8 ms·

Trillions in Bad Loans May Sap World Economy for a Long Time

115 points by es09 11y ago

mathgenius 11y ago
So, if one views the global financial system as a big distributed belief propagation algorithm (eg. min-sum) how do loans fit into this? Perhaps it makes sense switching to a "quantum-like" dynamics where one may "borrow" energy for a short amount of time before having to repay it, as in Heisenberg delta E * delta t uncertainty. So decreasing interest rates amounts to messing with some kind of Planck's constant.
- 50CNT 11y ago
  This isn't quite a relevant xkcd, but I do think it's relevant. Whilst it'd be cool to be able to apply models from physics to economics, there may be issues in applicability. http://www.smbc-comics.com/index.php?db=comics&id=2556 http://www.smbc-comics.com/index.php?db=comics&id=2556
  - mathgenius 11y ago
    Very amusing.. Ouch.. But that tensor beef does look yummie! I was just exploring an analogy, not particularly looking for any explanatory power.
- Retric 11y ago
  Money is irrelevant. It's clearly not a question of borrowing resources. It's conning people into thinking they have more resources than they actually have, while redistributing money around the economy. Until, the music stops and people notice they don't actually have anywhere to sit. PS: It's sad how closely you can model the financial system as a pyramid scheme.
  - deleted 11y ago
    [deleted]
redthrowaway 11y ago
Almost like the better part of a decade of free money tends to create bad debt.
- bsbechtel 11y ago
  I like how they devoted a whole paragraph to that point, although it's probably the most important one in the whole article.
- kolbe 11y ago
  On top of that, instead of getting rid of the people who issued bad debt ten and twenty years ago, and let new people into the banking system, we instead kept the same inept cleptocratic money managers in charge, but gave them more firepower.
  - nickff 11y ago
    We also left the same regulators (who did nothing to forestall the Great Recession) in place for good measure!
    - kolbe 11y ago
      The definition of insanity...
- MCRed 11y ago
  So, imagine what negative interest rates will do. Seriously, I can't imagine it, I sense it will be bad, but I'm not sure how it will play out. On the other hand, if the fed will pay me to borrow money, I'd love to borrow as much as I can and loan it out on Prosper or Kiva etc. Alas, the banks get these primo rates, not average joes... who are still paying %15 on credit cards. (money the bank borrows at near zero) Risk compensation and profit do not account for probably even half of that spread.
- dev1n 11y ago
  The free money was supposed to be used in conjunction with increased government spending on infrastructure projects. Unfortunately the latter half of that ideal fell through and banks ended up taking that free money and utilized it in not so good ways.
orian 11y ago
Have to paste it: http://i2.wp.com/armstrongeconomics.com/wp-content/uploads/2015/02/World-Debts.jpg http://i2.wp.com/armstrongeconomics.com/wp-content/uploads/2...
- roymurdock 11y ago
  Debt is an obligation of repayment in the future. So technically it is money that we owe our future selves and others. Of course, the future is uncertain, which is what makes debt risky (and profitable). If we enter another recession, much of that debt could default. This idea of basically seeing into the future, pricing risk/rewards was what always drew me to study finance. Sounds cool on paper, but the reality is much messier and morally ambiguous.
johnm1019 11y ago
Wouldn't this only sap the global economy if all those bad loans were backed by average Joes, who were then hurt by the loss of return? If instead they were backed by governments and multi-national conglomerates who already had hoardes of (free?) cash, then the effect on the economy would be limited.
- simonh 11y ago
  Loans are 'non performing' precisely because whoever borrowed the money cannot pay it all back, or even keep up with scheduled repayments. Generally that's businesses, though they may be government owned. The article does discuss this issue and the problems with the different methods of dealing with it.
ihsw 11y ago
Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people a rope to save them from drowning, but the rope is ending up as a noose around their neck more than anything else. The government's may have had good intentions in their support for the proliferation of subprime lending, but I think it would've been more effective to just give people money without the expectation that they pay it back directly. It will find its way back into the economy as, so to speak, trickle up economics.
- twoodfin 11y ago
  Imagine you're a bank calculating the interest rate to offer on a loan. Do you think that rate will be lower or higher if you believe there are circumstances wherein the government would unilaterally allow your borrower to cease payment? Obviously, if the government could be metaphysically certain of the loans that would never return another penny and only cancel those, there's no net loss to the bank. But there's no net gain to the borrower other than a potential psychological effect. Risk of government-sanctioned default is the same as any other default risk, and will be priced into interest rates, hurting especially those with marginal credit whom the banks judge most likely to be the "beneficiaries" of some future forgiveness.
  - sageikosa 11y ago
    Not to mention the precedent it sets with the corresponding expectations of future similar actions should they be needed, and the erosion of confidence in your money's ability to maintain inflationary value.
  - amalag 11y ago
    This is why in days of yore there was something called collateral. Loan goes bad, you take the collateral, maybe take a loss and move on. Now banks think they can get rid of that concept too. They want loans to be insured by governments so there will never be defaults and they can simply mint money?
marcusgarvey 11y ago
One view: this article is "an economically warped account that leaves important policy options off the table." http://www.nakedcapitalism.com/2016/02/new-york-times-bank-boosting-neoliberal-excusing-story-of-the-global-debt-hangover.html http://www.nakedcapitalism.com/2016/02/new-york-times-bank-b...
masterleep 11y ago
This is flat out impossible. Krugman assured us that debts do not matter and that trying to live within a budget is a wicked plot to impoverish us all.
- clock_tower 11y ago
  Krugman also denies that the broken window fallacy is a fallacy -- he actively thinks it's a good idea to destroy things (or produce shoddy goods) so that you can get the economic stimulus of building them again. He may be famous, but that doesn't mean he knows what he's talking about.
  - doyoulikeworms 11y ago
    Arguing whether or not Krugman is right or wrong about an issue is one thing, but it's another to say that he doesn't know what he's talking about. He's a Nobel laureate! Is he really that bad? Or do you just disagree with him?
    - clock_tower 11y ago
      He's a Nobel laureate _who denies the Broken Window Fallacy_ (and who, to reiterate the original poster's point, thinks that living within a budget is a bad idea). If his ideas are that bad and he collects those kinds of honors anyways, something's wrong with the Nobel Economics committee.
markhall 11y ago
Knowing that some of this will result in a partial economic downturn, how can the 'average investor' hedge/profit from it? Not in a 'Big Short' sort of way, just using this as an investment strategy for the layman. Any ideas?
- nissimk 11y ago
  sell financials. buy alcohol producers and distributors buy gold. buy bitcoin? :-)
- shostack 11y ago
  Isn't that trying to time the market?
ChuckMcM 11y ago
Reminds me of the joke, that if you can't pay your $100,000 loan you have a problem, if you can't pay your $100,000,000 loan then the bank has a problem. But it captures the scale of things. For literally decades people have suggested that China's economy (GDP) wasn't growing, it's money supply was. And as a result there would be a time when even with relaxed credit you could not justify adding any additional debt. At which point that particular path would be cut off and a more accurate picture of the economy would emerge. Which seems to be happening now. What would be useful, but no doubt hard to get, would be a list of Chinese firms which are currently technically in default on their loans and so at risk of dissolution. And even more useful would be an understanding of how the Chinese government would treat them (would they bail them out like our government did for GM, or let them fail like Lehman Brothers?)

