Re: Not really (Score:2)
Not necessarily true. In hot markets the expected future value can lead to an ownership premium. While this can happen because of regulation, it can also occur naturally due to limited land.
Re:Hope you saved up! (Score:5, Insightful)
Everything is insured! $8 trillion in bad loans? The Fed take them off your hands for $16 trillion: average house will be over $1 million by the end of the year
I bet the opposite happens. Real estate prices are about to collapse catastrophically. This was always destined to happen as baby boomers age. They own the vast majority of homes today in all parts of the nation and are reaching their life expectancy Remember, over 50% of baby boomers are still alive, but fewer than 25% will likely still be alive by 2033. We are going to see millions of baby boomers kick the bucket each year across the nation, and they will almost all have homes that will flood the market and crash prices. This same thing is what is driving the stock market to collapse as baby boomers have been retiring in mass numbers since 2020 and beginning to cash out their investments all at the same time.
Re: (Score:2)
Re:Hope you saved up! (Score:5, Insightful)
Not so much of a population decline but the rest of the population just does not have the wealth to give the going rate. As the average affordability of the population goes down, the price has to come down. A lot of wealth from the current and next generation has already been diverted to the BBs via infrastructure maintenance costs, housing prices, education costs, healthcare costs, loss of pensions, lower general tax rate, and social security age hikes.
As a current home owner, I am waiting for the prices to go down because this is a very unhealthy market. Obviously, I do not view my house as a "investment" nor did I buy the biggest sqft I could afford... but my house is much bigger than average and a little more than average cost in the US.
We are past the point of it being a choice... housing has to come down. Either due to severe dollar inflation or bubble correction. OR we figure out how to kick it down to the next generation again. But rest assured, most of the next generation will not take on the burden, I do not expect my kids to.
Re:Hope you saved up! (Score:5, Insightful)
Your child-like view of the real estate market is, in a word, fascinating.
Baby boomers have been dying "by the millions" for several years, and it has not resulted in excess housing inventory which would drive down valuations. You seem to ignore the millions of young home buyers starting families, moving frem rentals to home ownership, etc.
The thing that will drive down home prices is the lack of "cheap money" as mortgage rates increase as the Fed tries to reign in inflation.
Re: (Score:3, Interesting)
You seem to ignore the millions of young home buyers starting families, moving frem rentals to home ownership, etc.
That's because they don't exist. Young home buyers are kept out of the market [washingtonpost.com] as the sold homes are instead being snapped up by largely foreign-own conglomerates and converted into permanent rental properties. [nytimes.com]
Re:Hope you saved up! (Score:5, Insightful)
I realize that you're not the GP commenter, but since you've jumped in to attack the rebuttal, I'll remind you that you've just conceded that residential real estate prices are not about to collapse catastrophically because the hypothetical glut of supply from deceased sellers does not exist.
Meanwhile they're getting them from somewhere [corelogic.com] and your own NYT link says "Nationwide, large investment companies remain a small fraction of America's home buyers."
Re: (Score:3)
Lots of states are playing with laws that prevent ownership of properties within the state from other countries, and in some cases from other states. Because a lot of the available property today is being snapped up by foreign investors, then rented out to people that can't afford to buy. Which drives the market into feeding frenzies when something does come on the market, and has seen us getting random calls with somebody offering about twice what our house is currently worth to buy it sight unseen. Which
Re: (Score:3)
Re: (Score:2)
Our population is stagnant (Score:3)
The reason it's not is that we have $50 trillion dollars to the 1% in the last 40 years, and they're using that money to buy, well, everything and rent it back to us.
And we're letting them do it. Because we're distracted from economics by nonsense like "woke banks" and drag queen story hour.
Re: (Score:2)
Re: (Score:2, Interesting)
Re: (Score:2)
Re: (Score:2)
Brokerages will happily loan the money for whatever purpose using marginable securities as a collateral. They will also happily liquidate the portfolio during margin calls.
Re: (Score:2)
Because if they don't, the economy has a far greater chance of collapse and we're all fucked?
The Fed is not a for-profit bank.
Re: (Score:2)
The Fed shouldn't do this... but who knows what fine line the Fed will walk. Its been weird over the last 20 years. But if they do it, they will do so knowing that they are setting up something many times bigger than the 2006 housing bubble burst. One that their immediate decendents will not be able to handle.
Re: (Score:2)
TL;DR: Why would you think that real estate prices would continue to rise while demand falls?
