And?
Seriously. We either have to choose to be a market that is somewhat free or not. At this point, the government is choosing winners and losers. It is a repeat of 2008. Oh no, it is too big to fail.
Someone will come by with the investment to buy what is left. Perhaps they will run it better. Prepare better.
We're going through this with airlines and cruise companies now fighting for more money and loans from the government. Perhaps Delta grew too large to be what they are now. Maybe there are too many malls in existence. Maybe the method in which we collateralize mortgages doesn't make sense anymore.
Our economy has developed the too big to fail mindset and forgotten, largely, you can lose.
It's a news story, there doesn't have to be any underlying editorial message. Sometimes the news is just "thing happens".
The extreme example of this is a political news site that dedicates its entire site to posting anything that paints its opponents or their positions in a negative light. They can all be “thing happens” stories, but the filter alone gives it an angle.
The exception would be Bloomberg, or the Financial Times. Publications read for information to make decisions on.
>And?
And if you're a trader reading Bloomberg news, maybe factor that into your trading decisions, or something. Not every piece of news is a call for government regulation.
As has been stated, this happens, it’s what bankruptcy is for, and is not all that shocking or worth particular notice here.
These places tend to be connected to useful infrastructure like rail lines, and at least in the US, the internet kinda borrowed rail's right of way to lay fiber. Not sure how well connected malls are; they tend to be near highways so it might have a similar advantage?
If you really can't figure out one single use for cheap empty space, man, you need take a step back and just play around with your imagination a bit :)
If you decide you're going to force a shutdown and result in the unemployment of millions, you're going to have to ensure they have jobs to come back to.
But it's often not a choice between letting entire swaths of our economy collapse, and dumping absurd amounts of our tax dollars to prop up these poorly-run companies. We can give them loans with strings attached, force them to go through bankruptcy, wipe out the shareholders but preserve the structure of the company, bail them out but subject the industry to much greater regulatory scrutiny, etc.
Personally, I wish we had a straightforward way to bail out a company and have the U.S. government take ownership in the company until the stake can be safely unwound, or the too-big-to-fail company can be broken up. Theoretically, with a controlling stake and the corresponding board seats, you could force out the lousy management that didn't take adequate precautions as well.
It'd kind of be socialism-esque nationalization of industries with extra steps, but Japan has been doing a similar-style thing since the 90s, and I can't imagine it would be any worse than the relatively strings-free bailouts we've seen, or the collateral damage and runaway collapse that would occur from letting a monstrous chunk of the economy fail all at once.
Canada's CERB and CECRA have been doing wonders to keep ordinary people either afloat or employed, trickling up to small businesses all over.
(I don't mind your plan either, but it involves more per-company hand-holding than simply giving out generous unemployment and employment-support benefits)
Not saying he wouldn't have also signed the acts but the crisis was well underway by the time Obama was in the White House.
Why reward people who gambled and lost? Bust them out.
People will either buy the houses at more reasonable prices or (more likely in this case) the banks will renegotiate more reasonable terms with the original mortgage holders because they have too much supply and no buyers.
> instead of pouring money into banks and letting people suffer. Thanks, Obama.
That wasn't possible as liquidity also died. Solvent businesses couldn't give people paychecks because the banks had no cash. You had to bail the banks.
HOWEVER, what needed to happen was that the bank investors needed to get busted out. That was where Obama went wrong.
Why reward corporations and investors who gambled and lost? Bust them out.
>People will either buy the houses at more reasonable prices or (more likely in this case) the banks will renegotiate more reasonable terms with the original mortgage holders because they have too much supply and no buyers.
Other companies will buy the businesses at more reasonable prices or (more likely in this case) the banks will renegotiate more reasonable terms with the original mortgage holders because they have too much supply and no buyers.
And this was the issue with the 2008 fiasco. The government chose to save large financial institutions instead of breaking them up so the problems would be less likely to happen again. They chose to save large corporations over homeowners.
It is happening now with the pandemic response. I get the federal government wanted to dump a ton of money into the economy through PPP, but man, you cannot tell me the Catholic Church needed it. They are sitting on assets worth billions they could have sold/borrowed against to stay afloat. Same with large private educational institutions and public corporations.
