The Next Financial Crisis

[Swammerdami]

The credit crisis of 2008 was the most dangerous world-wide financial crisis since the the Great Depression. It was caused by a housing price bubble, and by financial shenanigans pursued in the name of "hyper-efficiency" but which led to large-scale gambling: Big Wall Street Traders were buying million-dollar sports-cars by squeezing an extra 0.01% here and there, oblivious of real-world implications and with criminal cooperation from rating agencies. They eventually cost trillions to the real economy.

The question is NOT whether there will be another severe financial crisis, but when it will come and which excess of hyper-efficiency or unregulated greed will bring it about.

The recent fall in asset prices MIGHT be a GOOD thing in terms of financial dangers: We needn't worry about a bubble bursting if much of excess exuberance has already fizzled out. But we can't guess the future market trajectory and, anyway, there are other dangers.

A big danger is rising levels of debt: Households, corporations, and countries had record-setting debt before the Covid-19 pandemic; and that crisis caused debt levels to soar. High debts may not seem to be a problem when interest rates are low, but now interest rates are rising.

Does the debt matter? Will the next crisis come later rather than sooner? I do not know, and am asking for discussion, or links to the opinions of experts who think they do know.

A recent Reuters news article caught my eye:

The Bank for International Settlements (BIS) has warned that pension funds and other 'non-bank' financial firms now have more than $80 trillion of hidden, off-balance sheet dollar debt in the form of FX swaps.
. . .
It estimated that $2.2 trillion worth of currency trades are at risk of failing to settle on any given day due to issues between counterparties, potentially undermining financial stability.

The amount at risk represents about one third of total deliverable FX turnover and is up from $1.9 trillion from three years earlier when the last FX survey was carried out.

FX trading also continues to shift away from multilateral trading platforms towards "less visible" venues hindering policymakers "from appropriately monitoring FX markets," it said.

Eighty trillion dollars of "hidden" debt! That dwarfs talked-about debt like the student loans, or even a country's national debt. And are these even real dollars, or just gambling chits? I suppose these Foreign Exchange Swaps are usually very short-term, but a party may depend on renewal. Didn't the late Senator Everett Dirksen once say "A trillion here, a trillion there, and pretty soon you're talking about real money"?

Are these huge "hidden" debts a big problem? I don't know. But whatever the details, they represent high-stakes gambles made as sacrifices to the God of Hyper-efficiency.

What will be the major causes of the next financial crisis?

 

[Cheerful Charlie]

A house of cards.

 

[Swammerdami]

Those movies do make clear that much of the 2007 Bubble was due to young insouciant Wall St nerds, and several sorts of snake oil! In one of the movies a big bank essentially tried to short-squeeze its counterparty — the hero's hedge fund. Was that ever taken to court?

The collapse in housing prices had immediate adverse repercussions. (A moratorium on foreclosures should have been imposed — that it wasn't is disgraceful). Venerable financial institutions came under solvency worries, even AIG, but the first scares came at Lehman and Bear-Stearns. Lehman was left in failure (how did it get split up?), but Bear was saved when Jamie Dimon the Big Banker acted, played a role like J.P. Morgan did a dozen decades earlier. (Not ironically, Jamie's firm is "JPMorgan - Chase.")

Jamie offered Bear shareholders very little (even after the amount was raised by an appellate court) and — with sweetheart deal from the U.S.Treasury who bought the worst assets, even paying 100 cents on the dollar IIRC — made a largish profit I think. Nevertheless Jamie is quoted as regretting his purchase of Bear Stearns (with its ultra-low purchase price). When the bank's name-sake JPM intervened 12 to 15 decades earlier, JPM acted with his OWN bank's money (and some prestige), and got applause but no help from USTreasury. Jamie instead didn't act until this $20 billion guarantee (or whatever it was) came through.

Instead of organizing a sweetheart deal for Jamie Dimon, should Buffett, Soros et al been called upon to help set a price? Some major bank would get involved if the price were right. Arrange to get some profit for Uncle Sam instead of just enriching a favorite Wall St. son.

Recently I read an analyst who said Lehman Brothers could also have been saved. !!?? Anyone know about that? (Does he just mean that liabilities would be covered if assets were allowed to run to maturity?) From a practical standpoint would this mean USTreasury would have again put up billions of dollars with no profit opportunity?

 

[Cheerful Charlie]

Nothing was ever taken to court. A couple of short sellers did try to go to court over the fact these CDOs et all were misvalued but were laughed of all court rooms. Marc Baum (Stephen Eismann) offered to testify before Congress as to the corruption underlying this fiasco, but was ignored. But was harassed by the IRS and investigated by the FBI for his trouble.