Expanding: with interest rates going up, the amount of buyers that can afford $1M+ homes greatly contracts. Less demand means that real estate doesn't sell without the asking price coming down to where there are more people in the market that can afford it. Moreover, bank underwriters aren't a big fan of writing loans that are not properly secured by the appraised value of the home, and appraisers aren't just goin
Re: (Score:2)
There is no $8 trillion in bad loans. That is like saying that a drop in a new car price imperils the operation of all the cars on the road today.
The MBS market conditions is all about the buying and selling existing good mortgage notes. It has nothing directly to do mortgages themselves, except insofar as the amount of money chasing these notes is indirectly related to what mortgage rate is available for a new loan tomorrow.
Re:Hope you saved up! (Score:4, Insightful)
Re: (Score:3)
Except, as shown in various news reports over the past several years there's ways around that, the big one being taking out a loan out while using an equivalent asset as collateral and then just not paying the loan back. Because it's a loan it's not "income" and because you defaulted on the loan and lost the asset, you get to write off the potential income from that asset as a "loss" which you can use against any "income" you have to generate that year for whatever reason thereby reducing, avoiding, or eve
Re: (Score:2)
You don't even need to default in some cases depending on your tax laws. I did precisely this with one of my houses. Took out a loan for the value of the house putting the house up as collateral. Opened an interest offset account and took all the cash I have and put it in that. Bank interest being paid on the loan $0. Taxes paid on the investment house value - loan value = $0 Taxes paid on cash sitting in an account: almost nothing because many countries tax investments but not cash.
Re: (Score:2)
For renters, rent should be pre-tax, not post-tax.
Let's create an income tax exemption or credit for renters.
Re: (Score:2)
For renters, rent should be pre-tax, not post-tax.
Let's create an income tax exemption or credit for renters.
Giving everybody an extra $100 to pay the rent. Landlords will just increase the rent $100.
Re: (Score:2)
Or the hoarders raise rents to cover the taxes, and lower-income renters just get shafted more.
Tell us you don't know anything about business, without telling us you don't know anything about business. This makes as much sense as the people that want a $16/hour minimum wage, and then cry when jobs are eliminated or prices go up. Or both.
Re: (Score:2)
And then nobody rents from them and they either sell it off or lose their shirts.
The buyers will be people who would fall under the higher tax bracket.
Also, it's fair enough if 33% of a products price (the labor) goes up 50% and the seller doubles the price claiming higher wages as the reason. Doing the math, it should raise the price 16.5%. Any more is gouging.
Re: (Score:2)
Real estate is a very bad investment right now because the national population is flattening out and will start declining in the 2030s.
Buying real estate in America today as a business investment is like buying real estate in Japan in 1992. Have fun!
Re: (Score:2)
Large real-estate holdings should be heavily taxed.
We do not currently have a "wealth tax", we don't tax people on their net worth, we tax income. Do you really think homeowners should pay taxes on the equity in their home? On the value of thier unsold stock holdings?
Re: (Score:2)
We do not currently have a "wealth tax", we don't tax people on their net worth, we tax income.
Yes, we do have wealth taxes today, just not at the federal level. Property taxes are very common in most states at the state or local level. Usually it is just for your home, but about half of all states also have an automobile property tax. A federal property tax would work in the same way as local property taxes, if we ever enacted one. Then the question would be what kinds of property are taxed, and how much property value might be exempt.
Do you really think homeowners should pay taxes on the equity in their home? On the value of thier unsold stock holdings?
I think there should be a federal property tax on the value of yo
Re: (Score:2)
Taxes on wealth alone are terrible[1]. Taxes on income alone are also terrible. What I would do is tax income but with the tax rate based on income plus wealth[2], not on income.
[1] Getting "taxed out of your home" because you have no/low income is not a society in which I'd want to live. And the rules you'd have to put in place to make exceptions for that give rise to abuse. And that's just one obvious issue with a wealth tax.
[2] The rules here would need to a) avoid having an unrealized loss count as ne
Re: (Score:2)
Yeah, because property owners are just going to eat higher taxes and absolutely won't pass them along in the form of higher rents.
Congratulations, your "solution" just made the problem worse.
Re: (Score:2)
if they could get away with charging more why wouldn't they already be doing that?
Because other property owners would undercut their pricing. But if other property owners are also paying the same property taxes, they would all be in the same bind and equally unable to undercut competition any more than they already are today.