The next round, and there will be a next round, will be more of the same. Carve outs will be rampant.
The USA should have looked at other countries providing direct income replacement to citizens. 70% income replacement sent to citizens and not force them through state's unemployment processes. Other countries did this and it worked.
Um, exactly?
As I said, the bank investors should have gotten wiped out.
The worst part is that a bank is probably the single business type that the Federal government can actually replace on a short timescale.
The US still uses SSNs for everything because everyone is too afraid of government identification to pursue a more sane approach, the result is a government issued identification that is poorly designed for what it's used for and extremely insecure. The same thing happens with our economy, instead of taking sane measure to fight against the penultimate death of capitalism (the slide into oligopolies) the vitriol against any form of government intervention has placed us in a situation where heavy handed government intervention is regularly required - we're avoiding a soft form of socialism and ending up with having to intervene like a planned economy about once every decade.
I really hope this can be solved by some smart people without trying to enlist wide-spread political support since I don't think that support is ever going to materialize.
Pretty much every market in the US has been insanely free, like "just don't kill people quickly and we don't care" free at some point. They all stopped being free when they got big. Then government got involved and regulation, regulatory capture and whatnot happened (I'm intentionally glossing over the details because they vary by industry and I don't want to pass judgement).
The US is thirty years out from the previous commercial real-estate reckoning. The S&L crisis. Everything that was booming a year ago was built on top of that reckoning.
In London a lot of commercial rents in newly gentrified areas have went up 10x+ in the last 10-20 years. There has been an awful of lot of value transferred to these landlords for really not a huge amount of work in many cases.
I don't disagree with you in principal, but unfortunately, we have a parallel problem of how the debt market works, which is essentially to generated and then sell the debt to investors, diffusing the "risk", or rather, I think of it more as displacing it. Much less incentive for active participation in investing via debt. People who end up holding the debt are many steps away from being able to have conducted due diligence.
Not to harp on a point, but the big theme of this whole fiasco starts with the displacement of risk from the risk taker. And since we've permitted that, we're all stuck with it.
And they should face the losses. And maybe learn from their mistakes.
And the people that were responsible with their money, didn't take on the risky assets that generated out-sized returns will be able to invest because they preserved capital.
(That hasn't been in the news for a few months, so I had to look around for some perspectives. Cf. https://daily.jstor.org/the-commercial-real-estate-markets-i... and, perhaps more controversially, https://www.propublica.org/article/whistleblower-wall-street..., suggesting that some of the same practices that turned the residential market into a crash-in-waiting may have been applied in the commercial market as well.)
The new laws did nothing to prevent this. They weren't meant to. We had a law designed to stop it that was enacted following the Great Depression. It was called the Glass-Steagall Act, passed in 1933. It was repealed in 1999 during President Clinton's administration... because Citigroup was too big to fail, and they promised to be good... honest.
2008 was an opportunity too great to pass up. Congress used the opportunity to enact a Federal bureaucracy that controlled banking and is not directly answerable to the Executive branch. This was the Dodd-Frank Act. Congress could have restored the rules in Glass-Steagall, which would have broken up Citigroup as a side effect. But they didn't.
Seems like recipe for disaster.
I'm sure that can't possibly go wrong. Especially since the entire SERP when I looked up the "non-prime" term you used was pages put up by fly-by-nights to reassure the suckers that there's nothing wrong with the paper and if anyone tries to tell you otherwise, you should probably punch them in the face.
Basically the Fed and the US government did their job. They stabilized the markets. The state governments (at least the competent ones) implemented lockdowns that cut the virus down. They will stabilize anything that is too big to fail.
I'm not too worried at this point, I don't think there will be any big problems. The Fed has learned a lot from the Great Recession and they are acting a lot more decisively than before. And I've lost a lot of money shorting the markets over the last 6 months so I've taken the other side of this and learned a lot (ie. don't fuck with the Fed).
SBA helped a lot. I have an SBA loan, and they gave us 6 months. Six months are up in October. At this point, we are not making money, but not using personal saving either. I won't be able to pay the mortgage after October.
I wouldn't worry about that. I fully expect the federal reserve to "fix" this by buying the toxic assets with printed money.
