Financial Crash

[Zhivago]

Looks like we could be heading for a global crash... Stock market bubbles popping...

[Digby]

The stock market corrects/dips far more often than one sees a global crash. It's always possible, but it's not likely.

[Stom]

Yeah...no.

[SerjeantWildgoose]

Is it a crash, and if so is it a new crash, a continuation of the old crash or just a few half-asleep lunatics crashing into the back of the crash that we have been crashed in since 2008?

[Mellsblue]

Is it a crash, and if so is it a new crash, a continuation of the old crash or just a few half-asleep lunatics crashing into the back of the crash that we have been crashed in since 2008?

Turns out there was no crash. It was just propaganda.

[Sandydragon]

Is it a crash, and if so is it a new crash, a continuation of the old crash or just a few half-asleep lunatics crashing into the back of the crash that we have been crashed in since 2008?

Turns out there was no crash. It was just propaganda.

Wishful thinking.

[Zhivago]

Is it a crash, and if so is it a new crash, a continuation of the old crash or just a few half-asleep lunatics crashing into the back of the crash that we have been crashed in since 2008?

Turns out there was no crash. It was just propaganda.

Wishful thinking.

Partly, but also partly due to the fact these things are hard to call. I admit that I was too quick to call it, but the Shiller PE ratio is through the roof, so at some point there must be a return to normality.

http://www.multpl.com/shiller-pe/

[Digby]

The Shiller ratio is bad one to focus on, other than a lot of people will look at it and there's no denying sentiment affects the markets

[Sandydragon]

Turns out there was no crash. It was just propaganda.

Wishful thinking.

Partly, but also partly due to the fact these things are hard to call. I admit that I was too quick to call it, but the Shiller PE ratio is through the roof, so at some point there must be a return to normality.

http://www.multpl.com/shiller-pe/

If normal people becoming more stink is something you hope for then fill your boots. Most of us will be more than happy if there are no further major shocks for th time being.

[Zhivago]

Wishful thinking.

Partly, but also partly due to the fact these things are hard to call. I admit that I was too quick to call it, but the Shiller PE ratio is through the roof, so at some point there must be a return to normality.

http://www.multpl.com/shiller-pe/

If normal people becoming more stink is something you hope for then fill your boots. Most of us will be more than happy if there are no further major shocks for th time being.

Just to clarify I was hoping the asset bubbles would burst as they cause instability to the financial system. Until the government relates financial markets properly to limit asset bubble formation from speculation then we'll never prosper.

[Digby]

What would that entail?

[Zhivago]

What would that entail?

I don't have all the answers, but there are things that could be introduced to reduce speculation - a financial transactions tax, minimum time necessary to own asset before reselling etc.

[Digby]

What would that entail?

I don't have all the answers, but there are things that could be introduced to reduce speculation - a financial transactions tax, minimum time necessary to own asset before reselling etc.

I understand the idea, but I'd strongly oppose both of those in practice. Indeed I'd scrap such as SDRT as I don't think we do want to impede the flow of capital to it's most productive ends

[Zhivago]

What would that entail?

I don't have all the answers, but there are things that could be introduced to reduce speculation - a financial transactions tax, minimum time necessary to own asset before reselling etc.

I understand the idea, but I'd strongly oppose both of those in practice. Indeed I'd scrap such as SDRT as I don't think we do want to impede the flow of capital to it's most productive ends

Speculation is not productive though.

The are other options, the central bank can use different interest rates depending on what the loans are for, like how the ECB is doing with TLTROs. In theory they could target the real economy and use such levers to reduce the incentive to speculate.

[Digby]

I don't have all the answers, but there are things that could be introduced to reduce speculation - a financial transactions tax, minimum time necessary to own asset before reselling etc.

I understand the idea, but I'd strongly oppose both of those in practice. Indeed I'd scrap such as SDRT as I don't think we do want to impede the flow of capital to it's most productive ends

Speculation is not productive though.

The are other options, the central bank can use different interest rates depending on what the loans are for, like how the ECB is doing with TLTROs. In theory they could target the real economy and use such levers to reduce the incentive to speculate.

Speculation can be productive and anyway the increase in liquidity certainly is, further if you hamper the secondary markets you will almost certainly hamper primary markets and then we do have a problem.

I do get why a lot of people don't like the various markets, but I'd be very mindful of the law of unintended consequences in pursuit of supposed more productive or fairer outcomes.

[Zhivago]

I understand the idea, but I'd strongly oppose both of those in practice. Indeed I'd scrap such as SDRT as I don't think we do want to impede the flow of capital to it's most productive ends

Speculation is not productive though.

