Luckily debt will be solved by the power of AGI, right? Just one more data centre! One more GPU! It can nearly write a basic three tier application with only 10 critical security vulnerabilities all by itself!

If you read the article, it says the default is directly related to the sell off of software stocks, which are heavy private credit borrowers.

What caused the SaaS apocalypse? Gen AI.

I'm long on AI hardware companies for this reason.

We didn't recover from the 2008 crash properly because we didn't introduce consequences for those who created it.

Hundreds of financial institutions with greater or lesser responsibility for the crash in 2008 went under in those years[0]. The shareholders in almost all of these companies lost all of their money and the responsible employees lost their jobs. This includes some of the most guilty companies, like Washington Mutual, Countrywide Financial, IndyMac, Lehman Brothers, Merrill Lynch (through First Franklin Financial), Bear Stearns. But all these companies are completely forgotten now.

Instead everyone hates on Goldman Sachs. Sure, Goldman Sachs deserves hate, but of the big banks they were the _least_ guilty of the crash in 2008. Not saying they were saints, but in 2008 they were the least bad.

0: This list only covers banks, not non-banks like Countrywide Financial: https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...

When you have people at the top of those institutions who made those decisions, and made enough money during their tenures to weather any length of unemployment and were sometimes even given a severance worth more money than the average American makes in a lifetime, going out of business or losing a job simply isn't enough.

It's one of the only investments of labor and time where the risk is not proportional to the return.

In order to create risk, you have to either claw back their money through civil action - which you can't because the entire point of incorporation is to separate the business entity from one's personal finances - or look at criminal charges. Otherwise, you have created a class of hyper-wealthy people who have no real incentive to perform in a way that is for the best interests of shareholders or society at large.

It's the reason we tie so much for regular people to employment in the US, like healthcare. Many argue that if you give the rank-and-file worker the kind of long-term financial security that just one or two years of being a C-suite executive at a major company, they won't work as hard. They won't make the best decisions. They won't be the dynamic workers our economy supposedly wants. That logic goes right out the window when a board goes hunting for a new CEO.

There's zero real risk involved.

>The shareholders in almost all of these companies lost all of their money

How is that penalizing those responsible?

Isn't it a pretty big leap to go from penalizing those selling packaged fraudulent loans to the public (whom, to my knowledge were never prosecuted) to the shareholders losing money as protection against it happening again?

The shareholders are responsible for the management of the company who are in turn responsible for their employees. By wiping out the shareholders in these companies hopefully other shareholders in other financial companies will demand more oversight. In the end people respond to incentives and the individual employees that sold the fraudulent loans were implicitly or explicitly incentivized to do so by management, who were in turn rewarded for this by shareholders. Going after the specific employees that sold the loans is of course morally satisfying, but if we want this to not happen again we need to make shareholders and executives keen to avoid a repeat. Looking at how popular Klarna, gambling companies and now private credit has been with investors, it doesn't seem to have worked, unfortunately.

But, yes, it is a travesty that more of the subprime loan salesmen weren't prosecuted. It has a lot of value for a society to actually convict people that have done actual wrong. We all want to live in a just world and seeing that people who have done wrong get what they deserve is part of that. Looking at the US from the outside I think a lot of the polarization we've seen in the US over the past 15 years could have been avoided if more prosecutions had happened in 2008-2012.

IMO this is also why big companies being allowed to do settlements without admissions of wrongdoing is so bad. They fail to fulfill the moral purpose of law enforcement. Ironically Goldman Sachs _did_ admit wrongdoing in their settlement with the SEC over their Abacus CDFs...

The problem is, shareholding is now so abstracted as to make actual corrective action incredibly unlikely.

If you have investments, go and look what your holdings are. There's a real chance you have some sort managed portfolio that will trade equities to maintain growth. It might be algorithmically-driven. Your holdings may very well temporarily include some companies that you don't approve of, but trading happens so fast and so often that you're not going to be able to keep up on what you actually own.

That is a highly abstract theoretical view that is true of private corporations but does not reflect the real world of public traded corporations.

The tap went off, but they kept the water they collected from it.

> That's because debt IS money. Literally.

OK.

> If you create debt, you have created wealth.

No, you have created money. Money is not the same as wealth. If you create money without creating wealth, then it's inflationary.

Just a minor nit. The rest of your post I agree with.

In fact we rewarded them. We bailed them out by printing a lot of money. We then printed more money during the pandemic to pay people to stay home and watch Netflix. Probably a lot more examples. All that money flowing around that has no basis in actual productivity or value created. It's got to correct at some point. One of the corrections is how much more everything costs now, but I don't think that has fully absorbed the excess.

I would argue the second instance (pandemic) was much more nearly what a good government should do than the first one

Exact opposite. We are in the midst of the COVID hangover.

So that govt money went to the wealthy to buy up houses (Californians bought real estate in the Midwest as investments and it drove up housing prices along with small immigration to these states)

Farmers etc benefited from bailouts when they were doing very well. It was a large blunder.