Many people cite the 1984 bailout of Continental Illinois as a turning point, but there are many examples before and after that.[1]
Bad execution is punished by going out of business.
This forces everyone to be hyper efficient at taking raw resources and getting useful value out of them. Thus people have more goods for less money.
People get confused because government gets involved and you end up with cronyism.
Free market is as another comment says, the minimum amount of regulation possible that isn’t killing people.
Government was involved from the beginning; capitalism was historically a redirection of the power of government from serving the feudal aristocracy to serving the mercantile class.
The utopian (and largely self-inconsistent) rationalizations for capitalism as something that magically exists separate from government and cronyism came much later than capitalism itself, and most of them even later than the early socialist critique of the reality of capitalism.
That's true for the entrepreneurs, but this was about the investors and it tends not to be true for them. It should be.
Not sure if it's just part of the joke, but the word is "tenet".
But what's equally important is ... if they are going to lose everything, how much of the social, economic and political infrastructure do they destroy on the way down?
It may well be that the era of the mall is over, for example. But malls crashing and burning as the mortgages associated with them fail is very different than a slower process in which there is time to think about repurposing and to give those directly affected to contemplate their options.
Because many people who still technically had jobs had their hours drastically cut, and because it's an economic stimulus, not strictly welfare.
Pretty sure that already happened. The US built waaay too much retail space[1], and still[2] has an overhang in most markets. And yea, Amazon kinda ate the Sears / JCPenny lunch, which has not helped matters.
[1]: https://qz.com/1032723/theres-much-more-empty-retail-space-i... [2]: https://amp.cnn.com/cnn/2020/01/08/business/macys-store-clos...
If the disruption happens to not be temporary, then it will be a problem (retroactively, so a huge one). But in that case, there are more pressing issues.
Pausing collections is fine. Pretending those loans are still performing is an exercise in fantasy.
This is, unfortunately, a very complicated problem.
I would argue that in Germany this is not the case. Everyone minds the gigantic soulless corporations suffering, because only they have the unions deeply intertwined with politics and the sympathy of the media (for whatever reason, ad money maybe?).
The Lufthansa bailout was clearly made to benefit the workforce and not the general population.
This crises lifts the high-level corruption here in Germany to the next level it seems.
Government help was supposed to alleviate that pain, but I doubt they'll receive any - another point for UBI. But forcing the debtors into liquidation when they could otherwise survive won't help anybody.
[0]: https://www.boredpanda.com/americas-oldest-shopping-mall-mic...
[1]: https://www.bloomberg.com/news/articles/2020-06-30/a-case-fo...
Speaking of films about the previous big crash, you could try "Margin Call" if you want a very straight-faced (to say nothing of po-faced) take, or "The Big Short" if you prefer something that, while no more genuinely incisive, is at least willing to pretend as though it were.
There's nothing wrong with not knowing a lot of malls, but come on, you have to qualify your statement a little bit, because your comment doesn't make sense to me as someone who can drive to KOP and at least a half dozen of the other malls I've been to when I was younger.
Although "still open" isn't exactly saying much either on your end - how many stores are empty? Are they on the decline?
I will concede that there are thriving malls in existence in the same way that stores that closed in one area of the country thrive in others. Not sure what that says towards malls as a whole but imagine it would trend to being viable in only a subset of the country.
...if rents don't fall. And maybe they should.
In both cases, the lenders and shareholders of the firm, have contractually obligated the firm to have specific returns (and often have built financial instruments on top of those predictable returns, which is why they bothered to invest in the first place!) So the firm itself is destined to either return the predicted profit, or die, with no middle road.
If the current tenants can be viable if rents are reduced, along with other cost saving measures, then maybe that’s a least worst outcome for society and the landlords.
Ultimately though, to me, the actual business leasing the property, employing people and providing service to customers is doing more for society and the real economy than a heavily leveraged management company. Those retail businesses don’t deserve to exist on any terms, but if they do have value, then I think they’re worth giving a second chance.
If that instrument defaults, it's not of so much concern that a property management company will die; but rather, that the companies who were on either side of it, relying on it as a conduit for money to flow through, will end up illiquid, unable to exchange through that instrument.
On one side, that's large investors, e.g. mutual funds. So the markets will go down.
