THE WOLF STREET REPORT: Revenge of Variable-Rate Commercial Debts

Most people in finance today cut their teeth in the era of Easy Money, when history books were thrown out the window.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  160 comments for “THE WOLF STREET REPORT: Revenge of Variable-Rate Commercial Debts

  1. Occam says:

    That was a very entertaining discussion of psychology and experience in finance, and how even when you’re right you can be wrong. One big reason no one (e.g., me) believed that the Fed could raise rates much above 2.5% was because of the immense built-in duration risk after 15 years of ZIRP. Over 300 trillion dollars worth of world debt issued at very low rates seemed to be an obvious anchor for rate increases. When bank failures in the US started, I thought LOL, I was right, rate cuts were inevitable. Instead, the Fed pulled the BTFP rabbit out of its hat, depositors were made 100% whole, and the panic blew over. Other central banks will thus have learned how to defuse duration panic, and so for now, higher for longer seems to work, despite trillions in unrealized losses in the financial system on existing debt, at least until the next panic occurs.

    • MrMagoo says:

      It is interesting, the Fed bailed everyone out.
      Everyone was bailed out, no $250,000 limit.

      If there is another run on banks, will everyone get bailed out again ?

      • JeffD says:

        Yes. And we will have Zimbabwe/Venezuela type currency. Count on it.

        • phleep says:

          We averted a breakdown. That’s what good regulation does. Everything is not a runaway process to catastrophe. That’s what regulation is for. Like your heart rate or blood pressure. For now it is within normal limits, except those out on a limb, such as these variable-rate folks. That was for them to manage. I did. Regulators are to preserve the system, not save every fool.

        • Lisa_Hooker says:

          @phleep – but the regulators through their policies over the past 15 years have created a tremendous oversupply of fools.

        • Winston says:

          “We averted a breakdown. That’s what good regulation does. Everything is not a runaway process to catastrophe.”

          But when we keep bailing out organizations that should not be we keep increasing the moral hazard and, eventually, when that which cannot continue indefinitely doesn’t, the compressed spring of bad policy and decisions based upon them will release its huge store of potential, destructive energy.

        • John H. says:


          Are you saying that the stabilization policy goal of the Fed has been successful, and, by implication, will be successful?

          History since Fed’s inception (boom in late 1920’s; decade-long Great Depression; 1933 default on Victory Loans; confiscation of public-owned gold; decades-long Great Inflation; Savings & Loan Crisis; 90%+ decline in dollar value; intractable budget deficits; debt “out the wazoo”; current galloping inflation crisis…) argues otherwise.

          Stabilization policy is a short-term fix that can only lead to systemic failure. The stabilization goal has failed repeatedly. Time to reconsider the Fed’s role, and to right-size the whole institution.

          (Apologies of you were being sarcastic.)

        • phleep says:

          Bagholders are lined up. I meant the Fed got a finger in the dike for now. This is like an urgent care visit where a crisis is averted. but the rot underneath is oh so deep, yes. This is one stage of defense line coming undone, going back to the follies of the Greenspan put, initiated 1987 (and later variants through Bernanke and Powell): cheap created money as a “solution.” It scares me that the next line of losses after all this jingle mail shakes through, may be the US dollar. I was breathing a sigh of relief there are other bagholders ahead in line, and it isn’t me, yet.

        • ru82 says:

          @John H Good points.

          Just my two cents.

          If we look at the FEDs goal. Supposedly it is 2% inflation and full employment.

          But the main goal is to avoid a depression and keep recessions small so that they do not spiral into a depression. They fear a depression?

          Depressions can last a long time. Almost a complete decade. i.e. 1929 to 1940.

          Bad things happen during depressions. Wars, riots, etc.

          Thus, there has really only been a few short recessions since 1945 and and hardly any recession last more than 2 Quarters since 1972 when we went off the gold standard. So you have to pat the FED on the back for small recession and no depressions.

          Unfortunately, the result of small recession will be followed by periods of high inflation.

          Over time, because of constant inflation, prices will double and double and double….. via compounded inflation. But during high inflation periods, people will complain but they have a job.

          Now very high inflation can also lead to big issues. The question is it easier to get out of a depression or stop run away inflation. Neither is good.

        • Cas127 says:


          Agreed…but so long as the Fed(s) can bullsh*t people into not connecting soaring, very hard to avoid prices (housing costs up 25%+ in 2 years) with their money printing policies, the DC worthies will continue the epic fraud…because it serves their interests.

          Think of all the pointless garbage the MSM perpetually focuses upon rather than material items that materially impact vast majorities of the population (renters are a minority, but home sales volumes have also collapsed…a prelude to price collapses).

        • John H. says:


          I respect your arguments, and throw out a few responses:

          1. You neglected to mention the 3rd mandate: “to promote… moderate long-term interest rates.” The FOMC and Fed Board have also forgotten this one. In an effort to keep employment strong, they promoted immoderately low long-term interest rates for much of the past two decades, and now we are likely to face a lengthy period of immoderately high interest rates as we proceed into the next decade or two. If this mandate is ignored, it leads to an explosion of government debt, and an eventually degraded currency.

          2. From my understanding (and it’s probably not conventional) the Great Depression was largely caused by the Fed and its reactions to the debt build-up of WWI. For an excellent summary from respected economists of the 1930’s (pre-Keynesians), check out Phillips, McManus and Nelson – Banking and the Business Cycle.

          3. Bad things also happen during inflations and stagflations. The 1960’s and 70’s were not without war and social unrest in the US.

        • longstreet says:

          “We averted a breakdown. That’s what good regulation does. Everything is not a runaway process to catastrophe. That’s what regulation is for.”

          The regulation stated insurance coverage stopped at 250K.
          So its good practice to ignore regulations?
          The gravity of what Yellen did (where did she get the power) to void the 250K limit has yet to be felt. Precedent will dictate, going forward and forever, that ALL deposits will be covered.
          Wait till we witness the bailout for FTX and SBF.
          Protecting the connected.

      • MattF says:

        If rates go up to 2.5%, investors are geniuses because profits go up . If it goes up to 6%, defaults occur and investors turn into idiots. Foolish decisions work great until they implode catastrophically.

        Same with >$250k bailouts. If it stops the bank run the FDIC is a genius because they stopped disaster. If the bank runs continue they are idiots because they have liabilities way beyond what they can afford and they didn’t achieve their goal of saving the system.

        Risk (and risky decisions) is great if you get away with it. Risk is disastrous if it breaks the system. Thus is the nature of playing the fool.

        • joedidee says:

          there was ONE group that didn’t get bailed out
          it was SVB cayman islands
          feds said eat it to them – ie they being foreigners – lot from china

      • Who Cares says:

        Only deposit holders were bailed out. They where made whole instead of getting there deposit back if below $250 000 and a percentage of their deposit over that based on how much was earned by selling the assets of the bank(s) in question.

        And for the two banks in question that means they’d got around 90% of the deposit (if it was over $250000) back before the decision was made to go for 100%.

        This also means that basically no one else got money or got bailed out because they did not get the money.

        Will this be done again? Depends, this time it was done to calm the fear of big deposit holders and prevent them from collapsing other banks by removing their deposits and triggering a bank run that way on banks that are solvent but illiquid.
        If there are more banks at risk at the same time then there is a good chance that it won’t be done since the FDIC fund had to spend tens of billions (mainly due to fire sale prices of collapsed bank assets) on just two banks and it doesn’t have unlimited funds.

