*but were afraid to ask.

I am motivated by some news of today (August 14, 2019), according to which something not good is happening to the market, so I was thinking that it might be a good opportunity for me to learn something from those in the JCC who know more on the subject.

In this thread any topic related to economics can be discussed, and in particular questions from those who know nothing are encouraged.
I can start with something quite general:
1) what is happening right now to the world economy and why?
2) what happened in 1929 and how is it different from what happened in 2008?
3) to what extent are political leaders responsible of the way the market behaves?
4) for example, I know that some people argue that Bill Clinton's deregulations might have played a role in the crisis of 2008. Is it true?

 

I have a question:

Will we ever have a president who considers market deregulation to be a bad thing, and would actually allow his/her Justice Department to prosecute speculators? Because Clinton, Bush, Obama, and Trump are all corrupt piece of ---- with lots of blood on their hands.

 

I have a question. What's the alternative to growth that's not the Middle Ages?

 

1) There are a number of answers, some of which are contradictory, but the most likely driver is a combination of a) Brexit being an almost certainty at this point (several signs in the last few weeks) which causes massive uncertainty in the market, b) interest rates cut which is going to drive profits and/or revenue (not the same thing) lower for several sectors in the US, c) several underperforming results from companies in the last couple of weeks (including Uber possibly going too far negative), and d) the Moron-in-Chief's tariff war coming home to roost with China announcing it will no longer buy any US agricultural products (at all).

2) 1929 is dead and gone, and won't happen again. Which isn't to say that there's not a massive recession coming -- the signs all point to one -- but likely not another Great Depression. Because the stock market is essentially all-electronic now, there are "circuit breakers" on the market. I think it can only drop 5% in a day before it'll cut in. Similarly, the economy is much more global, so whilst there's a desire from China to remove the dollar as the primary backing currency in world markets, doing it all at once would cause such instability (and they hold enough of our debt) that it's a losing strategy in the short-term -- so there's likely backup from our global allies (and some rivals) to ensure global market stability in a way that there wasn't in a post-WW1 society.

3) Less than people believe in most cases. However, in this case, Trump's insane tariff war does appear to be coming home to roost, as well as his Fed chair (who did what everyone thought he'd do -- and what Trump didn't want) -- who admittedly is probably doing the right thing (I don't blame the Fed chair).

4) Unlikely that Clinton's deregulation was a direct cause of 2008, but it was a contributing factor. Deregulation (and repeal of Glass-Steagal) wasn't prima facie bad, but the stewards of the market, as well as the -- frankly -- ludicrous debt brokers who caused most of the subprime mortgage crisis were the more primary drivers. The larger financial institutions, as a whole, were primarily not the instigators -- they were just much too extremely lax in due diligence in bulk repurchasing from the illegal mortgage sellers because they were making too much money to ask the right questions.

 

Is greed good?

 

... if you're one of the Pauls, Ryans, or other Ayn Rand fans. For basically everyone else, you need to attach your own personal greed to compassion. Or think of a "triple bottom line"...

 

@dp4m
very good, thy.
I have two questions:

"as well as his Fed chair (who did what everyone thought he'd do -- and what Trump didn't want)"

What did the Fed chair do?

"The larger financial institutions, as a whole, were primarily not the instigators -- they were just much too extremely lax in due diligence in bulk repurchasing from the illegal mortgage sellers"

What does this sentence mean?

 

Everything I know about economics:

 

I have a question about the current recession predictors... how does a recession like this affect someone like me? Basically, someone who already has a mortgage and a car payment and a job? But who isn't going to be cashing in my 401k for decades?

 

So, first part first. Trump has oft-times railed against the Fed as "too cautious" and basically hated everything that Janet Yellen did as Fed Chair, very likely because she's a woman and not for any substantive policy reason. The reason for this supposition is because the person he nominated as her replacement (Jerome Powell) -- out of literally all of the fairly qualified candidates he had -- had the temperament and policy theories most closely aligned with Yellen, he was just a Republican (and a less-educated, but not really any less qualified one).

Trump's stated goals are interest rate cuts by the Fed, full stop. Which they've been fairly much not doing over the last decade (sometimes no rate change, or sometimes small increase). This increases bank revenue, and therefore investor revenue, as well as eases the liquidity of the lending market so more people can borrow more money overall -- albeit at higher rates. (NOTE: This is a fairly simplistic way of defining all of that, but it should be more generally true than not)

The Fed just cut rates for the first time in a decade -- which is to hedge bets against the President's trade war -- but it's a) not as much as Trump wanted (because the Fed's not dumb) and b) cutting rates (an "insurance cut") in the middle of still fairly decent growth and unemployment while the peripherals are still not caught up, probably led somewhat to this stock plunge.

