[UncleOxidant]

No, I remember 2007-2008 pretty clearly. That felt much more precarious. Right now it seems pretty clear that if your bank fails you're going to get your money.

That's not to say that this isn't the start of some kind of a financial crisis. But it could be very different from 2008. In this case I think the risk is more towards high inflation - for example, if enough banks were to fail (hypothetically - I doubt this will happen) and bunch of money essentially has to be printed up to make everyone whole, that's going to devalue money hence more inflation.

[zhte415]

Precautionary demand for money isn't inflationary - it has a low velocity i.e. just sits, in it's precautionary state. [1 for an example during Covid lockdowns in AU].

The identity is MV=PY where M is money, V is velocity, P is the price level and Y is real income. [2]. A precautionary demand has a lower V.

While a rise in narrow money may be expected, there may be a fall in in broader money, typically much larger than M1, driven by a reduction in sought exposure to non bank financial companies.

[1] https://www.rba.gov.au/publications/bulletin/2021/mar/cash-d...

[2] https://en.m.wikipedia.org/wiki/Quantity_theory_of_money

[sbelskie]

I don’t think hyperinflation and bank bailouts go together.

https://marginalrevolution.com/marginalrevolution/2023/03/ba...

[fragsworth]

The argument you linked is ignoring the fact that when you provide a bank with dollars (M1 bailout cash), it is lent out by the banks and creates a much bigger sum of M2 money (bonds, liquid assets) because of fractional reserves.

Any bailout that is large enough, and isn't done in tandem with major deflationary events, would certainly impact inflation.

I think 2008 was spectacularly smooth with respect to inflation/deflation because they allowed enough banks to fail.

[rojeee]

M1 reserves are not lent out by commercial banks - they are a liability of the central bank and an asset of the commercial banks or anyone else with access to the central bank's balance sheet. Banks only ever lend you their own liabilities. E.g. if you get a loan from HSBC, you borrow HSBC pounds because you have a deposit with HSBC.

When banks lend, they create a deposit (or credit an existing one) in the name of the customer (liability), and create a corresponding loan (asset) on their balance sheet. Banks don't _need_ reserves, like warehoused cash, to lend. They just need a capital buffer to absorb any credit losses on their loan portfolios.

The M2 money supply only increases if banks lend. In theory, they are more ready to lend when they have a better capital and liquidity position, which an injection of reserves is intended to achieve. But if no-one wants loans then M2 money supply doesn't increase as a result of a higher M1 money supply.

Also, "fractional reserve banking" is not a concept that relates to modern banking. Banks can lend as much as they like within reason. They are no different to any other business which can leverage their balance sheet by adding debt to increase return on equity. Loan creation is limited by:

1) Capital requirements - whereby loan creation is a function of how much capital they have, how risky their existing assets/loans are and how risky incremental loans are

2) Demand for loans from customers, which is a function of the macro environment e.g. interest rates

[pjc50]

The thing is that a crisis like this is inherently deflationary! Or at least has a strong negative impact on the business cycle.

> they allowed enough banks to fail.

There really were not a lot of "bank fails and depositors lose money" events. Ones I can think of were Kaupthing (for some reason a lot of UK local government were keeping their money in an Icelandic bank), and Cyprus (deemed too dodgy to bailout).

There was a lot of fiscal policy tightening ("austerity"), the other lever which people forget about.

[UncleEntity]

> I think 2008 was spectacularly smooth with respect to inflation/deflation because they allowed enough banks to fail.

They also started paying interest on excess reserves held at the Fed as they printed up a bunch of money to recapitalize the banks so as to not end up creating trillions of dollars of new money.

This time they injected trillions of dollars directly into the economy (hello, Helicopter Ben) and are now dealing with the effects. All that cash caused a huge bubble in Silicon Valley because people had nothing to do for quite a while except buy and consume stuff off the interwebs.

Now we have the correction for the Covid stimulus spending.

[peyton]

We have a gigantic housing bubble and banks are holding the bag.

[abeppu]

Is it a gigantic housing bubble?

Prices clearly peaked, and the YoY price increase in some places had gotten a bit silly. But don't a lot of cities still just have a lot less housing than they should because of decades of not building enough? And even the decline in prices is mostly about the higher mortgage rates?

[prepend]

Everyone refinanced to very low interest rates. If home prices drop and people default then that’s lots of exposure to potential negative equity in all those home loans.

I think the bubble is due to extremely high home prices. In my metro area, prices are up 70% since 2020. So a drop of 40% to correct to 2020 levels isn’t unheard of.

Personally, I think the price is structural adjustments as people shift to remote work and that makes different houses more valuable (suburbs and exurbs have really increased quite a bit).

[abeppu]

> Personally, I think the price is structural adjustments as people shift to remote work and that makes different houses more valuable (suburbs and exurbs have really increased quite a bit).

To back up the idea that the price changes are mostly just about mortgage rates changing:

- In California, Redfin data shows that the peak for median sale price was in April 2022, at $839,100, and now we're at $706,000 for Feb 2023. Ooh, that looks like a >15% drop in less than a year!

- But FreddieMac shows that the average 30y fixed was 5% in mid April '22, and was 6.32% mid last month. The median home with an average mortgage was signing up to pay $4504/mo vs $4379/mo last month. That's a decline of roughly 2.8%

So it seems like home buyers today are willing to pay almost as much per month as they were at the price peak, which has drawn prices down.

https://www.redfin.com/state/California/housing-market https://www.freddiemac.com/pmms

[seizethegdgap]

I started to reply "How many of these loans are sub-prime ARMs though?" and then went and looked for the data myself. I can't tell if these ARMs are risky, but we're seeing an early-2000's-level number of people applying for them.

https://www.cnbc.com/2022/05/11/adjustable-rate-mortgage-dem...