        • Occam says:

          My estimate is that there are about 63 trillion dollars of unrealized losses in the world’s financial system. 300 trillion dollars of total debt issued at average 2% rate with average 7 year duration and current CB average rate of 5%. 3 X 7 = 21% discount of 300 equals 63. The world is deeply insolvent, but it’s a fiat world, and so it’s all just bookkeeping. We hope.

        • old school says:

          I would like to have seen a small haircut on the over 250K accounts even if it was only 1 or 2% so that bad behavior was not rewarded.

    • Andre says:

      exactly. where would we be now, hadn’t deposits been guaranteed? we would be deleveraging in a big way. raising rates and applying all sorts of cheating to prevent cleansing is a weak strategy which defies the original purpose. besides, we are still within the median lag period for rate increases to have a significant effect.

      • Shane says:

        A guess at the academic fed rationale would be that their goal is to dampen the oscillations of instability along the downward slope of de-leveraging (which they will hopefully encourage despite pivot prophets prayers) but I also think it is just drawing out the pain and enforcing bailout psychology, prolonging the heightened misery many have to live through.

        The original path prior to 250k+ FDIC might be a bit too “disruptive” for the tastes of a government allergic to pitchforks.

        It appears both bread and circuses are required at all times in the current state of things, like an IV drip. I wonder if it will become permanent.

        If they turn on the printer again I will head off for some beach paradise and probably never come back.

      • Sams says:

        If deposits newer was guaranteed, (fiat) money would just be used for payment transfer and short time storage of”wealth”.

        • Shane says:

          It seems like payment transfer and short term storage for fiat is all that has been economically viable with the interest rate environment the way it has been for the last few decades. Holding cash that is not going to be spent immediately or is needed for advantageous/speculative situational investments will always have opportunity cost over total investment of said cash, thus incentivizing investment (where else can we put it that makes more sense). Why any business would keep that much money in such a speculative banking institution is a better question, probably on the terms of the loans they received from the bank or something, or just a decade of relative stability. I think it was perhaps wise to backstop those depositors, but I sincerely hope the signal to the broader banking sector does not imply that behavior will become the norm going forward. This would juts encourage more outrageous banking practices.

          I do believe this all could have been avoided if the fed had not been running 0% reserve requirements since March 2020. I believe we still have 0% reserve requirements which is just insane. Seems like banks can just write as many loans as they want?

          They appear to not be entirely that foolish but still that should be a backstop held firm by public regulation when the public is the ultimate bag holder if said risky decisions were to come to pass.

          The people that receive the cash paid out by those soon to be defaulted on loans could effectively be getting a free wealth transfer from the taxpayer in the case the asset in question is overpriced and the value is not 100% recoverable. This difference is magic money received by the original seller in the transaction even if the bank goes under (would be great if that were audited but something tells me the government doesn’t do this work). That is the reason 250k seems like a fair balance to strike.

          As for the investors, their fate should be obvious, investments have losses. No risk, no reward at least in real capitalism™.

    • drg1234 says:

      Outstanding comment.

      • Zara says:

        These days bailouts and phony Fed ‘facilities’ are the new normal, everyone expects them as easy money or a rock solid ‘economy’. When rules are made up as you go, we are not a nation of laws anymore. We have kings and peasants. Like our predecessors, there is Only one way to restore justice.

    • Leo says:

      Financial system has broken down as most productive businesses have lost path to profitability. In this system Fed would try to enrich its bosses by stealing money from rest and economic disparity will keep growing at peak pandemic levels.

      The presidential debates will avoid economic disparity and high inflation and will focus on foreign policy, immigration, asset bubbles, abotion, gun laws etc.

      • sufferinsucatash says:

        Well one of the problems with the system as it is now, is that the big companies can manipulate their stocks just by being positive. In their earnings reports they make it by just a little .04 over earnings this quarter or whatev.

        Yeah it’s not criminal but they are gaming the system. Every earnings report is just gaming, gaming and more gaming. Then they wait for a recession to give you the truth. “We’re having horrible losses!”

        Then Jim Cramer gets on and says “No suprise there in this environment!”

    • economicminor says:

      Fits in well with Minsky’s Financial Instability Hypothesis.

      What Wolf talks about was the money printing. Ever larger loans against the same assets..

      The part that I don’t see discussed much is how the constantly raising values, raised the rents and how the rise in rents raised the price of everything. This was most apparent in both office space and retail space. In the end, it all became unaffordable.

      Prices rising started off slowly but in the end this syndrome of increases put the entire economy in jeopardy.

      Then came the final straw, the pandemic. Government’s fear of this house of cards collapsing, panicked and pushed the economy from surviving on heroine to an overdose.

      The assets aren’t going away, just a revaluation of the debts against them. There is no way to pay for under or non preforming assets and even those that are preforming need to be adjusted to the income of those who use them.

      We are just at the beginning of this re-alignment. Minsky was right.

      The idea that we can pay for all this financial engineering with a little bit of inflation is ludicrous. Inflation is a tax on retirees and workers alike.. Brilliant sociopathic economists thinks that the over burdened consumers/workers can just pay more and more so that the financial class can continue on without any readjustment is their form or Magical Thinking.

  2. MrMagoo says:

    Commercial Real Estate and some banks have a big problem.
    Residential Real Estate seems to be over priced, but not in danger of massive default.

    The economy is moving along, low unemployment.
    American is still the cleanest shirt in the dirty laundry.

    Large cities, especially highly liberal, Dems, Chicago, New York, and San Francisco are in a state of decay, just like Detroit was in 2013. Detroit went bankrupt, then recovered.

    In a few years, if rates keep rising, inflation remains stubborn, life will become difficult for most.

    On the other hand, we know the Fed is able to lower rates to zero, or even negative rates.

    Never believed I’d see rates at 20% nor Negative Rates.
    I do not know the future.
    But I know Elites will do what is best for them, not you nor me.

    • Apple says:

      New York City has a population of 18 million. That’s more people than every other state with the exception of Florida, Texas, and California.

      You want to see decay, drive thru Mississippi. You can buy single family homes for less than $10k.

      • rojogrande says:

        What? The entire state of NY has a population of around 20 million. I haven’t looked up the NYC metro area, but remember that extends into 2 other states. I think the city itself is less than 10 million.

      • Esclaro says:

        Got that right. They always go on about “liberal” cities when there are entire red states which are disasters. West Virginia, Mississippi, Louisiana…. Texas and Florida cities are turning into dumpster fires as well.

        • Publius says:

          While avoiding judgments about which color is the best for a city or state, most large cities in ‘red’ states are in fact ‘blue’. Suburban and rural areas provide most of the ‘redness’.

      • MM says:

        According to you’re way off – more like 8.3 million.

        • Wolf Richter says:

          It seems we’re confusing two entities here:

          1. New York City pop = 8.3 million.

          2. New York city metropolitan area (officially: the New York-Newark-Jersey City, NY-NJ-PA Metropolitan Area) = 20.1 million.

        • Swamp Creature says:

          NY Metro area extends into far out suburbs like Dover NJ, 40 miles west of NYC. It’s closer to Pennsylvania than NY. I worked there at Picatinny Arsenal for a short period of time. It was a s$ithole then and from what I’ve been hearing is a s$ithole now.

      • Cas127 says:


        I get the point you think you are trying to make…but a $10k non-NYC house…gets you shelter for a number of years. Maybe run down…but functional.

        $10k in NYC gets you shelter for 4 or 5 months.

        Do you think that represents the magnificent win you think it does?

