Robert Reich was Bill Clinton's Secretary of Labor. He has persistently engaged in radical (in US terms) thinking since leaving office to be an academic . He wrote in the Guardian yesterday about the failure of Trump's Covid 19 policy, saying:
Brace yourself. Not only will the virus take many more lives in the months ahead, but millions of Americans are in danger of becoming destitute. Extra unemployment benefits enacted by Congress in March are set to end on 31 July. About one in five people in renter households are at risk of eviction by 30 September. Delinquency rates on mortgages have more than doubledsince March.
An estimated 25 million Americans have lost or will lose employer-provided health insurance. America's fragile childcare system is in danger of collapse, with the result that hundreds of thousands of working parents will not be able to return to work even if jobs are available.
And this matters. Of course, it matters enormously for those immediately impacted by a state and President that does not care in the USA. They deserve the most massive sympathy. You can be sure a disproportionate number are black, because that's what always happens in the US.
But it matters beyond them too, even if it feels slightly inappropriate to say so. In this there is the making of a banking crisis. You can't have that much property failure and not have a banking crisis: that simply is not possible. And when US banks suffer property crises the world does, at the very least, sneeze.
It's easy to think that the UK has a domestic economic crisis to manage right now. And, of course, it has. That is precisely what we have got, and the evidence that we are going to manage it will is diminishing by the day.
But we have more than that, we also have the risk of an imported crisis, as we had in 2008. And the point of origin is the same, and is the US housing market.
Reich does not make this point. He makes the point that right now Trump is pursuing the end of Obamacare to give the rich a tax cut. But that is simply another brick pulled from the wall that will bring this crisis closer.
Worry. When the US banks wobble the world does, and no one is in a great place to defend themselves against this right now. Unless we bail them all again, of course.
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I agree, we will have a fall in property values. If people can’t pay rent then rents will fall along with values…….. and you have made that point powerfully in your blog. The first part of the story in the UK is playing out through a “rent strike” in the UK retail sector, the intu bankruptcy and a fall in the shares of property companies…. and it probably isn’t over, yet. This will surely fed through to residential property but we know that this works through more slowly.
But I am not sure what it does to banks…. or more particularly US versus UK banks. There are various factors at work.
First, delinquency rates in the US are not (yet) at levels seen after the 2008 crash…. although those peaked in Q1 2010 so there will be a lag and if unemployment support is reduced at the end of the month delinquency rates will surely rise again.
Second, the US mortgage market is far more highly securitised (and some of it is government guaranteed and a lot is with FNMA/FHLMC etc.) so the risk from defaults is spread more widely in the system (with pension funds insurers etc.). The risk is still there but it does not lie exclusively with the banks. This was also the case in 2008 but today the pipeline of low quality mortgage originations that necessarily sit on banks’ books prior to securitisation (and sent Lehman and others bust in 2008) is not so great this time around.
Third, due to the experience of 2008 banks hold much more capital against the loans they make so are more able to withstand losses.
My thinking from this is…..
1) This crisis will take time to run its course. This was true in 2008 and the idea that the worst is behind us might, perhaps, be true medically….. but the financial aspects will take a year to become apparent.
2) UK banks are more at risk than US banks since they have greater residential mortgage exposure… but again, this will take a year to become apparent.
3) Increased capital in the banking system is good news but in the absence of serious action on employment it might not be enough.
4) Possibly (and only possibly) funnelling the pain into the banking system (because there WILL be a lot of pain) might not be such a bad idea. We have relatively recent experience of dealing with banking crises and it might be easier for Government to deal with a handful of large banks than thousands of companies and millions of individuals. So, offer relief to companies and individuals at the expense of the banks and then deal the banks.
Clive
I accept, I have underplayed the sequencing
The issue is not an imminent failure, but security and collateral is disappearing – and aren’t are part of that – and in some ways it will be more invidious this time because it will creep up on us
And I don’t see the buffers being big enough to handle it
But I could be wrong
Richard
“…. the idea that the worst is behind us might, perhaps, be true medically…..”
I have a problem with this interpretation. It is (please forgive me) too complacent. We may be in a short summer lull, soon past, soon fogotten; but the future is unknown. I am quite apprehensive about this winter. I do not detect either confidence or even deep understanding of what we may expect from the ‘science’ either. The scientists are very circumspect about this winter, as far as I can see.
There is a difference between a ‘spike’ and a ‘second wave’; and the idea that the second wave is merely a few random spikes is unproved. The more complacent we are now, I believe the harder it will be to reconstruct a serious lockdown, even if required for a period this winter.
