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

http://www.nytimes.com/2016/02/04/business/dealbook/toxic-loans-in-china-weigh-on-global-growth.html

by es09 • 10 years ago

115 80 10 years ago

mathgenius2• 10 years 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• 10 years 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

mathgenius2• 10 years ago

Very amusing.. Ouch.. But that tensor beef does look yummie!

I was just exploring an analogy, not particularly looking for any explanatory power.

Retric2• 10 years 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.

redthrowaway• 10 years ago

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

bsbechtel• 10 years ago

I like how they devoted a whole paragraph to that point, although it's probably the most important one in the whole article.

kolbe2• 10 years 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• 10 years ago

We also left the same regulators (who did nothing to forestall the Great Recession) in place for good measure!

MCRed• 10 years 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• 10 years 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• 10 years ago

Have to paste it: http://i2.wp.com/armstrongeconomics.com/wp-content/uploads/2...

roymurdock4• 10 years 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• 10 years 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• 10 years 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• 10 years 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• 10 years 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• 10 years 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• 10 years 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?

aback• 10 years ago

Also:

phkahler• 10 years ago

> 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.

This seems to be the opposite with student loans. The government has backed those and will not allow them to be dismissed in bankruptcy and all that, yet those loans have some of the highest interest rates around.

Is that just based on the lack of collateral? I mean a person could die and then it will never be repaid. Homes are required to carry insurance, so the risk of destruction is covered. Is that what it is, or are they just screwing people over? These are just questions, I have no skin in the game ATM and hope my kids can avoid it as well.

sbierwagen2• 10 years 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?

It is unquestionably true that a debt jubilee would result in higher interest rates. It is somewhat disingenuous to spin this as a negative for people with marginal credit: you only have bad credit if you are very young, or have outstanding debt-- annulling a thousand bucks of debt has dramatically greater marginal utility than the ability to get a loan of a thousand dollars at 15% APR instead of 25% APR.

I also question how long the effect of a jubilee-premium would last. Five years? Ten? Brazil, Argentina and Mexico all defaulted on their sovereign debt in the 80s-- (https://en.wikipedia.org/wiki/Latin_American_debt_crisis ) and they certainly weren't locked out of the bond market forever-- Mexico's 30 year bonds are standing at about 6.8% right now. Gold was illegal to own in the United States from 1933 to 1975, (https://en.wikipedia.org/wiki/Gold_Reserve_Act ) yet investors aren't acting like they're afraid of the government taking their gold again-- it's at $1,155 a troy ounce right now.

jasode2• 10 years ago

Why not forgive the loans?

The idea of a "debt jubilee" is definitely something that's been discussed before by economists and philosophers.

One big issue is that there are other people on the other side of those debt cancellations that would get hurt.

For example, it's terrible that young adults have massive college loans to pay back. Some are kicking around the idea to forgive those loans. But there are also creditors as well. Think of grandparents who have a 401k for retirement. Through the interconnectedness of the financial system, a component of their retirement income will depend on payback of those "bad" college loans.

Will those senior citizens happily vote for a debt reset if they know their retirement savings get reduced? Seems doubtful.

The way to sell the idea of debt forgiveness is to convince the creditors that it's impossible for the debtors to pay them back. Therefore, take a financial hit now instead of later so the economy can get moving.

cryoshon• 10 years ago

Cynically: the old are already impoverished, and we have more to gain by freeing the youth from future poverty than we do by salvaging twilight years.

Realistically, you're right about debt having two sides... but one side is typically far more in the hole than the other.

Frondo• 10 years ago

This is a really good point. My gut tells me that if the old people were relying on the massive indebtedness of today's college attendees, then that has been a cruel error on their part, an injustice that should be righted.

Also, the artificiality of the debt--and the idea that a jubilee won't really hurt the creditors--is put into striking relief by the Rolling Jubilee. Right now, people are already buying that bad debt for pennies on the dollar, just to wipe it out. I'd like to see if anyone's modeled what would happen if that behavior were just turned up to 11, who'd be harmed, etc.

jsprogrammer• 10 years ago

But there are also creditors as well. Think of grandparents who have a 401k for retirement. Through the interconnectedness of the financial system, a component of their retirement income will depend on payback of those "bad" college loans.

Do most 401Ks really invest in student debt?

anigbrowl6• 10 years ago

One big issue is that there are other people on the other side of those debt cancellations that would get hurt.