        When you combine bad weather, absurdly high housing/living costs, high taxation, overcrowding and its quality of life issues…the only reason why 80% of people live in NYC is because higher paid jobs (or the “promise” of higher paid jobs) are there…primarily for the ease of the economic elites who can pay their way out of NYC’s numerous middle class miseries.

        There are a universe of living options in the US between an abandoned shack in MS and the packed, overpriced lies of NYC.

        • Arnold says:

          Population is shrinking in Alabama. Nobody wants to live in a podunk state making minimum wage anymore. Even the good ole boys want out of the mess they’ve made of that state.

        • VintageVNvet says:

          Be very careful discussing anything to do with populations in AL, GA, MS, and likely LA as well Arnold.
          Those states are in fact minority/majority conundrums at present, with lots of places being ”de-gentrified” at this time, with all the challenges that other locations have gone through since at least the last 4 or 5 decades now occurring.
          Also, taxes in AL have risen quite a bit in recent decades, including income and property taxes, making it not so cheap anymore to retire there.

      • sufferinsucatash says:

        I think half the state of NY left right?

        New York Times had some insane numbers migrated to other states.

      • Dave M. says:

        NYCity has a population of just under 9 million people. Your 18 million number is only 100% above the true population….

    • Juliab says:

      Residential real estate appears overvalued but is not in danger of a massive default.

      The rabbit can jump out of many places.

      Sooner or later the collapse of the real estate market will come

    • Jon Chamberlain says:

      Detroit never recovered. Stabilized at best and is sinking again. I know. I live here. bad……

      • Coffee says:

        The problem with Michigan is it is a one industry state. It does not believe in diversification. The lumber industry brought in riches until it tanked and the state’s economy faltered. Then came the auto industry, and we know how that ended.

    • economicminor says:

      I think that life is already difficult for most. Those who have enough to worry about economics are the few. If you hadn’t notices, there is a fast growing homeless population. And almost homeless are living in OLD RV’s parked along streets pretty much everywhere. The ones a little better off are in low end RV parks. Many of these people have cell phones and bank accounts and some income. Some even work. If things continue along the path it is on, life is going to rapidly get really ugly in the US.

      I also have no idea how this all turns out.
      Right now the decline is slow.

      A Black Swan or Ten Sigma event could change things to a much higher speed of decline.

    • Lili Von Schtupp says:

      A few things from a NYer not politically aligned at all: NYS is vast in geography. Urban, suburban, farmland, beaches, mountains. Most of it is red by geography but the urban centers make it blue by population.

      $10k gets you about 3 month’s rent in NYC and its ‘burbs clear into Columbia County and out into Orange County. 4 months if you’re lucky.

      As far as liberal politics, I don’t think people realize just how poor you have to be to get assistance in NYS compared to ‘red’ states. The poverty level vs the cost of living is untenable. People on Disability income still need to work off the books to make rent, because the housing and food assistance is reserved for the fully destitute and is terribly inadequate even when you can get it. Outside of the City a good chunk of NY’s welfare recipients live in central NY where industry fled leaving whole counties out to dry (Remember Hilary Clinton’s Upstate Tour during her Senate run?). Whole towns fully dependent on welfare checks and a delicacy called Pork & Water Roll for $2. And these folks tend to vote Red. If you’re not in healthcare or a very high demand trade, you’re pretty SOL up there.

      The more liberal policies speak to outrageously strict gun/weapon control (can’t even carry most protective keychains) and zoning laws that protect upper class interests and property values. NY is not a Liberal paradise for the poor, just the upper middle class and north. But our taxes do support Mitch’s state, so someone in the Union benefits at least.

  3. rojogrande says:

    Excellent report, thank you. It’ll be interesting to see how this plays out, but people have consistently believed the Fed is “trapped” and as you’ve said repeatedly that’s not the case. We can argue about another quarter point rate increase here and there (I don’t think they should have “skipped”) but lots of investors have been caught off guard by the rapid rate increases. I really hope you’re right and this era turns out to be an anomaly.

  4. Bev says:

    What if media went silent on the central banks and instead shone the spotlight on those impacted by these rates and quick run up including students
    Time to stop feeding into those oversized banking egos

  5. JimL says:

    In 2005 ish, I took a real estate investment class. I remember that there were people in the class who argued that it was smart to be leveraged to the hilt when investing in real estate since it was essentially risk free because real estate never went down. Most of them were young enough that what they said was true, but only in their lifetimes. A simple look at history would have shown them to be wrong.

    Just a couple of years later I wondered how those same people were doing when the housing market went to hell.

    There are lots and lots of people now who have essentially grown up in the extended era of cheap, easy money. They know nothing else but cheap capital. They have absolutely zero idea what it is like to invest in a tight monetary environment where capital isn’t dropped from helicopters by the FED.

    They may have seen some slight market setbacks in their lifetimes, but nothing major.

    Since at least the mid 1990’s, for the most part, we have lived in an era of cheap, easy capital. During that time frame, monetary policy has never been tight or restrictive. It has only been varying degrees of how loose monetary policy is.

    Even now, as you have well documented the past few months, monetary policy is still neutral at best, and probably more stimulative than truly restrictive.

    A lot of people are going to learn a hard lesson they have never had to experience before.

    • Pants_Relief says:

      How many people is “a lot’?
      When will these hard times finally come due?

      The answer is : “fewer than you think,” “later than you think” or maybe never.

      The government has their hands on all the economic levers now.

      It may not be a purely centrally controlled economy, but close enough. Election year next year. Fed wants to subtly inflate its way out of debt, while appearing to fight inflation.

      The population is getting dumber. The banks experimented with forbearance for mortgages, and it worked.

      The doom and gloom will be averaged out and barely felt, while the population eats, spends, looks at their phones, and doesn’t care if their $100 being worth $65, because it says $100 right there on the bill.

      No landing, no mass pain. Only printing and diminishing value to come.

      • DDG says:

        It’s called “boiling the frog”; a tried and true strategy by governments and the elite throughout history which generally works on a stupid, uneducated populace.

      • rojogrande says:

        I think you and JimL are talking about two different groups of people. JimL seems to be commenting on people with money to invest whose only experience in life is the easy money era. Although numerically large, that group is much smaller than the whole population which you seem to be commenting about.

        If the easy money era is over, I think JimL is right and investors who haven’t known any other conditions are likely to learn hard lessons going forward. JimL didn’t say anything about mass pain or no landing, just that investing in a world without easy money is very different than investing in one with easy money.

        • JimL says:

          Thank you. You hit the nail on the head. I was referring to people actively investing in the stock market.

          Investing in a loose money environment, sources of capital act very differently than they do in restrictive markets. In a loose environment, VC firms generally follow a shotgun approach. Invest in lots and lots of small startup companies. The winners will more than make up for the losers. Sure, they might have to make some mildly tough decisions on whether or not to continue to invest in and support a company that hasn’t taken off, but those decisions are rare and not that tough.

          In a tight monetary environment, VC firms have to make much tougher decisions on which firms to invest in. There is much more skill involved.

          Same process applies to banks. In a loose environment they hand out loans like an old lady handing out candy. In a tighter environment they have to make choices. Lending to company A means it will be tougher to lend to Company B or C.

      • Seba says:

        I’m tempted to buy into this view point as I’m watching and learning what the central banks are all about whenever someone expresses it, it’s an easy one to accept. However, I remember why the economy of my old country and the entire eastern part of Europe was crap and eventually collapsed under a command economy. You know, there can be hundreds of PHDs at the helm with gages, sensors, buttons and levers out the wazoo with the benefit of historical data and analytics etc.. they’re going to trip up, it’s inevitable IMO. If it was so easy to control an economy there would be no need for markets, my opinion anyway, I guess we’ll see how long they can keep the ship steady, maybe you are right and this goes on another 20ys.