All epidemiologists I know (and I know some) are worried about this winter
I have to say that I’d also actually considered this whilst watching a documentary of the what was happening with Covid in the U.S. – in it, it showed an undertaker in a pre-dominantly African-American area of a major town who was inundated with the deceased and had asked the police for help as he could not cope. He’s even ran out of refrigeration with terrible consequences.
I wonder how Trump’s handling of the crisis in the U.S. has gone down in the states whose electoral college advantage help Trump to steal the election?
Maybe restricting the sale of mortgage backed assets within domestic markets only instead of internationally must now be considered for sake of stability?
As far as I am concerned the US owes the world reparations for the 2008 crash given the FBI new about predatory lending and because the US Government’s deregulation of its finance sector as well as its reluctance to regulate derivatives at all – all major components in the crash.
Richard, in another post, you draw attention to the writing off of shale fracking assets by the major energy companies. In fact, there is a crisis in the energy producing industry in the USA since the fall in hydrocarbon prices during the pandemic. Production is being cut, wells are being sealed off, and companies are going to the wall. Before covid 19, the US was claiming to be the new Saudi Arabia, and to be (incorrectly) energy self sufficient. The collapse of the fracking industry in the US, both oil and gas, will assuredly add to the woes and uncertainties of the American economy. There will be pressure on the banks, with inevitable consequences for the property and housing market. Inevitably, the US economy will be in stagnation, and that will affect us over here.
Agreed
… it’s already giving me nightmares about the AVC pension pot I am/was relying on to pay off the mortgage on my bijou flat.
My dilemma is whether or not I cash it in now (I’m over 60), take the tax hit and lose 40% because I’m (fortunate to be) working – not asking for advice by the way, just illustrating – or do I wait until next April when I may have either opted to retire, or been made redundant by the university I work for, and then find that there’s nothing left (it dipped very very scarily earlier this year).
If I do take the tax hit in this year, I’ve then got to find a further £12k to pay the remainder of the mortgage off. I recognise that I’ve had and still am in a very privileged position (I won’t have a luxurious retirement, simply enough to get by on and to not have to seek charity until my state pension start in some years time) , so my sincere apologies for sounding the ‘woe is me’ note, as I’m fairly certain that the other pension pot I have will be there – though I note the ‘stranded assets’ line applies to my university pension pot too.
Tricky one and not for the faint hearted.
Sorry – I cannot offer financial advice
I am not going to give you advice as I don’t know your circumstances well enough, but I will suggest that 60% of something now is better than 100% of nothing next year, but also that I doubt you will be looking at nothing next year. Do you really expect to be lose another 40% from here?
Losses you have suffered earlier this year are gone already and there is no time to recover them if you might be taking the pension next year. You need to work back from what you need and when, and work out how you might get there from here.
Depending on the nature of your pension scheme and the AVCs (are they defined contribution – you get what you put in plus growth? not defined benefit – “buying” extra months or years of service?) I’d suggest that you might want to explore whether you could take pension benefits now (perhaps a pension plus a lump sum, or draw down capital or income), or whether your pot could be moved to a lower risk category (with more gilts, and less equities), or whether it would possible to get a transfer value so you can move it yourself to an external pension fund where a lower risk portfolio is available. (Gradually shifting from higher risk to lower risk as you approach retirement age should be a standard option.)
You may have more options if you can transfer – perhaps taking the pension, or start drawing down after the transfer – but watch out for fees. You may be better off staying where you have been for some time than switching for a short period. And please don’t believe the charlatans who might offer to help you to “liberate” your pension (and stuff you with a big fee, and then a swingeing tax bill).
You may know this already, so apologies if I am teaching you to suck eggs. Good luck.
In addition to the impending socio-economic crises mentioned by Robert Reich, there’s not much headline talk about another potential crash of the American financial sector – due to its current ‘fascination’ with CLOs. While CDOs were mortgage-based, CLOs are business-based and apparently with the same disregard for financial integrity. The unprecedented economic downturn from Covid-19 could trigger a perfect storm in the US, which would obviously have a significant impact internationally, especially the UK and other major economies which are fragile to say the least.. The worst-case scenario could be a total collapse of the global economy. How serious do think this threat is?
– https://www.bloomberg.com/news/articles/2020-04-22/how-a-deluge-of-downgrades-could-sink-the-clo-market-quicktake
– https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/
Well, at least this time we are not ennobling the leader of a British bank (with a Scottish name) to become the biggest bank in the world.