The are other options, the central bank can use different interest rates depending on what the loans are for, like how the ECB is doing with TLTROs. In theory they could target the real economy and use such levers to reduce the incentive to speculate.

Speculation can be productive and anyway the increase in liquidity certainly is, further if you hamper the secondary markets you will almost certainly hamper primary markets and then we do have a problem.

I do get why a lot of people don't like the various markets, but I'd be very mindful of the law of unintended consequences in pursuit of supposed more productive or fairer outcomes.

I still don't agree, but let's narrow the discussion down to leveraged speculation. Surely even you can agree such risk is not conducive to financial stability?

[Digby]

Speculation is not productive though.

The are other options, the central bank can use different interest rates depending on what the loans are for, like how the ECB is doing with TLTROs. In theory they could target the real economy and use such levers to reduce the incentive to speculate.

Speculation can be productive and anyway the increase in liquidity certainly is, further if you hamper the secondary markets you will almost certainly hamper primary markets and then we do have a problem.

I do get why a lot of people don't like the various markets, but I'd be very mindful of the law of unintended consequences in pursuit of supposed more productive or fairer outcomes.

I still don't agree, but let's narrow the discussion down to leveraged speculation. Surely even you can agree such risk is not conducive to financial stability?

I don't start by saying no to this sort of thing, risk is what it is and oftentimes it's useful. For a start if you want to end leveraged speculation that's the mortgage market gone, so I think we'd need to be much more precise about what the risk is, who holds the risk, how is that risk contained...

[Zhivago]

Speculation can be productive and anyway the increase in liquidity certainly is, further if you hamper the secondary markets you will almost certainly hamper primary markets and then we do have a problem.

I do get why a lot of people don't like the various markets, but I'd be very mindful of the law of unintended consequences in pursuit of supposed more productive or fairer outcomes.

I still don't agree, but let's narrow the discussion down to leveraged speculation. Surely even you can agree such risk is not conducive to financial stability?

I don't start by saying no to this sort of thing, risk is what it is and oftentimes it's useful. For a start if you want to end leveraged speculation that's the mortgage market gone, so I think we'd need to be much more precise about what the risk is, who holds the risk, how is that risk contained...

What on earth are you on about? It's not the mortgage market gone at all, if it were dominated by leveraged speculation the interest on the loan would be expected to be financed from the asset price appreciation. With the mortgage market (at least the bulk of it), the loan is paid off primarily by an individual's earnings (or otherwise proven income stream).

[Digby]

I still don't agree, but let's narrow the discussion down to leveraged speculation. Surely even you can agree such risk is not conducive to financial stability?

I don't start by saying no to this sort of thing, risk is what it is and oftentimes it's useful. For a start if you want to end leveraged speculation that's the mortgage market gone, so I think we'd need to be much more precise about what the risk is, who holds the risk, how is that risk contained...

What on earth are you on about? It's not the mortgage market gone at all, if it were dominated by leveraged speculation the interest on the loan would be expected to be financed from the asset price appreciation. With the mortgage market (at least the bulk of it), the loan is paid off primarily by an individual's earnings (or otherwise proven income stream).

The money being lent by the lender is all leveraged in the mortgage market, many times over.

[Zhivago]

I don't start by saying no to this sort of thing, risk is what it is and oftentimes it's useful. For a start if you want to end leveraged speculation that's the mortgage market gone, so I think we'd need to be much more precise about what the risk is, who holds the risk, how is that risk contained...

What on earth are you on about? It's not the mortgage market gone at all, if it were dominated by leveraged speculation the interest on the loan would be expected to be financed from the asset price appreciation. With the mortgage market (at least the bulk of it), the loan is paid off primarily by an individual's earnings (or otherwise proven income stream).

The money being lent by the lender is all leveraged in the mortgage market, many times over.

Surely you mean the collateral is rehypothecated? I don't see why that's an issue particularly, although I'd limit the number of times it can be rehypothecated.

Or are you saying the banks funding for granting the loan is from its own borrowings?

[Digby]

What on earth are you on about? It's not the mortgage market gone at all, if it were dominated by leveraged speculation the interest on the loan would be expected to be financed from the asset price appreciation. With the mortgage market (at least the bulk of it), the loan is paid off primarily by an individual's earnings (or otherwise proven income stream).

The money being lent by the lender is all leveraged in the mortgage market, many times over.

Surely you mean the collateral is rehypothecated? I don't see why that's an issue particularly, although I'd limit the number of times it can be rehypothecated.

Or are you saying the banks funding for granting the loan is from its own borrowings?

I'm not saying it's rehypothecated, I don't as it happens know if I've ever even used the word before today. I'm saying the money is leveraged which will do just fine as an explanation, and if you want to know why it's an issue maybe check out the crash back in '08

[Zhivago]

The money being lent by the lender is all leveraged in the mortgage market, many times over.