    • JeffD says:

      Since the US allows for non-recourse loans, there really is no reason not to put 3% down and leverage to the hilt. Mathematically, averaged over long periods, this is a “sure thing” money maker. Now, if you couldn’t walk away and instead had to take responsibility for bad decisions — different story. But under the non-recourse system, there is no real risk, statistically. Worst case, you start over and win next time.

      • Einhal says:

        It’s only non-recourse in a handful of states, and even then, there can be restrictions (for example, California used to have restrictions on refinancing and keeping the non-recourse, although I think some of those have been amended).

        In most states, lenders can pursue a deficiency judgment against an underwater borrower.

        That’s not to say that they necessary will bother, as you can’t get blood from a stone, but they can.

      • Wolf Richter says:


        “Since the US allows for non-recourse loans, there really is no reason not to put 3% down and leverage to the hilt.”

        Wait a minute… you’re giving wrong legal advice to people who live in the 38 full-recourse states and in DC! People need to talk to a lawyer or read their mortgage contract before they default.

        There are only 12 “non-recourse” states where homeowners can walk away from a residential “purchase” mortgage without fears of being hounded by a bank (in some of these states, lenders may have recourse with other types of mortgages, such as a refis, 2nd mortgages, and HELOCs).

        These are the 12 nonrecourse states where lenders will only get the home (collateral) and cannot pursue a deficiency judgement after foreclosure:

          North Carolina
          North Dakota

        The remaining 38 states and DC have “recourse” mortgages.

        • JeffD says:

          Agreed, but it shouldn’t be allowed anywhere. It incentivizes destabilizing economic activity. I feel similarly about cryptocurrencies. And about issuing new debt to buyback stock.

        • sufferinsucatash says:

          If you get the property what more could a judge reasonably give to a mortgage issuer (bank)?

          Imaginary Fees? BS made up items?

          The ex owner probably has to declare bankruptcy anyhow.

          Seems like kicking a starving dog.

        • Wolf Richter says:

          Yes, as you said, it can be like “kicking a starving dog.” But it can also be that these are investors with several rental properties, and they have other properties, etc., or it can be that these are people with some or a lot of assets…

          In recourse states, the lender can obtain a deficiency judgement after the foreclosure sale. For example, the homeowner defaulted on a $500k mortgage. The bank forecloses on the home and sells it at auction for $300k. So it has a loss of $200k. In addition there may be $20k of accrued interest, and $50k in legal fees and expenses. So the bank can ask for a deficiency judgement of $270k. If they get it, they can go after other assets that the borrower might have, and they can garnish wages and your bank account, and they can get your tax refunds as soon as you put them into your bank, etc.

          If the borrower is totally broke, then the bank cannot get much other than through garnishments of future wages.

          The borrower may then file for bankruptcy protection, and a judge will determine how much the borrower will have to pay every month, and for how many years.

          These complications and the notoriously thin yield of deficiency judgements when home prices crash was one of the reasons banks didn’t do this on a large scale. Another reason was that no one was staffed up to handle the mortgage crisis – neither the courts, nor the banks, nor the law firms.

        • HowNow says:

          Yes, I met four people from Alaska who, after the oil bust in the late ’80s, lost their house and were then having their wages garnished. Their banks sued and won due to the recourse loans on their homes.
          Few remember the real estate calamity for homeowners and investors after that oil price collapse: Texas, OK, Alaska, Arizona, Colorado were hit the worst.
          Don’t think for a moment that residential real estate can’t devalue.

        • Seen it all before, Bob says:

          Wouldn’t a truly free market force mortgage rates to be higher for non-recourse states? There is more risk in these states so the rates/fees should be higher.

          However, government agencies (FHA) allow 3% down payments for the same rate whether the state is recourse or not?

          As Wolf has pointed out, banks haven’t held many home mortgages since 2008. The risk is being held by the government and taxpayers.

      • SS says:

        “But under the non-recourse system, there is no real risk”

        This is not true. Default on a loan and wait and see who is willing to lend you money again, and at what interest rate.

        All mortgages should be non-recourse loans. A mortgage is a lien against a property. Keyword here: A (one) property.

        In fact, recourse mortgages are “no real risk”… for the banks! Bad assessment? Don’t worry, in the worst case scenario the bank just bought a slave.

        Banks should also bear some responsibility about who they lend money to, for what properties, and in what amounts.
        Even more considering they get free confetti (FIAT money) from the Fed (bailouts and what have you).

        • Seen it all before, Bob says:

          I’ve heard that defaults, foreclosures, and bankruptcies don’t affect your credit after 7 years.

          If you defaulted/foreclosed from 2007-2012, you were able to jump back into housing speculation by 2019. Just in time for Housing Bubble 2.

          If the timing plays out the same, housing prices will bottom by 2028. Any new default/foreclosures will be able to jump back in for the Housing Bubble 3 in 2035.

          However, with the Fed in control of interest rates, only they will be able to control the timing of the bottom.

        • JeffD says:

          Papers have been written on this. Non-recourse loans artificially inflate prices, and interest rates on non-recourse loans should be higher to compensate (Pavlov and Wachter, March 2002). I haven’t found the paper yet, but I am betting one out is out there that say asset price increases in non-recourse states bleed over to asset prices in recourse states. In some sense, I believe that non-recourse loans are the root of all evil in the nationwide affordability crisis.

      • Countrybanker says:

        Jeff. Your comments that non- recourse should not be allowed requires government intervention. Better solution is thoughtful, educated, trained bankers of a well capitalized banks understanding risk and reward. These young bankers own no part of the bank. A loan officer needs skin in the game. Needs to personally lose if a loan goes bad.

        Your point is good though. A 3% down payment on a mortgage loan is really crazy. Options on assets can cost more than that

        • JeffD says:

          “Better solution is thoughtful, educated, trained bankers of a well capitalized banks understanding risk and reward.”

          You and I both know this is a unicorn that doesn’t exist and has never existed in an environment where originators don’t have skin in the game. For some time now, financial companies have been able to write loans and then immediately sell them to someone else with little to no consequences to the originator.

    • Bibber says:

      The Fed just devalued long term debts by 30%. That might give it room to do a few more iterations of the same old easy money policy.

      There are no natural laws that govern finance. It’s just a bunch of man made contracts, written and implied. They’ve shown they will change the rules on a whim, and print your savings out of existence if necessary to keep others solvent.

      The financial circus can continue for a long time as long as central banks are allowed to take from some, give to others, so that purchasing power is maintained.

      • Gomp says:

        I thought I had a handle on my retirement. No debt. It all penciled out. Not great but doable. Suffered thru the zirp years. Then came inflation. Most retirement plans now cancelled. Not postponed. Cancelled. Back to work? Ha. Age discrimination is real.

      • sufferinsucatash says:

        I wonder what the final tally on the boomers savings will be after all this inflation?

        Did they cut it in half?

        That’s gotta burn the boomers, buying items now they pay 2x as much as 2019. Especially if your savings is not adjusted for inflation. Like a 401k

        • longstreet says:

          The Boomers never believed central bankers would do what they did. The life experiences told them that inflation would never be promoted by the Fed (it is now), that if inflation erupted it would be dealt with promptly (its transitory), that debt is bad and saving is good ( leveraging and expecting asset inflation was the winning strategy), that long term interest rates should be above short rates (Fed pounding long rates occurred to force near term investment).
          Bernanke won the Nobel for doing what the Fed had never done…….and now we are dealing with the ramifications….and Powell with a Trillion dollar unrealized loss.