Wouldn't be an issue if we didn't inflate bubbles (Score:2, Insightful)
What we really need is a government willing to stand up to the Boomers and older Gen Xers and just loudly say "your house is not an investment asset." Government policy should actively restrain housing prices to reasonable levels above their cost to build, maintain and put to productive use (ex gardening or farming). Housing should be a boring market. When it's a boring market, loans on it have very stable collateral value which makes them a natural safe harbor. People are getting antsy here because they kn
Re:Wouldn't be an issue if we didn't inflate bubbl (Score:5, Insightful)
A house is most people's largest asset. Boomers and everyone else have depended on the rise in value, not to mention the possibility of rental income from said asset. Are you proposing price controls, or outlawing residential rental? Curious as to what you think the alternatives are?
Re: (Score:2)
Re: (Score:3)
No you don't. You need policies to allow housing to be built, policies that allow people to make money (realestate development is not a low risk investment so people expect high return), places to build them, infrastructure to support them, and above all people to do the building.
There are many countries in the world with very friendly policies to allow housing to be built, but can't be done because of a shortage of workers. I live in a country now which is actively trying to build as many houses as possibl
Re: (Score:2)
Re: (Score:2)
There's the problem. When unproductive assets become investments, never mind your main investment, it makes everyone poorer. It's easy enough to sort out, just keep interest rates at some reasonable value, require reasonable qualifying terms to get a mortgage, and pass a law requiring everyone to point and laugh at any dumbass who says things like "a home is a great investment!"
Most people's second largest asset is a car. Can you imagine if we sudd
Re: (Score:2)
A house is most people's largest asset. Boomers and everyone else have depended on the rise in value, not to mention the possibility of rental income from said asset.
Also: Boomers and everyone else have been forced to use it as anasset, because it's the only asset that has some protection against taxation-by-government-driven-inflation.
First, inflation directly taxes all assets in a form of either money or a debt or contracted payment denominated in dollars: Printing extra currency dilutes the value of th
Re:Wouldn't be an issue if we didn't inflate bubbl (Score:5, Interesting)
What we really need is a government willing to stand up to the Boomers and older Gen Xers and just loudly say "your house is not an investment asset."
Speaking as either the youngest of possible X'ers or oldest of Millennials depending on who you ask, I can't agree with you on that, for two reasons. First we have looming retirement crisis already, the vast majority of Boomers and X's have no hope of maintaining the life style to which they are accustom if real-estate investments (be it their own homes, or REITs etc) prove bad. That is a recipe for big time social unrest. Alternatively it will mean younger generations pour their productivity out on their elderly relations and create economic inefficiencies. Alice stays in Kansas to take care of mom rather than going for that research job in Ohio because mom has literally no other options..
Second, government did literally everything anyone in government could imagine to manipulate the housing market and encourage people to over buy and over invest. Reversing course now would very much be an unfair 'rug pull'.
Government policy should actively restrain housing prices to reasonable levels above their cost to build, maintain and put to productive use (ex gardening or farming).
Heck no, government tampering with the housing market got us into this mess. More tampering isnt the answer. We need to GRADUALLY take the housing supports away. By gradually it probably needs to be done over a span of 50+ years with a published plan for the phase outs, you need to discourage speculators for thinking they could get rich quick or that they are going to build generational wealth by buying and holding acrages near some ex-urb; but also not trigger a rush for the exits.
Housing should be a boring market.
Yes.
Re: (Score:2)
Second, government did literally everything anyone in government could imagine to manipulate the housing market and encourage people to over buy and over invest. Reversing course now would very much be an unfair 'rug pull'.
Housing prices have jumped nearly 150% since the year 2000. That is an unsustainable and harmful situation. Ceasing policies that help create an unsustainable and harmful situation is not a rug pull.
With interest rates realigning closer to historical norms than the recent past, the rug is pulling itself.
Re: (Score:2)
the vast majority of Boomers and X's have no hope of maintaining the life style to which they are accustom if real-estate investments (be it their own homes, or REITs etc) prove bad. That is a recipe for big time social unrest.
Poor old people aren't normally the ones causing social unrest.
It's either young poor people or old rich people.
Re: (Score:2)
Hmm, I've been to a country where the taxes on property profits (a combination of local and national taxes) mean that property is not a speculative asset in the same sense as in the UK or USA. This means there is little incentive for people to spend money on their houses unless it directly impacts their immediate amenity. So there is little improvement in the housing stock. For example, lots of houses still have old wooden windows and doors because there's no value in replacing them.
This may not be as bad
Re: (Score:2)
"Government policy should actively restrain housing prices"
So, I shouldn't be able to sell my property for the amount the buyer and I believe to be fair?
Re: Wouldn't be an issue if we didn't inflate bubb (Score:2)
Not at all. But your buyer should be forced to pay 15% interest on the mortgage.