On the other side, that's the businesses themselves. Having no access to financially-healthy property management companies to rent from, is a lot like having no access to loans: it limits your choices as a business.
Maybe the valuations of these properties will crash without property-management companies around to compete over them, and businesses will be able to afford to buy them directly. But more likely, as we saw in 2007, the commercial real-estate market will just become illiquid, with everyone who is currently holding empty commercial property (i.e. mostly banks, after a presumed default or bailout of PMCs) refusing to sell it "until things recover", so that they don't have to write down a loss. And that means there won't necessarily be any commercial properties on the market for these businesses to buy into in place of their previous rentals.
If Fedex & UPS were to be forced to sell off package delivery in NYC to cover losses while USPS continues to be hamstrung by the administration then things will get bad - and there are a lot of other operators that are a lot less visible but just as essential. Let slip retailers and banks are less stable - let slip banks and companies that are operating through the pandemic on shoe-strings and a whole bunch of backed credits lose the ability to keep the lights on.
Then the market will adjust. If you can't get packages delivered in NYC, you will have to get your goods through some other means. Maybe all of NYC is a bubble. Maybe that many people shouldn't live on a handful of tiny islands, importing their food from the mid west and their goods from China. Maybe everyone's in the wrong place.
But if that's true, is the correct solution to crash-and-burn from the current scenario to some version of a "better" one?
Profitable compared to what? Profitable for whom? Profitable based on what assumptions? Profitable by what metric? Dollars accrued to capital? Dollars accrued to GDP? Quality of life index? Happiness index? Life expectancy numbers? Infant mortality? Profitable with what externalities forced to be part of cost-factoring?
What is "the market"? What is a "decision" in this context? What is the cost benefit analysis of allowing "the market" to "decide" versus more policy-driven unfolding of the outcome?
... and so on and so on ....
i.e. the usual litany of problems with free-market boosterism
But the implications go beyond the people who work for corporations that fail, into communities (possibly far and wide). I don't think there are policies that can mitigage this without damaging the entrepeneurial climate, which I'd rather not do. At the same time, the incredible ease with which one can start new businesses in the US, and the trivial availability of credit, almost guarantees that we have huge numbers of businesses that play valuable roles in their communities but have absolutely no resilience to negative economic shifts. I don't know how we fix that.
There are things that we benefit from as a society that aren't realistic to accurately price for ethical reasons so I think this is quite too simplistic a statement.
Basically, except in the first scenario everyone agrees to suffer together. In the first scenario, the initial investors suffer and the new investors think they got a good deal. It's worth noting that LP's are usually built from people who have worked together before or from people with track records of being good to work with.
Nah, the third option is bailouts, and they are not wrong for having high confidence in getting bailouts.
Described in this: https://www.theatlantic.com/magazine/archive/2020/07/coronav...
The Dodd-Frank act capital requirements seems like they'll protect banks a bit, but to an outside layman like me it does seem like the CLO risk is similar in structure to CDOs.
What am I missing?
I'd be skeptical how different this is in practice. In 2008 there was an incentive to give loans to people without caring if they could pay because you could immediately sell them to larger banks that never checked the underlying status of the borrower.
With CLOs the borrowers are already selected to be companies in trouble - is the underlying resell incentive fixed if they're still being bundled together? In some ways the selection is worse because while most people need a mortgage no matter how good their credit is, I think business loans are needed more by desperate businesses. At least if the banks don't own as much (like you said) that's probably good.
From that Atlantic article:
> "A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world."
I think the structure of the CLO tranches rely on not all small loans collapsing at once and I'd bet the banks risk models (which already are incentivized towards taking on too much risk) didn't account for a global pandemic forcing everyone to stay at home.
I know Dodd-Frank requires them to have lots of capital on hand to protect against this kind of problem, but is it enough?
Also for us regular people, what should we be doing? Sell index funds and just buy Amazon?
Again, from that Atlantic article:
> "For the moment, the financial system seems relatively stable. Banks can still pay their debts and pass their regulatory capital tests. But recall that the previous crash took more than a year to unfold. The present is analogous not to the fall of 2008, when the U.S. was in full-blown crisis, but to the summer of 2007, when some securities were going underwater but no one yet knew what the upshot would be."