        • Seen it all before, Bob says:

          “I wonder what the final tally on the boomers savings will be after all this inflation?

          Did they cut it in half?”

          It depends on how good their crystal ball was.

          If they went extremely conservative in 2010 and didn’t buy a house, invested 60:40 in long term bonds (like some banks), they likely “lost” close to 50% today. Even gold has been relatively flat for the last 13 years.

          If they they were moderate in 2010, and purchased a house with a 15 year loan, they almost own their house, 60:40 equities vs long term bonds, they are likely up vs inflation.

          If they were extremely risky and were lucky enough to invest in Bitcoin ($300 in 2015, up 100X today) and Nvidia (up 100X today),
          they could likely buy a yacht and private jet.

          My luck isn’t great, so I am slightly up vs inflation.

        • Wolf Richter says:

          Seen it all before, Bob,

          Can you do me a huge favor and change your screen name to something else for the next five comments. Several commenters here are getting tagged as “spam” by some AI-powered internet-based firewall. And I’m going through them one by one. We have now successfully resolved this issue with two commenters by changing the screen name. So this seems to be a solution. Thanks.

        • BobE says:

          Sure! Thanks for pointing this out.

          Given the way things have been going, I obviously haven’t seen it all before and the name was sounding a bit arrogant.

          I hate to be thought of as a spammer.

  6. Jonathan Searcy says:

    I enjoyed the presentation. The concepts presented where what I would generally expect. If the interest rate is fixed, the lenders get hit because the capital value of their loans diminishes with rising market rates, and if the interest rate is variable, the lenders get hit because the borrowers are either unwilling or unable to make the payments. In either case, a paradigm shift in interest rates spells serious danger for lenders — and all at a time when the real capital value of the loans is being erroded by inflation.

    What I would like to see, that you do very well, are some charts and numbers that show these effects coming through into the real data.

    • Sufferinsucatash says:

      It was good, and a good explanation.

      Perhaps a guess at where we are headed would have been nice. Put on the mystical Wolf hat and hold the envelope to your head! (Johnny Carson)

    • JR says:

      @Jonathan Searcy, I agree. Some charts would be welcome.

  7. Gary Fredrickson says:

    The Federal Reserve bailout of all depositors above the $250,000 FDIC limit is reported as stabilization, restore confidence etc. These depositors over the limit are expected to be sophisticated financial experts that look over the bank’s books and can influence the bank to prudent behaviors. In the case of Silicon Valley Bank a few depositors were billionaires or such businesses.

    There is also a Federal Reserve emergency repo loan operations that does not have to report the recipient for about 2 years. Therefore, if someone had money in such a bank apparently the sophisticated depositor could not tell if there was a solvency problem.

    The apparent purpose would seem to be to avoid the depositor discovering the true health of the bank and withdrawing their money. Am I missing something or incorrect in this understanding; i.e., apples and oranges myriad of Federal Reserve programs?

    PS: There are so many bailouts and pots of money, apparent sleight of hands that some sort of pamphlet with flowcharts of the Federal Reserve’s operations would be helpful.

    • longstreet says:

      “These depositors over the limit are expected to be sophisticated financial experts”

      Wait till you see the FTX resolution.

  8. spencer says:

    Our means-of-payment money supply hit historical highs in November 2020. Only the unthinking thought inflation would be transitory.

    Only price increases generated by demand, irrespective of changes in supply, provide evidence of monetary inflation. There must be an increase in aggregate monetary purchasing power, AD, which can come about only as a consequence of an increase in the volume and/or transactions’ velocity of money.

    The volume of domestic money flows must expand sufficiently to push prices up, irrespective of the volume of financial transactions consummated, the exchange value of the U.S. dollar (“reflected in FX indices and currency pairs”), and the flow of goods and services into the market economy.

  9. spencer says:

    Paul Volcker was quoted in the WSJ in 1983 that the Fed: “as a matter of principle favors payment of interest on all reserve balances” … “on rounds of equity”. [sic]

    That’s called the suppression of interest rates. It is taxation without representation.

  10. spencer says:

    “Quantity leads and velocity follows” Cit. Dying of Money -By Jens O. Parsson

  11. John H. says:


    Great presentation.

    If I’ve understood correctly, you have emphasized in this and past articles that the CMBS market failures do not pose a systemic risk to the banking community because banks packaged the loans and peddled them to investors including pensions and portfolio managers like insurance companies and mutual funds.

    Is the CMBS market large enough to be a “systemic risk” to pension plans (including PBGC), or the other holder groups, do you think?


    • Wolf Richter says:

      1. These CMBS are spread around globally.

      2. CMBS come in slices: The high-risk slices pay more yield but take the first losses, and get wiped out first. The lowest risk slices take the remaining losses after the prior slices got wiped out, but pay the lowest yield. Unfortunately, the high-risk slices were too small to absorb all the losses (yield chasing made this possible); and so the low-risk slices face a big risk.

      If the loss ratio is 80% on a single-issuer CMBS (only one big mortgage in it), all the higher risk slices are wiped out, and even the lower risk slices take a substantial loss but a lot less than 80% loss.

      So it depends on what pension funds and bond funds hold. They both went way out on the risk curve to get yield during the low yield era.

      Pension funds are widely diversified, and so they face a lot of other issues, and CMBS alone are not a systemic issue. But they can combine with some of the other issues. All a pension fund needs to get in real trouble are a few years of moderately negative returns.

      And typically pension benefits are indexed to inflation, so inflation isn’t helping pension funds at all.

      The HUGE asset bubble from March 2020 to Dec 2021 bailed out pension funds. They were in trouble before. Now they go back to being in trouble.

      • RobertM700 says:

        I think most private pension funds, what’s left of them, are NOT indexed for inflation.

        • David G La says:

          And even the ones that are indexed to inflation, it’s the government inflation numbers not the real numbers on the ground.

        • Gomp says:

          Colorado has public employees pension called PERA. It guaranteed in the state constitution. But, Colorado also has TABOR. Taxpayer bill of rights. Government can’t raise taxes (some) without vote of the people. Train wreck coming.

        • Wolf Richter says:

          1. “benefits,” not “funds,” are indexed to inflation.

          2. I don’t know about ALL pension funds, but benefits paid by the biggest pension funds in the US are adjusted to inflation via “COLAs” (cost of living adjustments), similar to Social Security COLAs. This includes CalPERS.

          3. There may be a US pension fund that doesn’t adjust benefits to inflation, but I doubt it, and if it exists, it’s worthless.

        • rojogrande says:

          My understanding is that pensions from private sector employers are generally not COLA adjusted while public sector pension benefits are COLA adjusted. I have family members with both types of pensions.

        • Happy1 says:

          Colorado state pensions (PERA) can be and have been held to zero inflation adjustments or adjustments less than inflation by law in years where the return on investment is less than projected. This is the result of several years of reform efforts to limit taxpayer liability for the state pension fund. The reforms are not as much as is needed for long term viability and funding of PEEA, but they are a start.

        • old school says:

          I remember in one of Buffet’s early letters that he said any CEO that guarantees an inflation adjusted pension doesn’t know what he is committing to.

      • kpl says:

        “Now they go back to being in trouble.”

        You may well add “Now the CBs go back to bailing out pension funds”

        The central bankers will go back to bailing them out – like BoE – one can argue that was not a bailout but liquidity supply. Obviously, the CBs are not going to watch the pension fund blow up inflation or no inflation period!