Re: (Score:2)
The problem is, you don't do that now. You sell your property for the price the bank thinks the buyer can just manage to pay over the next thirty or forty years.
Re: (Score:2)
The government created this shaky and brittle economic situation, and your solution is...to give government MORE control?
Yes, because us little folks down here at the bottom have absolutely zero power to enact these kind of changes on our own.
Prior to Regan and Trudeau Sr., yes nearly everything wrong today can be traced back to the "Reganomics" changes implemented both in the US and Canada back in the '70s, we used to have sane housing regulations which prevented the type of environment we're seeing. The problem is the damage done by corrupt politicians who found the legal loopholes deliberately created so the wealthy could
Re: (Score:2)
Wasn't it Reagan and Mulroney in the early '80's who did the Reaganomics?
Re: (Score:2)
Indeed, grand parent post doesn't realize that property/long term home owners provide a source of stability to an area and create the positive economic impact that lifts all boats. You won't get that from a roving band of mad max type nomads moving from area to area like locusts. So sure make home ownership even
Re: (Score:2)
Home as investment makes home ownership attractive, but it's impossible to make it a stable.
Discretionary income and home prices need to track for stability.
Re: (Score:2)
"Home Ownership" hasn't been a thing since the mid/late 1980s! Since then its been an "retirement vehicle" that has replaced Pensions. Unfortunately, it was mostly available for the Pensioners and after pensions went away, housing as a retirement investment mostly did too. Now its a security pretty much on par with a ponzi scheme... just trying to find the next sucker so its not you. It is heavily woven into the global economy completely reliant on the confidence in the US workforce. Its just a matter
Re: (Score:3)
The reduction of value of labour relative to capital caused the instability.
The consumer class compensated by having multiple jobs per family, one that mechanism ran out the government compensated by allowing them to take on ever more debt.
The current level of production and consumption is not necessary to the owner class, the transition to more appropriate consumption and housing standard levels for the peons is a bit painful though.
Re: Wouldn't be an issue if we didn't inflate bubb (Score:2)
You don't need more government control. Just keep raising interest rates and it will sort itself out.
Considered "safe"? (Score:2)
Yeah, they've been rock solid for all of, what? 15 years now since the last time they collapsed in flames. Woo-hoo! Go, mortgages!
Re: (Score:2)
gee, ya think? (Score:3)
Let's see: we have a massive, global S&L banking crisis triggered when rating agencies designated by US law failed to do their fundamental job and accurately rate bundles of junk bonds as shit.
Following that collapse of a trust-based system, nobody was punished, nobody ended up in jail, and those agencies remain the designated official bond-rating agencies to this day. In fact, one of the scot-free culprits of the previous issue sits on the board of the SVB.
https://www.politico.com/news/... [politico.com]
The flavor of this particular issue is slightly skew to the specifics of the previous one, but the lessons that we failed to learn the first time 100% still apply here.
Are we flabbergasted that the system doesn't seem to have worked....again?
I'd say we should have been a shit-ton more anxious than we have been to date.
The role of the Fed (Score:4, Insightful)
There are other tools to fight inflation but they are politically unpopular (such as raising taxes, especially on the rich: https://www.forbes.com/sites/q... [forbes.com]). These alternate strategies should be included as a broader inflation-fighting strategy, rather than just raising the interest rate over and over again (because that creates other problems, like this bond and banking issue).
The Fed could easily reduce the bond problem for banks by lowering the federal interest rate but there is fear that will further increase inflation.
The biggest problem is the stupid, greedy banks who should know that what goes down must come up and are happy to rely on the government to bail them out when their idiotic, risky strategies go down in flames.
Re: (Score:2)
Easiest way to kill inflation is for people to stop buying things. Demand plummets, companies need to get rid of goods by lowering prices.
But then, you did say politically unpopular, so obviously this will never happen.
Re: (Score:2)
Production matches demand on a pretty short time scale.
Demand plummets, jobs plummet. Societal collapse isn't really popular period.
Re: (Score:2)
But it definitely takes care of the inflation issue, doesn't it?
Re: (Score:2)
Why sell? (Score:5, Interesting)
As I understood the situation, SVB had assets that more-or-less matched its deposits. The problem came when SVB had to start selling its assets, mostly bonds, at a loss, to come up with the cash to give depositors making withdrawals. The reason the bonds were sold at a loss had to do with the low interest rate (yield) those bonds had built into them compared to the rising interest rates on new debt. (Rising yields = falling prices.)
