Wolf here: Co-author Marc, who worked for Moody’s for nine years, told me, “I want to see rating agencies improve their performance before they contribute to another meltdown.”
By Marc Joffe and Joe Pimbley, who consult for PF2 Securities. The article was first published on Expect[ed] Loss.
On Black Friday, the Destiny USA Shopping Mall in Syracuse, New York was evacuated after a shooting in the food court. The following day, a knife fight broke out in the mall’s entertainment complex, adding to shoppers’ apprehension about visiting. This apprehension should be shared by holders of Commercial Mortgage Backed Securities (CMBS) collateralized solely by Destiny USA loans, including owners of $215 million in AAA-rated senior notes.
While one short-lived catastrophic event will not lead directly to bond defaults, the outbreaks of violence at an already troubled mega-mall cast a harsh light on rating agency decisions to assign their highest grades to structured notes wholly lacking the protection afforded by diversification.
As Marc reported previously, rating agencies have repeatedly assigned top ratings to CMBS secured by mortgages on only a single shopping mall. These shopping mall deals are a subcategory of so-called Single Asset / Single Borrower (SASB) CMBS. Buyers of AAA-rated SASB securities are protected from adverse performance only by overcollateralization – the fact that subordinated bonds will take the first hit when underlying loans fail to pay interest and principal in full and on time.
In the case of the Destiny Mall deal, JPCMM 2014-DSTY, the S&P and KBRA AAA-rated tranche accounts for half of the $430 million deal (excluding interest only securities). A credit event that forces a write-down of the underlying mortgages by more than 50% will trigger losses on the AAA notes.
While unlikely, such an event is hardly unimaginable, especially given the large number of dead malls dotting the American landscape. Isolated shooting and stabbing incidents – even at the height of the shopping season – probably won’t deliver a large blow to Destiny USA, but if the mall gains a reputation for danger, shoppers will inevitably begin to avoid it. In a weak environment for brick and mortar retail, reduced foot traffic could trigger store closures, leading to a downward spiral of fewer retailers and fewer shoppers.
Without diversification, the senior CMBS notes are vulnerable to default under these circumstances. Facing such a highly plausible default scenario, the senior notes do not justify a rating of AAA – an ultra-safe category for which default should be virtually unimaginable. S&P, for example, claims it expects AAA bonds to have a default probability of 0.15% over any 5-year period.
Why would any rating agency believe a single property, even with multiple businesses on this single property, should have such certainty that a loss of greater than 50% of asset value is virtually impossible?
KBRA, for example, acknowledges the low diversity of SASB CMBS but asserts implicitly that its stress assumptions for net cash flow and capitalization rate are sufficient nonetheless. Yet the stresses at the AAA level apparently do not permit the model to reach 50% loss. Et voila, it’s possible to reach the AAA rating with 50% or lower LTV.
While S&P and KBRA maintain AAA ratings on Destiny USA mall bonds, two other rating agencies take a more critical view of the facility. Both Moody’s and Fitch rate municipal bonds supported by mall revenues. In June, Moody’s downgraded these securities to Ba2 – a speculative rating – citing Destiny’s challenging operating environment. Fitch also downgraded the bonds to BBB concluding that “a recent trend of weaker performance … is likely to reduce the mall’s value.”
The top ratings from S&P and KBRA are even harder to comprehend since the CMBS are subordinated to the municipal bonds to which Moody’s and Fitch assign the much lower ratings of Ba2 and BBB, respectively. These municipals are secured by “Payments In Lieu of Taxes” (PILOT) from the mall. According to the Official Statement for these PILOT bonds: “The 2014 CMBS Mortgage securing the 2014 CMBS Loan is subordinate to the PILOT Mortgages securing the PILOT Bonds (Page 4).”
AAA ratings for CMBS bonds that are subordinate to Ba2/BBB municipal securities are very hard to fathom. The distinction of CMBS versus municipal bonds is irrelevant since Dodd Frank’s Universal Rating Symbols mandate requires that rating agencies maintain equivalent meaning of rating symbols across different asset classes.
A dozen years after the financial crisis, rating agencies remain a weak link in the financial system. We don’t know when the next financial storm will occur or what it might look like, but overrated commercial mortgages are clearly a vulnerability. Before the clouds start gathering, rating agencies should take a harder, more skeptical look at deals collateralized by shopping malls and those collateralized by pools lacking in diversity. By Marc Joffe and Joe Pimbley, for Expect[ed] Loss.