        These CBs have poisoned the system to an extent that only more of the poison will keep the system from blowing up. That is till it is beyond their printing presses also.

  12. Jose says:

    Didn’t the lenders of these floating interest rates require an interest rate cap. From my understanding its was the insurance on these rate caps that went through the roof. Eating away at rental income for many commercial buildings.

  13. spencer says:


    Basel III could increase capital levels by 20%.

  14. DDG says:

    It’s called “boiling the frog”; a tried and true strategy by governments and the elite throughout history which generally works on a stupid, uneducated populace.

  15. Mike R. says:

    Boiling the frog works until the frog dies.

    The US is boxed in a corner. Those that think Powell can simply lower interest rates signficantly or restart QE if the economy goes south are wrong. International developments with Russia, China, Saudi Arabia, BRICS, etc. are going to make it hard for the US to substantially cheapen the dollar.

    • fred flintstone says:

      Mike, two ways of looking at that. IMO everything that is happening is deliberately positioning us for a weaker dollar.
      The debt burden melts, the middle class gets hit with inflation, the government will cut spending, a lot of US corps will enjoy huge profits from increasing exports and bringing cash home which will goose the market, trade deficit drops and tax revenue increases. Probable that we have fewer wars.
      The folks that want a strong dollar are poor and middle class, except the ones doing the fighting…….. the rich may love it.

  16. vecchio gatto veloce says:

    Regarding the four banks that went under, and the many more banks holding long-term Treasuries at virtually zero interest on their books, why the hell would you park money where there is no real return?

    Yeah, if interest went negative, these Treasuries would go up in value. But it just seems dumb, on a basic level, for a bank to park cash long-term for no return; and in a place of risk if, and when, interest rates would rise. To make matters worse, the banks did this even when inflation was staring them in the face and the Fed was telegraphing its intentions to start raising rates.

    “Held to Maturity” vs “Available for Sale.” The new and exciting Mixed Martial Arts Cage Match coming to a Financial Institution near you!

    • spencer says:

      The principal ways to reduce the volume of bank deposits is for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a banks service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., bank stocks, debentures, etc.

  17. LIFO says:

    According to Christopher Leonard’s book, “The Lords of Easy Money,” which often cites the minutes of the FOMC, Jerome Powell opposed Ben Bernanke’s QE plan in 2010. If my memory is correct, Powell argued that QE will make wealth inequality worse, will likely lead to inflation, and will be difficult and painful to reverse. I wonder how Powell reconciles his earlier analysis and his tepid response to our current situation.

    • Einhal says:

      I have a few theories.

      A lot of politicians fully intend to do the right thing when they enter office, but end up either doing the wrong thing or focusing on other priorities entirely, and letting momentum continue the “wrong thing,” simply because there are so many vested interests relying on that “wrong thing.”

      • Doolittle says:

        Not anymore and not for quite a while. The sewer dwelling politicians are corrupt before they get into office chosen by their puppeteers.

        • Esclaro says:

          As I have mentioned before there are very, very few competitive house districts. Thanks to gerrymandering, the politicians choose their voters and not the other way around. I used to live in a competitive district but now an idiot like Chip Roy will never face an actual election.

        • Venkarel says:

          I was thinking the same thing but flipped now I am in that vacuous idiot from Austin’s district not the honorable Mr. Roy.

    • SpencerG says:

      It is curious that you describe Powell’s response as “tepid.” He has raised interest rates by over 5 percent in the space of a year while at the same time engaging in QT on the balance sheet.

      I know this will come as a shock to many of WolfStreet’s readers… but the Fed doesn’t exist to blow up America’s financial system. Nor would it last very long if it did that.

      • Swamp Creature says:



        The Fed exists to maintain a stable money supply and the Integrity of the dollar. Everything else is noise. Interest rates are still well below the inflation rate. QT is proceeding at a snails pace. At the current rate of QT it will be 10 years before they make a dent. Before then we will have another recession r depresson and the Fed will pivot to QE. Mission NOT accomplished.

        • JeffD says:

          The Fed’s directive is price stability. What they created since 2020 is “pay whatever” pricing, which is the exact opposite of their mandate.

        • SpencerG says:

          Not even close to right. The Federal Reserve Act states that the Fed’s goals are “maximum employment, stable prices, and moderate long-term interest rates.”

          Somehow this gets translated to a “dual mandate” when there are in fact THREE goals that Congress directs the Fed to consider as it sets monetary policy. Keeping those THREE goals in check is akin to trying to stay on top of a giant beach ball in the ocean… it is very easy to put a foot wrong and end up in the drink.

          Things like a “stable dollar” are an OUTGROWTH of the Fed’s getting the balance right between those three directives. In fact, the Fed (particularly under Greenspan) has warned other nations wanting to “dollarize” their own currency (due to their own central bank’s failures) that the Federal Reserve is there to benefit the AMERICAN economy and will not necessarily do things that provide for a stable currency for other nations that choose to use the dollar as their own currency (or to peg their own currency to the dollar).

      • LIFO says:


        I agree that the Fed does not exist to blow up America’s financial system. I hope you will agree that the Fed does not exist (officially) to create asset bubbles, to bailout Wall Street’s mistakes, or to implement trickle-down economics as the official policy of the U.S. government.

        Your description of the Fed’s interest rate and QT history seems correct, but the Fed did not begin raising rates until March of 2022 and did not begin QT until June of 2022. If the Fed had reversed course a year earlier, we might have had a much different outcome.

        • HowNow says:

          In retrospect, anything could have been done better. If the running back wasn’t handed the ball he fumbled but a pass play was done instead… No one remembers what went on in 2008, when the financial collapse was happening in technicolor. It was at the end of Bush Presidency. After the bailouts, and big bank mergers, and ZIRP, the economy was still paralyzed. QE was a new measure to prevent what was still feared to be another depression. The early rounds of QE were not getting traction. Bernanke was and continued to jawbone how this or that measure would shore things up. To blame the FED for any and all financial problems, and describe them as conspiracies, is just howling at the moon. They are not shills for the wealthy; they’re trying to keep the trains running on time, nothing more.

        • SpencerG says:

          “Trickle Down Economics”??? This latest bout of inflation didn’t happen because of the Budget Act of 19-EIGHTY-One… it happened because of a spendthrift Congress in 2021 going on a $3 TRILLION spending spree instead of tightening the budget up after coming out of the COVID pandemic. Ronald Reagan and Paul Volcker created an American economy where (with only a single exception— 1990) inflation didn’t rise above 5% for FOURTY YEARS… so stop trying to pin the blame on them!

          So NO… the Fed isn’t supposed to create asset bubbles or to bailout Wall Street’s mistakes. But NEITHER are they supposed to sit on their hands when Wall Street screws up and plunges the nation into a near Depression. NOR are they supposed to sit on their hands while a once-a-century pandemic ravages the nation’s economy.

          It can’t be easy being the only adults in Washington. The last politician in Washington who was serious about fiscal budget discipline was John Boehner… and his own party ran him out of town on a rail. Blaming the Fed for doing what is necessary to keep the economic ship afloat may feel good to you… but they aren’t exactly getting any help.

        • SpencerG says:

          HowNow… EXACTLY right. “Policy Drift” is a thing and the Fed is hardly the first governmental entity to keep doing the same thing over and over as long as it seems to be working… while ignoring the storm clouds that are gathering.

          -Would it have been better if they had started QT in 2021… Yup!