Surely you mean the collateral is rehypothecated? I don't see why that's an issue particularly, although I'd limit the number of times it can be rehypothecated.

Or are you saying the banks funding for granting the loan is from its own borrowings?

I'm not saying it's rehypothecated, I don't as it happens know if I've ever even used the word before today. I'm saying the money is leveraged which will do just fine as an explanation, and if you want to know why it's an issue maybe check out the crash back in '08

You're not making sense. Seems to me like you're deliberately being vague to try to close this debate down.

[Digby]

Surely you mean the collateral is rehypothecated? I don't see why that's an issue particularly, although I'd limit the number of times it can be rehypothecated.

Or are you saying the banks funding for granting the loan is from its own borrowings?

I'm not saying it's rehypothecated, I don't as it happens know if I've ever even used the word before today. I'm saying the money is leveraged which will do just fine as an explanation, and if you want to know why it's an issue maybe check out the crash back in '08

You're not making sense. Seems to me like you're deliberately being vague to try to close this debate down.

What part of saying the mortgage market is highly leveraged doesn't make sense? You might not agree, which would seem to fly in the face of reality, but that's a different thing

[Zhivago]

I'm not saying it's rehypothecated, I don't as it happens know if I've ever even used the word before today. I'm saying the money is leveraged which will do just fine as an explanation, and if you want to know why it's an issue maybe check out the crash back in '08

You're not making sense. Seems to me like you're deliberately being vague to try to close this debate down.

What part of saying the mortgage market is highly leveraged doesn't make sense? You might not agree, which would seem to fly in the face of reality, but that's a different thing

You mean the ratio of debt to equity is high? Do you have a statistic for that?

http://www.savills.co.uk/blog/article/2 ... he-uk.aspx

Here the outstanding loan to value ratio is listed as just 20% for the housing market as a whole. That's not particularly high. Certainly its clear that those with a mortgage, where it is 46%, do not require an increase in the asset value to pay off the loan. Therefore it is not leveraged speculation. Your argument is false.

[Digby]

You're not making sense. Seems to me like you're deliberately being vague to try to close this debate down.

What part of saying the mortgage market is highly leveraged doesn't make sense? You might not agree, which would seem to fly in the face of reality, but that's a different thing

You mean the ratio of debt to equity is high? Do you have a statistic for that?

http://www.savills.co.uk/blog/article/2 ... he-uk.aspx

Here the outstanding loan to value ratio is listed as just 20% for the housing market as a whole. That's not particularly high. Certainly its clear that those with a mortgage, where it is 46%, do not require an increase in the asset value to pay off the loan. Therefore it is not leveraged speculation. Your argument is false.

You're ignoring how the market raises monies that it lends in the first instance, or it might be you simply don't know how it does that, but I can assure it's leveraged. I'm loathe to set out the following as it seems a bit Roger red hat, but given there's even a query then I'll note the following:

Basically banks/building societies know that those with deposits will want a certain % of their monies, and they can lend the reaminder (and frankly the majority). And at basic what the banks retain is their capitalisation. The banks take the assets the depositers aren't expected to want and lend it, whether to retail customers in the form of loans, credit cards, to businesses and of course in mortgages. The thing is if they simply lend the money out for a mortgage and then wait 25 years for the money to be paid back it takes a long time for them to be able to lend that money again and it's deemed not to be working hard enough for them, so they don't do that, instead they make a loan and then sell that loan, and then they can loan out the money they've gotten for selling the loan and that then repeats over and over. Exactly what model the sale of the loan takes will vary, we've seen CDOs (collateralized debt obligations), MBS (mortgage backed securities), REMIC (real estate mortgage investment conduit), SIV (structured investment vehicle) and so on and so on, these (supposed) assets are sold to other institutions and to private investors too, but as so often the whole doesn't look vastly different to a Ponzi scheme, albeit it is a legal one, it's certainly an inverted pyramid. As the sale and lending of the same monies builds one atop the other the entire situation becomes increasingly geared or indeed leveraged. That the whole is so geared, and so many banks all owe money to each other is why back in 2008 once the value of the assets become suspect and the repayment of the loans saw an increase in the failure rates, is why the whole system started to crash so quickly, if the cash doesn't keep moving to lubricate the gears of the mortgage economy then the geared system grinds to a halt.

Some of the assets even have some great names that set out that the assets are geared, though they also seemingly mislead somewhat. There's a famous example for instance from Bear Stearns who had the investment scheme where you could buy debt that was called the 'High Grade Structured Credit Enhanced Leveraged Fund' the high grade post crash turned out to be questionable, the leveraged part wasn't and isn't