All that money directly led to housing inflation that still hasn't settled. The PPP loans were all forgiven (which massively favored business owners and upper class).

Meanwhile student loan forgiveness was overruled by the supreme court.

It's really hard to ignore the implication that it ended up being more like a wealth transfer than anything else.

It may be what they should have done, but the effect was still inflationary. There is no free lunch.

It was inflationary but would spread out the pain over the recovery period after the crisis, the other option was to allow 100% of the pain to be felt immediately: economy shutting down, people losing their jobs, diminished household spending, less money circulating in the economy, businesses still running having fewer orders/customers, more people being laid off, all the way until the crisis passed.

Between the latter and the former I believe the former was a much smarter choice in the medium to long term.

Thanks, that was a perspective I hadn't thought about. But still doesn't seem like that taught any lessons, other than the taxpayers will bail out our carelessness.

I appreciate your posts generally, you have a lot of good insights.

Do you think replacing that 4T was a good call? I'm struggling to see how it was the right play.

I think it was a good call, yes. A deflationary collapse is incredibly damaging to the economy. The Great Depression was such a collapse, but there are others. The Panic of 1857, 1873, 1907... there's a long history of these.

The Fed avoided that. And they also avoided causing inflation. It was an amazing job of threading the needle. (One could argue that they caused a decade of stagnation, but in my view that was minor compared to the other options.)

I have really tried hard to figure out the counterfactual as being a good thing and it is just really hard to make the argument that we would have been better off with a deflationary collapse.

This is especially true from a global perspective. It would be a much more equal global economy but unimaginably poorer. The political consequences are unknowable but a deflationary collapse would not have had good political outcomes.

We largely shifted a nightmare into being a great time to be alive but take the good times completely for granted because we can't really know the nightmare we didn't see.

Thank you for the thoughts. Do you think if we had ripped the band-aid off then it would have been completely disastrous? I don't mind saying that this economy is frustrating, and it feels like we keep kicking the can down the road. I'm confident I'm not the only person that feels this way, and I'm quite open to being wrong here. My guts says there's just too much money sloshing around, and it gets vacuumed up, leaving the majority feeling like nothing changed.

I'm asking this in as non-confrontational way as possible, what am I missing?

I think you may be missing that $4 trillion evaporated in 2008, and the scale of the catastrophe that would have caused if the Fed did nothing. What the Fed did then was, essentially, restore the amount of money to what it was in 2007. They were trying to turn 2008 into as much of a "nothing changed" as they could, and they did it quite well.

I think the economy can adjust to any amount of money; it's the abrupt change in the amount that causes problems (because it causes an abrupt change in the value of money).

I think you may be missing that I'm not saying the same thing about the pandemic response. I think that too much money got poured in during the pandemic years, and that has caused inflation, and we've been seeing that inflation since. I wonder if you are taking how you feel about the last five or six years, and mapping that onto the last 18 years.

Now, from 2008 to 2020 was not all roses. Things were kind of stagnant. The rich were probably doing better than you were, because assets like stocks and land went up in value as interest rates went down, but your wages didn't go up. So, it was reasonable for you to feel "there's too much money sloshing around" in things like stocks during those years.

But I think it got worse after Covid. The government air-dropped too much money in, and there has definitely been too much money sloshing around since then.

In all of this, I'm not really saying that you're wrong in feeling that there's too much money sloshing around, or that the economy is frustrating.

Consequences would be nice, but actually forbidding it for the future would be enough. Obama promised to do it, but didn't, and everybody kind of forgot and moved on.

    > Obama promised to do it

Do you know how the three branches of government work and who writes the laws?

The legislative produced Frank-Dodd...which Trump and Republicans later scaled back...

Do we still have three separate branches?

We sure did when Frank-Dodd was written by the legislative and then signed into law by the executive.

GP's comment is about the aftermath of 2008, entirely missing the fact that the legislative did in fact create laws which were signed by the executive and then later, in 2018, dismantled under a different administration.

It's a matter of simple facts here.

Frank-Dodd wasn't nearly as strict as the post-1929 regulation (Glass-Steagall act) that actually prevented such crisies for half a century.

Sure, but is that Obama's fault? See GP

If it wasn't in his power to toughen regulation, why did he promise it in his campaign?

So do you or do you not understand how the branches of government work?

An executive's promise can only mean "I will sign the bill" because aside from executive orders, legal structures originate from the legislative.

I mean people have been saying a crash is coming for years... Consumers recklessly purchased homes and cars at double their value, while relocating for remote work that was never long term in the eyes of their employer. Sounds like a receipt for disaster or a repeat of 2008- however, so much has changed since 2008... whatever happens, Black Swan! Hope "you" have your ducks in a row... As for AGI, lol. A box of matmuls isnt going to solve any real problems, so far, as you point out- is can barely write software. LLMs are basically gifted children. Smart sounding, lacking wisdom, chaotic, and likely just going to end up not that impressive. Either way- before we ever see AGI, we better get our heads out of the holes of the wealthy and enact UBI...