Wow, that was fast: In default is a $650 million portion of a $2 billion loan package, signed in 2018. Read… Brick & Mortar Meltdown Manhattan Style: Lenders Foreclose on Times Square Tower whose Six Retail Floors are 90% Vacant
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This would never have happened when I went to school there in the early 70s People are losing it like Gerald Celente said they would
Yes, America is becoming very third world. The upper middle and upper class will need to segregate themselves from the other classes. I know in Brazil and other countries in central and south America, the wealthy restrict their travel and often travel with armed escorts in bad or marginal areas. Sad but true. Unfortunately, consciousness on the planet is quickly bifurcating. We have people who are making wonderful progress every day in many areas of life, but on the other side of the great chasm, there is a class of people who have no desire for personal development.
Pity not everyone cant own a Tesla and drive to the organic coffee shop on Saturday mornings to enjoy the finest beans from Ethiopia flown in by private jet that morning.
False dichotomy.
we had mall here in Tucson – sold in 2007 for $150million
after couple store closings, etc. it went bankrupt
funny thing – group that sold it – local – bought it back for $40 million
and are now in process of renovating/re-purposing it
If you make “personal development” then there is no “personal development”.
Moral judgments only make matters worse.
So they say.
Favelas For All !!! …. right, RIGHT ???
Over the cliff we goooo.
…explains a lot: for the upper middle and upper class to hold off “the other” poorer classes, further dividing by race/religion/ethnicity/heritage HELPS! That kind of sowing confusion provides perhaps another ten years of power “runway” for the upper middle and rich!
You mean Gerald Celente, the crackpot who says we are in a great depression? Anybody following that guy is just going to get poorer.
That “ crackpot” is from the Bronx so watch yourself wise guy And he doesn’t say that What he says which is the truth is we would have been in one if not for all the easing and money printing they did after 2008 and he’s spot on
Frederick : I agree with you about the peace loving Kinston,New Yorker Gerald Celente. Like Gerald I got my guns, gold and a get away plan. These type of incidents is what his message is about. He is a true patriot.
I can’t disagree with Celente very much. All advanced economies no longer have population growth, which is the fuel for economic growth.
Japan crashed in 1989, Europe is going into recession now, and that is with negative interest rates. They have no ammunition to get out.
The U.S. will have negative growth in a few years.
China had a one-child policy for 20 or 30 years. Worse, families selectively aborted girls. Their workforce will look like Niagra Falls.
Lower tech jobs will continue to disappear thru AI.
Governments have no idea what to do about this, so don’t even mention these future problems.
Bureau of Justice Statistics–murder rate was 10 per 100,000 in much of 70s and 80s. Currently, the rate is less than half of those years around 4 to 5 range. Better coverage of crime today with the internet.
Murder is not the main crime problem at malls. It is the coarsening of American life. Rudeness, vulgarity, fist fights at the food court.
What is terrifying is that ordinary people are forced into these investments by the Fed to get any return on their money. The hedge funds can study the opaque financing behind these schemes and have the advantage of being the ‘first mover’ if they detect trouble just as happened in the GFC and funds like Magnetar or John Paulson could even make enormous profits by finding a way to short these dodgy financing schemes but the retail investor just gets screwed when the bottom falls out.
No, the problem is people have no reason to shop there. They haven’t had in years.
The mall model was built around good sales volumes and high sticker prices which in turn allowed a complex financial ecosystem to develop: the REIT could pay big coupons, the franchisees could pay their hefty royalty fees and rents, city governments got their sky high impact fees and property taxes… and the consumer was bamboozled by the spin doctors in the media into overpaying, often massively so, to get a “great shopping experience”.
But things have changed: I owe Hegel an apology… if I understood that guy correctly back in high school. ;-)
Malls are failing to adapt, and spectacularly so. I’ve recently read a PR piece putting the blame on Amazon for “the failure to meet inflation targets set by the ECB”. You cannot make up stuff like this. It manages to be both pathetic and funny at the same time.
This frozen in time mentality is exactly the reason Internet sales are booming and malls are getting hit with a brick over the head by an enemy they cannot even touch, not easy money, not consummerism, not anything else.