> “More borrowers continue to utilize ARMs to combat higher rates. The share of ARMs increased to 11% of overall loans and to 19% by dollar volume.” At the start of this year, when rates were still hovering near record lows, the ARM share was just 3% of all purchase applications. At 11% that is the highest share since March 2008.

https://www.mba.org/news-and-research/newsroom/news/2022/07/...

> The adjustable-rate mortgage (ARM) share of activity decreased to 9.5 percent of total applications.

https://newslink.mba.org/mba-newslinks/2022/november/mba-new...

> The ARM share of activity increased to 12.0 percent of total applications.

Now, my wife and I bought our current house on a 5/1 ARM that was capped at +-1%/year and I think 10% total. We then refi'd in April 2020 and got on a 30 year fixed. I'm not sure if new rules after 2008 require ARMs to have total/yearly caps or not, if they do then a bubble pop will likely hurt a lot less. If they don't, then we're likely 4-5 years out from another crash.

[b1c1jones]

Your metro area is not my metro area, nor is it any other metro area besides your metro area.

[prepend]

My metro area is similar to many other metro areas.

And I think is a pretty decent reference to average US home prices going up by 45% [0] since 2020.

[0] https://www.ceicdata.com/en/indicator/united-states/house-pr...

[basch]

Who here has a mortgage that eventually got purchased by Fannie or Freddie? The lenders underwriting home loans hold them a grand total of a couple days before they get passed along.

The crisis this time is going to be to bank shareholders. Probably some pensions and retirement funds. And then consolidation, and fewer choices for the consumer. Eventually we will all bank at MorganChaseGoldmanWitterWellsSchwabFargoHamiltonMellonMerrillLynchPierceFennerReynoldsSmithSachs.

[smt88]

Housing bubbles don't always burst (see: Australia)

[lmpdev]

Australia is in DIRE need of reform - unfortunately we voted against Shorten's election plans in 2019 that would have dramatically reduced the upward pressure on housing prices

Anecdotal but I cannot afford to move back to the lower middle class regional town I grew up in, as there are 0 rentals and buying is minimum $800,000

My mother's place has gone from: 1990 - $100,000 AUD 2006 - $600,000 AUD 2021 - $1,200,000 AUD

The local council estimates we can only add 0.29% to the population YoY

[quickthrower2]

Australia might be a reverse bubble. It is really the salaries shrinking (in real terms) rather than hot house prices increases.

[viraptor]

My street going >60% up in price would disagree and I can't think of any other price that grew as fast in the last 2 years. Food and other things got slightly more expensive, but it doesn't seem comparable to the housing.

[quickthrower2]

I am guessing your street is a very hip desirable (top 1%) area.

Most suburbs would have gone up in 2021 and down in 2022 and not be that much higher.

[anonuser123456]

Banks hold to maturity. There is no bag.

[testbjjl]

During this crisis, the Dow will rise because investors, or those left with a job and money to invest know there will be bailouts. These layoffs will put people back in the office so the cities don’t collapse. I don’t know how that’s going to happen any other way.

[adamredwoods]

2008 crushed the Icelandic bank system. I don't think any one is in that kind of trouble right now.

https://en.wikipedia.org/wiki/2008%E2%80%932011_Icelandic_fi...

[red-iron-pine]

Iceland has like 300k people; it's a rounding error with regards to European population. It's like trusting Rhode Island as a barometer for the US, it just doesn't follow.

[AnimalMuppet]

I second that this is not like 2008. 2008 felt like the end of the world; this feels like more banks are failing than in a normal recession, but nothing like 2008 - at least so far.

> In this case I think the risk is more towards high inflation - for example, if enough banks were to fail (hypothetically - I doubt this will happen) and bunch of money essentially has to be printed up to make everyone whole, that's going to devalue money hence more inflation.

I disagree on this point. Why do you have to print money to make everybody whole? Because a bunch of money disappeared when the bank went down. You're printing a bunch of money to try to get to net zero. That's not inflationary. In the same way, the Fed's moves in 2008 to create $4 trillion were to replace the $4 trillion that vaporized in the crash, and were not inflationary. (And before anybody raises the point, no, inflation showing up a decade later does not mean that the Fed's actions in 2008 were inflationary.)

[somewhat_drunk]

Same. 2008 was a potential world destroyer. This is small peanuts by comparison.

[nostrebored]

This is 2006

[dragonwriter]

No, we aren’t 5 years into a hollow “expansion” like the post-2001 one. People who only look at aggregate figures and headline institutional failures, and ignore distributional facts of the preceding context, simply cannot begin to understand anything about what was going on in the Great Recession.

[smt88]

People have been saying that since 2016.

[nostrebored]

Because we’ve deferred the pain of 2008 for years. The market makes no sense.

[smt88]

Consumption, job creation, and wages are still going up (on average). Most appreciating real estate is in high-demand urban centers where construction can't/doesn't keep up.

On top of that, a lot of older people are realizing the equity in their homes or their stocks, and they can buy in cash.

In that environment, you expect high home prices and high debt (as people assume their income will keep rising).

[pas]

which market and why doesn't it make sense?