Here's a decent article on the cut and other information: https://www.nytimes.com/2019/07/31/business/economy/federal-reserve-interest-rate-cut.html

In terms of the second part: by and large, significantly sized financial institutions (even as large as small / regional banks) were not the primary driver of bad / junk loans and mortgages that caused the subprime mortgage crisis. It was primarily third-party lenders who, in many cases outright fraudulently, gave out loans and mortgages and then packaged these bad assets into combined investment instruments that those banks then bought.

Ordinarily, the Risk departments would have caught this for those institutions (again, even for the smaller / regional banks, let alone the giant ones) but the positive financial impact was so large that speed-to-market was such a legitimate concern that many of the warning signs were ignored in favor of (potential) short-term profit. This obviously blew up in everyone's faces, but companies like AIG, Citi, JP Morgan Chase, etc. would never have given those loans out individually or insured those properties individually -- but when they were bulk packaged as massive investment assets (with some good assets in there with the bad) it got out of hand.

Make more sense?

 

Michael Douglas actually explains it quite well with Shia LaBouf in Wall Street 2:

"You know subprimes are crap."
"A credit-default swap is a good idea in theory; it's the execution that's problematic."

Your entire career, @dp4m, summarized in two lines .

 

... is really more apt.

 

Zing! Love it!

 

BTW, having never seen the movie -- is that a real quote? That'd be a hell of a needle-thread they'd have Gecko trying to do...

 

You’ll be fine, assuming you don’t lose your job. The 401k was I’ll have enough time to recover. It’s the one in the ten years before you retire you have to worry about : P.

I had different “401k” options in my gov job, and if I had stayed to retirement I intended to move all the money into a safer option closer to retirement. Until then I was being quite aggressive, but basing it on the previous five years of growth for the plans offered.

 

I had heard the general rule is to take 100 minus your age to get the percentage you should have in the stock market vs. safer options. So I have about 70% of mine in stocks. But yeah, long way from retirement... unfortunately.

The keeping my job thing is... well I hope so. Because I love my job.

 

If most of the world's money does not physically exist then what is all this "money" changing hands around the globe?

 

It’s a real quote.

So’s this:

“You stop telling lies about me, and I’ll stop telling the truth about you”.

 

Yes, thanks I think I am slowly starting to understand the general idea.

1) When the interest rates are low more people borrow money, and this maneuver of cutting the interest rates is usually adopted when the economy is not in a good shape to stimulate growth (I guess?), whereas here they decided to do it when the unemployment was already very low and the GDP was increasing at decent pace. But what are the mechanisms for which cutting the interest rates in the wrong moment provokes the stock plunge?

2) so the characters of this story are the following
--- the third party lenders who created the investments assets using "bad" loans and mortgages (and I guess that bad here means that these loans and mortgages were made for people who cannot be trusted to pay back)
--- the big sized banks who bought those investments assets
--- the Risk agencies who didn't warn the investors about the bad quality of these investment assets

am I on the right track?

 

For #1, the market is already in a period of uncertainty (given the factors I answered above at first), but a reduction of interest rates now means that the Fed is taking a chance of a recession seriously -- and hedging against international uncertainty by trade war -- and just giving what they call an "insurance cut." Generically, this is part of a wider cut plan by the Fed -- but we don't know how that will play out, and the market reacts badly to uncertainty. I don't necessarily think that the cause of the markets going down is the rate cut, but I think the rate cut might be an effect of the market instability over the last few weeks.

For #2, generally yes except 1) the "bad" was the third-party lenders outright committed fraud in some cases (either in sales to people, or falsifying underlying financial data when packaging it up, or both) -- though yes it's also true that some people were fiscally irresponsible in taking on way more debt than they should have, and 2) the risk organizations are internal to the banks (it's not an external agency). This is a good explanation of the 3LOD system, which most banks tend to use:

https://www.theirm.org/media-centre...-under-the-3-lines-of-defence-in-banking.aspx

And here's a good primer on some of the shortcomings even within that (post-2008):

https://www.theirm.org/media-centre...-under-the-3-lines-of-defence-in-banking.aspx

 

I think you unintentionally copied and pasted the exact same link twice.

 

You are correct, I did!

https://www.bcsconsulting.com/blog/held-accountable-the-three-lines-of-defence/

The above is the correct link. And fortunately, also not the link to Chili Colorado I also was researching...

 

I'd like my income not to be dependent on the whims of some doofus that was chosen into office by a minority in a far-away country that bloatedly calls itself America.
How can we arrange this?

 

Several methods:

1) Thoughts and prayers.
2) Thoughts and prayers for McDonald's and KFC to finish the job.
3) Elections.
4) The Second Amendment
5) Susan Sarandon the economy (see #3).
6) Impeachment (see #5).
7) Invasion by Eurasia.

 

This may be your best post ever.