But it's not like the bonds themselves failed. Had they been held to maturity, SVB would have continued to get (relatively low) interest payments and eventually the entire principle back. SVB couldn't hold those bonds indefinitely - they needed cash. But the FDIC doesn't need to sell those bonds to raise cash. The FDIC is swimming in cash from all other depositors' insurance premiums and, failing at that, the Fed can get them the money.
So can someone explain why the FDIC needs to sell the bonds it has received from SVB? It is just "well, the bank failed, so let's liquidate"?
Re:Why sell? (Score:5, Insightful)
So can someone explain why the FDIC needs to sell the bonds it has received from SVB? It is just "well, the bank failed, so let's liquidate"?
Its an insurance organization. Really insurance (lets leave healthcare, non-term life out of this) works pretty much like banking. You have a bunch of people paying in and a few people making huge withdrawals when some calamity occurs. You need a certain amount of cash on hand to cover those payouts the rest you invest in things like bonds to generate revenue on..
Actuarial science is basically projecting the costs. The FDIC sees a lot more banks out there they see how much cash they have to turn loose of to make the insured depositors whole and they look at the likelihood of more forward bank failures. The obviously believe that they are likely to have make more payments than they safely have enough case to cover in the span of time between those events are expected to occur and premium revenue will fill in the gap. So they have liquidate assets.
In short there is at least a pessimistic vision of the future at FDIC more bank failures are on the way and soon and they have to be prepared if that comes to pass.
Re: (Score:3)
Re: (Score:2)
The reason the bonds were sold at a loss had to do with the low interest rate (yield) those bonds had built into them compared to the rising interest rates on new debt. (Rising yields = falling prices.)
In this case, the bond prices fell to cover the cost of inflation (ie, if you hold the bonds to maturity, they lose value due to inflation).
Re: (Score:3)
the bonds do not lose value if you hold them to maturity...That $1000 may have less buying power due to inflation,
"Less buying power" is "less value."
The fed's strategy is clear (Score:4, Insightful)
During the 08-09 crisis, they let Lehman die as an object lesson to the rest of the banking idiots. Then they bailed out the rest in order to prevent the entire system from burning to the ground.
This time around, SVB is dead. They'll be dismantled and the bank will dissappear, other than a note in the history books that says "don't be like those idiots". The rest will get bailed out in order to prevent another great depression.
I think this is a good strategy. If you're an idiot playing with gasoline in your living room, there's a good chance the fed will stand by while your house burns to the ground. But they'll prevent the fire from spreading to the town.
Extreme risk-takes need to understand that there's a finite chance their parachute just might not open. They need to FEEL it in the pit of their stomach.
Re: (Score:2)
The problem with this, is that we allow pyromaniacs to still buy gasoline. I'd personally be much happier if part 2 of the strategy is to have Congress re-establish laws that prevent banks from splashing volatile flammable liquids all over the living room to begin with.
It's time to firewall off commercial banking from investment banking again. This experiment is now conclusive: allowing greedy fucker bankers to gamble with other people's money ultimately causes bank failures that spread far beyond the gre
Re: (Score:2)
It's a secondary market (Score:2)
My mortgage has a value to the bank. They paid me say $100,000 last year, and after one year I have to pay back $99,000 over x years at y% interest a year, and that obligation has value to the bank. And they can sell that obligation to another bank. It doesn't affect me. If mortage rates go up, then my obligation to pay say 1.5% interest is worth less than someone else's obligation to
Re: (Score:2)
"My mortgage has a value to the bank."
Yeah, and it's probably negative right now. The bank borrowed that 100k they gave you. That 1.5% you're paying is probably less than the bank has to pay their creditors, so they're losing money on the deal.
I think I saw this in a movie... (Score:2)
And 16 years ago too. Will people ever learn?
Real estate greed (Score:2)
I cannot wait for this real estate greed and bubble to completely crash and burn, finallyâ¦
Re: (Score:3, Insightful)
Large real-estate holdings should be heavily taxed.
What? Have you forgotten which President signed the repeal of Glass-Steagall? In 1999, Bil CLinton was President - did he veto the move? Did the Republicans override his veto?
Did you forget that Glass and Steagall were both Democrats?
How can you single-out Republicans for a Democrat bill signed into law by a Democrat President?
Re: (Score:3, Funny)
There's no inconsistency here.
1. Glass-Steagall is the regulation that got repealed.
2. The Republicans took over in 1994.
3. Clinton was a DINO. Remember, this is the guy who signed and took credit for kicking people off welfare.