          -Would it have been better if they listened to Wolf as he was howling at the moon in mid-2021 that inflation was NOT “transitory or whatever” (his words from this broadcast)… Yup!

          But to try to attribute some grand conspiracy to them is beyond silly. As you say… they are trying to keep the trains running on time… in a world in which people feel free to criticize the food they serve and how bumpy the ride is on “Yelp or whatever.”

        • economicminor says:

          “They are not shills for the wealthy; ”

          They are the wealthy.
          Not one of the Fed’s top management is anything close to the Middle Class!

          You can’t convince me they aren’t looking after their own personal interests FIRST!

          And like the ethics at the SCOTUS, who is it that is going to call them on their hanky panky or personal greed? What are the consequences? None that I have ever seen.

      • spencer says:

        Every boom/bust since WWII has been the FED’s fault.

    • rojogrande says:

      Interesting, I need to read the book. If your memory is correct, it shows Powell knows he’s in a very difficult situation. The inflation he expected in 2010 has come to pass, and he thinks reversing course will be painful. He is now attempting to reverse course and bring inflation down while inflicting as little pain as possible. It makes me a little more sympathetic to his predicament. It also shows he’s was sensitive to the growing wealth inequality QE policies would engender. Perhaps he isn’t just trying to protect rich friends as is often suggested in these comments.

      The question is whether or not the current response is “tepid.” I think that’s debatable. The Fed was certainly slow to respond, but brought rates up 5% in 14 months when it did respond. The Fed started QT, but the runoff has been slow. If Powell’s analysis in 2010 indicated reversing course would be painful, it makes sense he would be a little tepid. Maybe Wolf is right when he says Powell doesn’t want to blow everything up and lead us right back to QE and ZIRP. Maybe Powell actually wants to take this opportunity to normalize monetary policy for the long term. Maybe.

      • Arnold says:

        People on this blog consider anything other than a 50% crash in house prices, 20% unemployment rate, and a fed rate of 18% to be ‘tepid’.

        • Not Sure says:

          Arnold, the pre-GFC fed funds rate has historically spent most of its time at least a couple percent above inflation, sometimes even 5%+ higher. So compared to historical norms, the FFR is still neutral at best or maybe realistically accommodative in the face of stubbornly high inflation. Meanwhile, the balance sheet hasn’t really gone anywhere in the last few months when you figure in a short blip to bail out SVB depositors and hush the related banking scare. Worst yet, will we see another blip delaying QT again when (not if) the next heavy-hitting bank blows up? Almost certainly yes. The Fed’s actions are objectively tepid given the scale of the problem.

          That being said, I think I’m with you if you’re implying that a lot of WS commenters will be disappointed that they won’t get that huge nominal crash. This era has the 70s written all over it to me… Not so bad nominally (median house price nearly tripled from ’70 to ’80), but a lot of pain in real terms. And in reality, the more aggressive commenters on here would be pretty unhappy campers if they got the cataclysmic crash they’re asking for.

    • ru82 says:

      It is a great Book! Eye opening.

    • ru82 says:

      I keep wondering why some of the Zombie companies that were financed through LBOs and have not yet failed. I am guessing the debt they took on has a few more years before it is do and they need to roll it over with new refinancing.

    • Pea Sea says:

      Never mind his tepid response to our current situation. How does he reconcile it with his role in creating our current situation?

  18. EnglishEnglish says:

    UK banks got a little help from their Government last week.
    Lenders will be passing-on Thursday’s base rate rise of 50 basis points to their borrowers.
    But typically they will only be paying an extra 15 basis points to their depositors.
    This is the outcome of a meeting between Chancellor (finance minister) Hunt and bank chiefs on Friday.
    The British media is running stories like ‘Hunt Strikes Deal to Help Householders’; presumably by forcing savers to fatten-up the banks’ profit margins..

    • HowNow says:

      “…presumably by forcing savers to fatten-up the banks’ profit margins..” Might it be that they’re doing it to keep the banks from failing en masse?

  19. Thomas Curtis says:

    Thanks Wolf, I can’t thank you enough!

    You help average Joe’s like me read the tea leaves. I know our (homo sapien) economic system is broken but figuring out how to navigate it is very challenging.

    Take care, I suspect that the Lord’s of Finance don’t like you.

    • billytrip says:

      I second that emotion. I don’t understand every nuance of what Wolf writes here, but I understand enough. And I’ve been reading here long enough to know that Wolf is usually right.

      I amazes me that in the financial media at large, I can read two opposing headlines on the same day. One can cherry pick data to support just about any conclusion one wants, and a lot of the MSM does a lot of pickin’ IMHO.

      • SpencerG says:

        Wolf really is amazing at this. Even when he is wrong he is worth listening to. And the guest writers he sometimes has are equally interesting… I can think of a couple of times where they have clued me into a new way of thinking about the latest “unicorns” being touted in the financial media…

        • sufferinsucatash says:

          How did you do Bold text?

          I miss using emojis and gifs. Some Bolding would be nice! Lol

        • SpencerG says:


          If you google Bold Italics HTML (those three words) then you will get examples of how to Bold and italicize

          Basically you are going to put a b in between at the front of what you want to bold and a /b in between at the end of what you want to bold

          That second part is very important… because Wolf’s system doesn’t have an edit function to fix it like other systems do… if you don’t put /b between at the end of what you want to bold then ALL OF THE REST of your post will be in bold which is why I use HTML formatting very sparingly on this site.

        • SpencerG says:

          As you can see, I forgot to put the / and i in between the after italicize and the whole post is now in italics. Oops! Now the only way to fix it is to email Wolf and ask him to do it for you… and he has better things to do with his day.

        • Wolf Richter says:

          Fixed the italics for you.

          Be careful when you use html to format. Beyond a couple of basic things, such as italics and bold, nothing is allowed for security reasons, and the html characters and sometimes text in between get stripped out. So you end up with a text that reads like swiss cheese. I cannot fix it for you because I don’t see the original either. I just see what’s left over after everything got stripped out.

        • SpencerG says:

          Even worse is that it is leaving out the that you put the b and i in so now my posts are truly meaningless. You may want to experiment with it as Disqus and see how it works there.

  20. Imposter says:

    I keep worrying about the interventions in the risk/reward of informed investing. Specifically, Wolf’s implosion list, and now 100% bailouts of these several banks. Someone responsible for those accounts should have known their exposure to significan loss and hedged against it.

    Have a generation CFOs and finance “pros” been so cushioned from consequences that the investment in financial frauds and disasters will just continue?

    • John H. says:

      There was a time when bank owners had to cough up additional capital if/when their bank financial condition deteriorated. Limited liability of bank shareholder was….limited! A novel thought – tying consequences to actions or ineptitude.

      One paper studying this:

      From abstract:
      “Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability…. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure.”

      • HowNow says:

        If shareholders are held partially liable, then only the dumbest punters would buy those shares. No one, including the CEOs of the banks, know what the hell is on their books.

        • John H. says:


          …..or, the most talented, capable, and profitable banks would attract investor dollars, while the weaker, inept bankers would fold, or at least not feed as actively at the bailout trough.

          Privatizing returns, while socializing risk through bailouts and interest rate price fixing, invites banking corruption and over-expansion.

          Also, all shareholders are “liable” now: their liability is 100% of the investment amount. The point is that bank shareholders, at one time, were required to pony up if/as their financials deteriorated. financial consequences were tied to results — good or bad. Seems fair to consider returning to such policy for the privilege of investing in such a potentially lucrative business.