 

[ZiprHead]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

 

[Oleg]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

 

[ZiprHead]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

7 and a half trillion of that just from Trump. We all know the history. Republicans get in charge and spend like drunken sailors. Then Democrats take over and Republicans go all

over the debt they're mostly responsible for.

 

[Cheerful Charlie]

We are not yet facing any one killer bubble, but the U.S. is facing several which combined potentially are a problem.

4 Economic Bubbles Growing In the United States

Although the market indices have been hitting record highs, there are structural problems that continue to build in the United States economy that may severely impact customer spending and corporate earnings in the next several years. This article (updated for 2019) will outline four bubbles...

www.lynalden.com

 

[Oleg]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

7 and a half trillion of that just from Trump. We all know the history. Republicans get in charge and spend like drunken sailors. Then Democrats take over and Republicans go all

over the debt they're mostly responsible for.

Right. Both parties have been wildly irresponsible. When our comeuppance arrives, it’s gonna hurt.

 

[Cheerful Charlie]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

7 and a half trillion of that just from Trump. We all know the history. Republicans get in charge and spend like drunken sailors. Then Democrats take over and Republicans go all

over the debt they're mostly responsible for.

Right. Both parties have been wildly irresponsible. When our comeuppance arrives, it’s gonna hurt.

Uhmmmm. No. Trump and the GOP gave us $7.8 trillion in new deficits all by them selves. Brian Riedel's analysis found Trump inherited a good economy from President Obama. Had Trump done nothing at all, the U.S. would have been able to cut $3 trillion from U.S. deficits

Trump’s Fiscal Legacy: A Comprehensive Overview of Spending, Taxes, and Deficits | Manhattan Institute

When President Trump took office in January 2017, he inherited a growing economy and budget deficits that had gradually fallen to 3% of GDP in the years since the Great Recession. At this time, the Congressional Budget Office (CBO) projected that the $585 billion budget deficit from 2016 would...

www.manhattan-institute.org

 

[Elixir]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

7 and a half trillion of that just from Trump. We all know the history. Republicans get in charge and spend like drunken sailors. Then Democrats take over and Republicans go all

over the debt they're mostly responsible for.

Right. Both parties have been wildly irresponsible. When our comeuppance arrives, it’s gonna hurt.

And if Republicans are successful in blaming Democrats for the Republican-induced pain, it is likely that they will “fix” the problem for good by suspending the Constitution (temporarily forever) and parceling out every remaining national asset among the oligarchs to whom they owe their power.

 

[ZiprHead]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

7 and a half trillion of that just from Trump. We all know the history. Republicans get in charge and spend like drunken sailors. Then Democrats take over and Republicans go all

over the debt they're mostly responsible for.

Right. Both parties have been wildly irresponsible. When our comeuppance arrives, it’s gonna hurt.

Went right over your head, didn't it. History be damned.

 

[Loren Pechtel]

The credit crisis of 2008 was the most dangerous world-wide financial crisis since the the Great Depression. It was caused by a housing price bubble, and by financial shenanigans pursued in the name of "hyper-efficiency" but which led to large-scale gambling: Big Wall Street Traders were buying million-dollar sports-cars by squeezing an extra 0.01% here and there, oblivious of real-world implications and with criminal cooperation from rating agencies. They eventually cost trillions to the real economy.

Disagree. I think the primary cause of the collapse was that we ignored the lesson we learned in 1929 about limiting margin ratios. We saw how allowing too much margin exposure destabilized the system and responded by limiting margin borrowing. However, as new forms of margin appeared we didn't apply that lesson to them and ended up in the same situation as 1929--too much margin-caused instability. The CRA, and the financial shenanigans set it off but that was only possible because of the underlying instability.

Unfortunately, we did not learn our lesson in 2008 and did basically nothing to curtail the exotic forms of borrowing. The same instability still exists. It's like the snow pack on the mountain--if it's unstable enough sooner or later the avalanche will be triggered. The nature of the trigger is unimportant, the underlying instability is what caused it.

 

[Loren Pechtel]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

7 and a half trillion of that just from Trump. We all know the history. Republicans get in charge and spend like drunken sailors. Then Democrats take over and Republicans go all

over the debt they're mostly responsible for.

Right. Both parties have been wildly irresponsible. When our comeuppance arrives, it’s gonna hurt.