I don’t work in finance and these topics always bring out over confident know-nothings on HN going on about policies they don't understand (and I don't want to be that), but there are parallels here that seem pretty disturbing.
I don't want to be in the Summer of 2007, our institutions are less stable than they were back then and the politics have gotten scarier.
Like in 2008, the Fed will print as much money as it takes to prevent this kind of systemic collapse.
I'd be worried that the political will may not exist this time, or that the administration wouldn't be able to understand the problem well enough to even figure out what should be done.
If capitalism does what it says on the tin, I don’t get why can't we have a market cleaning price for buildings. Are we doing too much capitalism, or not enough? Is this just all very efficient but I’m not smart enough to figure out how?
Market economy works fairly well as to get the most value from the least work. If you allow empty apartment buildings, you will have empty apartment buildings if that's likely the best risk/reward for the owner.
It's not about too much or too little market economy, it's about accepting the proliferation about the wrong kinds of markets, markets that are not in the best interest of people. We don't accept trade in ivory because that's not good for the elephants, there's no reason to accept apartment buildings left empty when it's to the detriment of people.
No economic policy will govern itself, especially not any policy claimed to do so.
Mostly too little capitalism - buildings are very heavily regulated. Zoning, property tax, planning laws, rent control, and habitability laws are big factors. For example maybe it's illegal to rent out the building because the kitchens are too small, and renovating it would not only cost a lot up-front but also push up the property taxes, so you'd have to be confident of getting a return - and maybe you're intending to knock it down and build a replacement as soon as you get planning approval.
Yeah the knock on effects would be terrible, but the underlying results being lower costs for renters, seems pretty natural / appropriate.
The federal insurance program made it so people could trust in banking again.
Now I do think that the policy has gone too far. Bank investments should receive any bailout, those are part and parcel of the normal functioning market.
The real laws should have been 'banks shall not loan out money from a depositor's account' and the problem would have been resolved. Investors could have loaned out money. Insurance could have protected against bank robberies, similar to how any kind of insurance works against theft today.
In this situation though, when there is a threat to society as a whole either military or natural, there’s a legitimate role for society to pull together and coordinate our actions. That’s what government is for. All societies can benefit from consensus and leadership, especially in situations like this.
If their business model really fails, then fine, that’s because there’s enough value in alternative providers that these ones are no longer needed. However in temporary crises it’s possible that the process of dissolving businesses can leave a gap in the provision of valuable or even vital services that the market cannot fill fast enough. Markets are incredibly powerful, but they aren’t omniscient or omnipotent.
This is why although I’m a believing capitalist, I think there is a role for regulation and even bailouts in extraordinary circumstances. I’ll even extend that to individuals, a crisis can hit any of us just as it can hit a business. I don’t see that necessarily as socialism, just good management when done judiciously and proportionately. Ultimately it’s about fairness and good outcomes. I’ve no time for ideologies.
And, in this fun world, you might find a terribly over-leveraged business where no one ever tried to act fraudulently but some vulture capitalist consultant helped "ensure access to liquid assets" and is now in Kiribati watching the world burn.
In practice, I think we will see companies being sold off the friends of the sitting president, and powerful senators.
Today, at least they must at least pretend to be equal in their bailouts, which gives non affiliated companies a chance to receive money.
... even more.
Behind this is a lot of overvalued debt, which is at risk. Large institutions essentially treat this debt like dollars and have a bunch of their holding spread across a bunch of mortgage-backed securities such as these. Effectively, debt needs to be written off, and as such, "dollars" will disappear. This could result in some serious deflation.
The people who will be screwed are retail workers.
Not everyone has aircon.
Not looking forward to that if COVID is still kicking our arse.
I think the idea of a indoor mall was great, but it’s a big building that’s hard to maintain.
Maybe future societies will just have geodesic domes around town centers to get the best of both worlds.
But the moves threaten to upend huge swaths of the real estate market and the half-trillion dollar market for commercial mortgage-backed securities.
It's not "Busted US Retailers Use Bankruptcy to Break Leases", but more the "...by the Thousands" part. Malls are going to start becoming ghost towns, especially with no anchor stores like Penny's and the since-departed Sears.