115 points by es09 11y ago

So, if one views the global financial system as a big distributed belief propagation algorithm (eg. min-sum) how do loans fit into this? Perhaps it makes sense switching to a "quantum-like" dynamics where one may "borrow" energy for a short amount of time before having to repay it, as in Heisenberg delta E * delta t uncertainty. So decreasing interest rates amounts to messing with some kind of Planck's constant.

50CNT 11y ago
This isn't quite a relevant xkcd, but I do think it's relevant. Whilst it'd be cool to be able to apply models from physics to economics, there may be issues in applicability. http://www.smbc-comics.com/index.php?db=comics&id=2556 http://www.smbc-comics.com/index.php?db=comics&id=2556
- mathgenius 11y ago
  Very amusing.. Ouch.. But that tensor beef does look yummie! I was just exploring an analogy, not particularly looking for any explanatory power.
Retric 11y ago
Money is irrelevant. It's clearly not a question of borrowing resources. It's conning people into thinking they have more resources than they actually have, while redistributing money around the economy. Until, the music stops and people notice they don't actually have anywhere to sit. PS: It's sad how closely you can model the financial system as a pyramid scheme.
- deleted 11y ago
  [deleted]

redthrowaway 11y ago

Almost like the better part of a decade of free money tends to create bad debt.

bsbechtel 11y ago
I like how they devoted a whole paragraph to that point, although it's probably the most important one in the whole article.
kolbe 11y ago
On top of that, instead of getting rid of the people who issued bad debt ten and twenty years ago, and let new people into the banking system, we instead kept the same inept cleptocratic money managers in charge, but gave them more firepower.
- nickff 11y ago
  We also left the same regulators (who did nothing to forestall the Great Recession) in place for good measure!
  - kolbe 11y ago
    The definition of insanity...
MCRed 11y ago
So, imagine what negative interest rates will do. Seriously, I can't imagine it, I sense it will be bad, but I'm not sure how it will play out. On the other hand, if the fed will pay me to borrow money, I'd love to borrow as much as I can and loan it out on Prosper or Kiva etc. Alas, the banks get these primo rates, not average joes... who are still paying %15 on credit cards. (money the bank borrows at near zero) Risk compensation and profit do not account for probably even half of that spread.
dev1n 11y ago
The free money was supposed to be used in conjunction with increased government spending on infrastructure projects. Unfortunately the latter half of that ideal fell through and banks ended up taking that free money and utilized it in not so good ways.