Deficits go down when the Democrats are in control. They go up when the Republicans are in control. It becomes even more obvious if you assign each year's deficit to the party in power last year--this year's deficit is determined by last year's budget bills.

 

[Swammerdami]

The credit crisis of 2008 was the most dangerous world-wide financial crisis since the the Great Depression. It was caused by a housing price bubble, and by financial shenanigans pursued in the name of "hyper-efficiency" but which led to large-scale gambling: Big Wall Street Traders were buying million-dollar sports-cars by squeezing an extra 0.01% here and there, oblivious of real-world implications and with criminal cooperation from rating agencies. They eventually cost trillions to the real economy.

Disagree. I think the primary cause of the collapse was that we ignored the lesson we learned in 1929 about limiting margin ratios. We saw how allowing too much margin exposure destabilized the system and responded by limiting margin borrowing. However, as new forms of margin appeared we didn't apply that lesson to them and ended up in the same situation as 1929--too much margin-caused instability. The CRA, and the financial shenanigans set it off but that was only possible because of the underlying instability.

Unfortunately, we did not learn our lesson in 2008 and did basically nothing to curtail the exotic forms of borrowing. The same instability still exists. It's like the snow pack on the mountain--if it's unstable enough sooner or later the avalanche will be triggered. The nature of the trigger is unimportant, the underlying instability is what caused it.

I'm not sure why you say you "disagree" with me. My "hyper-efficiency" and "gambling" referred directly to excessive leverage. By the way, there are hyper-efficiencies other than excessive leverage that also pose risks to stability; high-frequency trading is one example.

But do not underestimate the sheer criminality that contributed to the crisis. The fancy new "investments" required good ratings from Moody's et al, but the favorable ratings were a corrupt joke. It is unethical for Wall St. salesman to exaggerate the way used-car dealers do, but many were well aware of financial flimsiness.

It's hard to prosecute Wall St. criminality. Passing new regulations after the fact is like Whack-a-Mole: New loopholes will be found. I think a very small tax on financial transactions would eliminate some of the useless^* hyper-efficiency and associated instability.

 

[Tigers!]

Within MMT (Magic Money Tree) thinking aren't debts thought not to be much of a problem?

 

[Swammerdami]

Government-owed debts are "no problem" (in Magic Money Theory) when the debt is denominated in fiat money that government can print itself.

But the $80+ trillion in FX swaps mentioned in OP are not government obligations; they are very highly leveraged obligations made by a variety of private players. The FX marketplace is already precarious ("$2.2 trillion worth of currency trades are at risk of failing to settle on any given day") and a sudden move might trigger liquidity issues.

Or not. The next financial crisis might hit from a completely different direction. All we can know for certain is that Wall Street's only goal remains supplying young conscienceless nerds with million-dollar sports-cars. Another financial crisis WILL come.

 

[atrib]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

And where did this debt come from? And who is responsible for creating it? Its funny that you don't want to talk about that.

 

[atrib]

A big danger is rising levels of debt: Households, corporations, and countries had record-setting debt before the Covid-19 pandemic; and that crisis caused debt levels to soar. High debts may not seem to be a problem when interest rates are low, but now interest rates are rising.

In other news, one of my younger colleagues at work told me that he had just closed on a $330K house. He is 2 years out of school, makes less than $80K a year, has no savings to put a down payment on this purchase, and his wife expects to be a full time stay-home mother for the next 3 years. They really need this house because they have a baby on the way, and it is not safe for babies to live in rented apartments. I kid you not. We are a country of stupid when it comes to money.

 

[Oleg]

The next crisis will be the Republican shenanigans with the debt ceiling. A totally home-made and avoidable crisis.

Yes, if we just keep on adding debt there'll be no financial crisis coming our way. Nope. Where are we at now? $31T? Pfft. Pocket change.

7 and a half trillion of that just from Trump. We all know the history. Republicans get in charge and spend like drunken sailors. Then Democrats take over and Republicans go all

over the debt they're mostly responsible for.

Right. Both parties have been wildly irresponsible. When our comeuppance arrives, it’s gonna hurt.

Deficits go down when the Democrats are in control. They go up when the Republicans are in control. It becomes even more obvious if you assign each year's deficit to the party in power last year--this year's deficit is determined by last year's budget bills.

Stop with the finger pointing. It's the kind of problem that ends empires. Yes, both parties - with probably some indepedent votes - got us here. There's nothing in history or human experience that says the US can just keep maxing out new credit cards without consequence. I read somewhere recently that soon interest payments on the debt will match the amount we spend on defense. That's fucking crazy and unsustainable.