A risk they assumed when they decided to put their capital to work. I don't actually have any debt myself so I don't have a dog in this fight, but if you have the money to purchase risky assets in expectations of earning a coupon then your necessities are already covered. Between people who don't have enough to live with dignity and people whose investments don't pan out, most of my sympathy goes to the first group.

branchless2• 10 years ago

Bonfire of the boomers+. It's time.

golergka2• 10 years ago

What about the people who put their money in the bank, the money that was used to give those loans? People who are relying on their pension plans? Life savings?

What you're saying is that we should _just take money from people_, without expectations to give them back anything directly.

sbierwagen2• 10 years ago

Savings accounts are FDIC insured up to $250,000.

Many retirees hold government bonds, which aren't going to default.

A consumer-debt jubilee mostly affects investors, and maybe pension funds.

cylinder• 10 years ago

Read here, http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...

tl;dr is China will need to eventually give in and do debt forgiveness. there's strong historical precedent for it.

krapht2• 10 years ago

Is there a mirror? My corporate firewall is blocking your link.

wernercd• 10 years ago

The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place.

So, your solution to "the banks" slack policies - which were actually caused by government meddling: Affordable Housing Act, guaranteed student loans, etc...

Your solution is more government meddling? Forcing the banks that didn't want to give out loans... to lose money on those loans?

How about stay-out-of-the-way economics?

Socialism - take from the "rich" and give to the "poor" - disincentivizes people from working and being productive. Why work hard, when the trash down the street lives better by being worthless?

I mean... it just blows my mind that people see these issues... issues caused largely by interference... and so many think that the answer is more interference.

anigbrowl6• 10 years ago

Nobody forced the banks to participate in those markets. The government interference has been limited to demanding that banks treat the public equally instead of reinforcing structural discrimination.

roymurdock4• 10 years ago

The government plays a regulatory, distributive role in society, allowing profits to accrue to capitalists but setting taxes and running social programs at the proper level to ensure that society as a whole functions smoothly, and that there are opportunities for everyone to improve their situation.

Most of the economic world is in agreement that financial deregulation was a huge contributing factor in the crash of 2007-08. The repeal of Glass-Steagall allowed banks to take on too much risk with too little supervision.

This would have been fine if the banks had been the only ones punished when their bets went bad - but they had also been allowed to accrue so much power (through consolidation/M&A) that it was impossible to let them face the consequences of their own bad decisions and fail. So they had to be underwriten with public money in the form of QE.

A functional society requires healthy levels of both capitalism and socialism to survive. But the most important thing in my opinion, is that those who intentionally commit fraud or do not act in the fiduciary interest of their stakeholders are adequately punished. This last part is of course the rub - how can you tell if the leaders of business and finance were intentionally setting up their dependents for a crash? What is the adequate punishment?

maxxxxx• 10 years ago

Nobody takes about "taking from rich and giving to the poor". How about at least stopping giving more and more to the rich?

ArkyBeagle3• 10 years ago

Because people are bloody minded animals.

This is a survey: http://mappingignorance.org/2013/03/20/experiments-in-fairne...

The seminal experiment is Kahneman around 1986. I fail at finding a good treatise on it. But here's this: https://en.wikipedia.org/wiki/Prospect_theory

And as applied directly to econ: http://www.econ.uzh.ch/dam/jcr:ffffffff-9758-127f-0000-00005...

The banks are simply our agents in this. Roughly, other "innovations" have made debt more dangerous over time. My paltry understanding is that one of the uses of inflation is to erode the value of debt.

We don't have meaningful inflation any more. And yes, I relaize how bizarre that sounds. But: http://www.interfluidity.com/v2/3212.html

Something terrible has happened to the tradeoff between the balance sheet and cash flow. A really crummy analogy is position v. velocity on quantum realms; as competitiveness has escalated, we get to where the trade between them is more severe. Also IMO, much as wages have stagnated, the value of capital goods has also.

CyberDildonics• 10 years ago

If you have a job and the company has agreed to pay you, why don't you work for free?

marcusgarvey• 10 years 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-b...

masterleep• 10 years 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_tower2• 10 years 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• 10 years 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?

markhall• 10 years 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?

nissimk2• 10 years ago

sell financials. buy alcohol producers and distributors

buy gold.

buy bitcoin? :-)

shostack• 10 years ago

Isn't that trying to time the market?

ChuckMcM• 10 years 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?)

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

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