orian 11y ago

Have to paste it: http://i2.wp.com/armstrongeconomics.com/wp-content/uploads/2015/02/World-Debts.jpg http://i2.wp.com/armstrongeconomics.com/wp-content/uploads/2...

roymurdock 11y ago
Debt is an obligation of repayment in the future. So technically it is money that we owe our future selves and others. Of course, the future is uncertain, which is what makes debt risky (and profitable). If we enter another recession, much of that debt could default. This idea of basically seeing into the future, pricing risk/rewards was what always drew me to study finance. Sounds cool on paper, but the reality is much messier and morally ambiguous.

johnm1019 11y ago

Wouldn't this only sap the global economy if all those bad loans were backed by average Joes, who were then hurt by the loss of return? If instead they were backed by governments and multi-national conglomerates who already had hoardes of (free?) cash, then the effect on the economy would be limited.

simonh 11y ago
Loans are 'non performing' precisely because whoever borrowed the money cannot pay it all back, or even keep up with scheduled repayments. Generally that's businesses, though they may be government owned. The article does discuss this issue and the problems with the different methods of dealing with it.

ihsw 11y ago

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people a rope to save them from drowning, but the rope is ending up as a noose around their neck more than anything else. The government's may have had good intentions in their support for the proliferation of subprime lending, but I think it would've been more effective to just give people money without the expectation that they pay it back directly. It will find its way back into the economy as, so to speak, trickle up economics.

twoodfin 11y ago
Imagine you're a bank calculating the interest rate to offer on a loan. Do you think that rate will be lower or higher if you believe there are circumstances wherein the government would unilaterally allow your borrower to cease payment? Obviously, if the government could be metaphysically certain of the loans that would never return another penny and only cancel those, there's no net loss to the bank. But there's no net gain to the borrower other than a potential psychological effect. Risk of government-sanctioned default is the same as any other default risk, and will be priced into interest rates, hurting especially those with marginal credit whom the banks judge most likely to be the "beneficiaries" of some future forgiveness.
- sageikosa 11y ago
  Not to mention the precedent it sets with the corresponding expectations of future similar actions should they be needed, and the erosion of confidence in your money's ability to maintain inflationary value.
- amalag 11y ago
  This is why in days of yore there was something called collateral. Loan goes bad, you take the collateral, maybe take a loss and move on. Now banks think they can get rid of that concept too. They want loans to be insured by governments so there will never be defaults and they can simply mint money?

marcusgarvey 11y ago

One view: this article is "an economically warped account that leaves important policy options off the table." http://www.nakedcapitalism.com/2016/02/new-york-times-bank-boosting-neoliberal-excusing-story-of-the-global-debt-hangover.html http://www.nakedcapitalism.com/2016/02/new-york-times-bank-b...

masterleep 11y ago

This is flat out impossible. Krugman assured us that debts do not matter and that trying to live within a budget is a wicked plot to impoverish us all.

clock_tower 11y ago
Krugman also denies that the broken window fallacy is a fallacy -- he actively thinks it's a good idea to destroy things (or produce shoddy goods) so that you can get the economic stimulus of building them again. He may be famous, but that doesn't mean he knows what he's talking about.
- doyoulikeworms 11y ago
  Arguing whether or not Krugman is right or wrong about an issue is one thing, but it's another to say that he doesn't know what he's talking about. He's a Nobel laureate! Is he really that bad? Or do you just disagree with him?
  - clock_tower 11y ago
    He's a Nobel laureate _who denies the Broken Window Fallacy_ (and who, to reiterate the original poster's point, thinks that living within a budget is a bad idea). If his ideas are that bad and he collects those kinds of honors anyways, something's wrong with the Nobel Economics committee.

markhall 11y ago

Knowing that some of this will result in a partial economic downturn, how can the 'average investor' hedge/profit from it? Not in a 'Big Short' sort of way, just using this as an investment strategy for the layman. Any ideas?

nissimk 11y ago
sell financials. buy alcohol producers and distributors buy gold. buy bitcoin? :-)
shostack 11y ago
Isn't that trying to time the market?

ChuckMcM 11y ago

Reminds me of the joke, that if you can't pay your $100,000 loan you have a problem, if you can't pay your $100,000,000 loan then the bank has a problem. But it captures the scale of things. For literally decades people have suggested that China's economy (GDP) wasn't growing, it's money supply was. And as a result there would be a time when even with relaxed credit you could not justify adding any additional debt. At which point that particular path would be cut off and a more accurate picture of the economy would emerge. Which seems to be happening now. What would be useful, but no doubt hard to get, would be a list of Chinese firms which are currently technically in default on their loans and so at risk of dissolution. And even more useful would be an understanding of how the Chinese government would treat them (would they bail them out like our government did for GM, or let them fail like Lehman Brothers?)