  21. Stephen Waters says:

    Wolf – I really enjoy your reports and wish I had your financial acumen. It seems to me that based on recent history, when the Fed raises interest rates it has both negative and positive effects on inflation. Consumer goods and services go up and it costs the consumer more creating more inflation. Real-estate (especially commercial) go down and is worth less. In my opinion, the quick pace of raising interest rates by the Fed was unnecessary, and the financial institutions could not react quickly enough for the reasons you stated.
    I will send you some more dollars – and thank you again for your insights.

  22. SoCalBeachDude says:

    Interest rates throughout the US economy are still below historical norms and anyone complaining about them as being ‘high’ needs to understand the history of interest rates in the US.

  23. Mad Puppy says:

    Bravo, Wolf! Probably one of your best depictions of the insanity that has persisted over nearly the past 15 years ( or maybe 40 years). It never ceased to amaze me how people would take a 3% variable rate mortgage over a 3.25% fixed rate mortgage (as an example). Risk assessment( upside and downside) was thrown out the window by too many people who should have known better. I got into a 10.25% fixed rate mortgage in 1978 (in Canada) which saved me when I left teaching to sell real estate in the early 80’s for a couple years. Like you, I suspect I know how this will play out.

  24. Brilliant review of where we are and how we got there; just excellent work Mr. Richter. Thank you.

  25. Brewski says:

    “Most people in finance today cut their teeth in the era of Easy Money, when history books were thrown out the window.” Wolf Richter

    Excellent summary, and:

    “The only thing new is the history you don’t know.” Harry Truman

    If/when interest rates finally get real, bond investors will pay a very high price.

  26. SocalJimObjects says:

    One thing that’s been on my mind: where’s the derivatives blowup? The Fed’s been increasing interest rates at the fastest pace in history and it’s like most everyone are perfectly hedged? There’s no way that’s true.

    • Wolf Richter says:

      When we talk about banks hedging their interest rate exposure, or landlords hedging their variable-rate mortgages, or oil and gas drillers hedging their future production, or retail investors gorging on options… those are all derivatives. For many derivatives, there are two sides (counterparties), one party loses, the other party wins, and the net is zero. That’s why you don’t hear much about it unless a small hedge fund stakes everything on one trade and blows up, with everyone else winning. But if a hedge fund has a lot of derivatives, some trades lose money, and some trades make money, like everything else.

      • Occam says:

        AIG in 2008 was blown up by its insane derivatives book. The Fed bailed it out. These days everyone tries to balance their book but not everyone will do so. It’s the nature of bankers and financiers to get stupid periodically.

        • HowNow says:

          AIG insured the public pension funds in several states, among them was Florida. If AIG failed, lots of retirees would have gone bust. The FED backstopped AIG to prevent a wholesale income collapse.
          And the GM and Chrysler bailouts (not AIG insured)? If all those employees were to have lost their jobs, the unemployment payments in the aftermath would have exceeded the bailout by miles, not to mention the pensions that would have gone bust.
          Harry Truman had it right.

      • SocalJimObjects says:

        I get that Wolf, but that’s boring boomer hedge fund stuff like running a balanced long short trade book. Most hedge funders are in the game for doing stuff like breaking the BoE trade ala George Soros or shorting the mortgage market to the tune of billions like John Paulson did since they would win either way.

    • spencer says:

      As FDIC Chairman Sheila Bair complained:

      “Sellers of derivatives still have ‘no skin in their game’ & excessive concentrations”… “a culture, and Congress, that celebrates exploitation of an unwitting public for the sake of a fast buck” where the bankruptcy code gives derivative sellers preferential treatment allowing them to take ownership of their higher-quality assets as collateral before proceedings.”

  27. Nick Kelly says:

    ‘Many borrowers bought their homes when mortgage rates were closer to 1% or 2%.

    But, this week, the interest on the average two-year fixed-rate mortgage rose above 6%, according to financial product comparison website Moneyfacts.’

    This is from the BBC about the UK mortgage crisis.

    But to quote a UK banker when rates were closer to 1 or 2 %: “real interest rates are the lowest in 5000 years’
    That’s what he said: ‘Five thousand years’

    Who lends money for 1% per year?
    No individual human for sure. So who?

    • HowNow says:

      Mortgage rates at 1%??

    • SpencerG says:

      Who lends money for 1% per year?
      No individual human for sure. So who?

      A committee… that’s who.

      To quote a Chief Petty Officer who straightened out this particular Navy Lieutenant way back in 1994… “People will agree to things in a committee that they would NEVER sign off on as an individual.”

    • ru82 says:

      There were adjustable rates mortgages in Europe that were negative pre-covid. Many countries in Europe had Negative interest rates. You paid the bank to hold your money and banks paid borrowers to borrow money. Google it.

      This is how it sort of went. Not exact numbers. A person would buy a CD at a Euro bank at -2%. (This person paid the bank 2% the CD value for the bank hold their cash). The bank was then loaning the money out at -1% to home buyers. The bank would pay the home buyer 1% for borrowing money. LOL

      Banks can still make money at NIRP. LOL

  28. George W says:

    Bundled mortgages, Recourse/non-recourse loans and the 2008 housing crisis.

    Banks no longer hold mortgages through to maturity but instead bundle these mortgages and sell them off to investors. To me this new reality seems to muddle the whole recourse/non-recourse argument significantly.

    Investors that purchased bundled/traunched mortgages likely didn’t enter into their investment position with a complete understanding of how to recover some or all of their investments under current State law structures. I am not aware of any law that prohibits the bundling of mortgages from States with conflicting legal agenda’s.

    While bundled mortgages may be easier to sell. Once investment failure has occurred, identifying recoverable mortgage investments from those that are not would seem particularly difficult.

  29. Antonym says:

    FT just now: “Bundesbank may need recapitalisation to cover bond-buying losses”

    Bundesbank is the German equivalent of the FED !

    I bet the mass of ordinary Germans are going to be saddled up but that clown show.

    • Wolf Richter says:

      That was a bullshit piece by someone OUTSIDE the Bundesbank. Bullshit is so much fun to spread, isn’t it?

      The Bundesbank made clear that this is bullshit; it said that it will simply not pay any future profits to the government until the losses are all reversed. Same as the Fed. End of story.

    • SoCalBeachDude says:

      Absolutely false, Antonym. That is total BS as to the Bundesbank needing or wanting any sort of capitalization.

    • Antonym says:

      OK, FT spreads BS on occasion; I guess last of all on money no one shoots as straight as an arrow.

  30. Julie says:

    Turns out the boiling frog fable is just that, a fable, at least for frogs. They WILL jump out of gradually heated water before being boiled to death.

    Frogs are very sensitive to their environment. Humans not so much? It appears that people are more likely to accustom themselves to gradual shifts that can lead to disaster. Studies show this is what’s happening with climate change–people will ‘forget’ after 5 years that what they are experiencing is not ‘normal’. We even came up with a phrase for it and other unpleasant events–the new normal.

    Sorry if this sounded pompous, but someone has to stand up for the frogs.

  31. Xavier Caveat says:

    How much more moral haphazard can the financial system take or is it simply baked in, the cost of doing business, in order to keep the facade going?

  32. Antonym says:

    Bloomberg June 20th: “Hedging Failure Exposes Private Equity to Interest-Rate Surge” https ://

    “By failing to appreciate just how much central banks would jack up rates, many private equity firms opted against hedging arrangements that could have shielded companies saddled with $3 trillion in floating-rate debt from rising interest costs, that in some cases, doubled or more. For much of the past decade, those hedges cost next to nothing.”

Comments are closed.