At this rate I expect the demand for a bailout of the mall sector by 2025 at latest. If it happens you read it here first. ;-)
70’s & 80’s: High inflation, wage stagnation, high unemployment, lots of veterans coming back from an ugly war… We even had a less densely populated country then, greater economic equality overall, and no video games actively training kids to kill. I hate to be all doom and gloom, but… let’s compare numbers when this “business cycle” turns.
On the flip side, though, lead-poisoning (which triggers violent behavior) was more prevalent in the 70’s thanks to leaded fuel, lead paint, less efficient cars. Some researchers link that to much of the violence back then. Maybe all the BPA in our plastic bottles is making us more docile. :)
I went to college in the late 70’s on the West Coast. My old dad, an italian immigrant who went through WW2 in Italy and suffered greatly along with so many Europeans. He had been around the “block” so to speak as forced by the fallout of war…Africa, Australia and finally the USA. He had seen it all and made this call this in 1976 – I remember that discussion vividly. He also mentioned that illegal migration would become a huge problem as well…20 years before it was on anybody’s radar. It is not magic, just an understanding of basic human nature, especially the politician. This is simply a complete crisis of the spirit and the soul …when so many folks believe in nothing, they will unfortunately then believe anything. This insane fairy tale is being extended by this debt orgy courtesy of the Fed.
This is why I say “gird your loins” as in scripture…prepare and strengthen yourself for what is to come. Our generation has been fortunate thus far, but we will be tested.
You have to be careful There are quite a few people who post on here that will attack you for speaking the obvious truth buts it’s going to be their loss in the end
Great article on an excellent topic. The bond rating agencies badly failed in the run-up to 2008. Good ratings at issuance are vital because once a bad bond is out there, the whole endeavor becomes a scam – finding a bagholder before time runs out.
So how is it possible that regulators are allowing the CMBS to be rated AAA, when they’re subordinate to B-rated Munis supported by the same revenue stream? (Perhaps it’s no accident that the munis and the CMBS are rated by different agencies?)
There needs to be a regulatory tripwire to catch this and pressure the rating agencies. It shouldn’t require an industry veteran to blow the whistle!
AND it’s a scam even to have a “municipal” bond supported by a mall (or anything other than government tax revenue streams). But here the muni bond raters are providing a more honest assessment than the CMBS raters!
These “ rating agencies” sound a lot like Goldman Sachs treating their clients like cattle You have to wonder how they have any credibility left
The CMBS ratings need to be tied to the quality of the tenants, the real revenue stream, and evaluated yearly to be relevant. In any rental the quality of the tenant is everything. A good tenant enhances the property and a bad one destroys value.
In a mall the stores are the draw, if a popular store leaves, foot traffic is bound to drop. The mix of stores should be a consideration in the rating of the mall, not just the real estate. As the mix changes, the ratings should be adjusted. Empty stores should be reflected in the ratings too.
Oh Yeah!
In 2008, the rating agencies got behind the action and on one report would downgrade a company by “three notches”.
Sadly, many times until that contraction ended.
It may have been a “contraction” for you but it was more like a collapse for many of us and it’s coming around again so I hope you’re prepared I know I am
Malls need more security. They have been cutting back on costs everywhere and the one place they need to spend money is on an obvious security presence. I don’t go to the mall that much anymore and I try not to go alone because I just don’t feel safe.
We have had the teens shooting at each other at the mall theaters and it is a permanent stain on the properties. First I avoided the one, now I avoid two of them. Instead we invested in a nicer tv and netflix. This is the consequence of the lack of security. We stay home more and shop online more.
One thing you never have to worry about in Warsaw where I own an apartment is shootings Never happen Crime is extremely low in fact Just some pickpockets now and then near the main station Very safe and liveable city if you don’t mind cold winters We have four large malls and they are all clean and safe
I hate to be a pain, but your stuff is hard to follow without periods at the ends of sentences.
Don’t bother. Frederick doesn’t use punctuation and doesn’t read replies.
Punctuation Nazi Nice and I obviously do Zantetsu
Is that Warsaw Poland?
I agree, malls need more security and should follow the visible security model at Mall of America. Mall of America also has a large number of plain clothes security.
Wasn’t Mall of America where a little kid got tossed off a balcony? There’s never enough security to stop crazies.
Violence in the mall, though never rising to the level of shootings, was a key cause in the loss of business that drove the mall in my city out of business. The reputation suffered because the newspaper wouldn’t print articles about the fights and muggings, and so word of mouth exaggerated the seriousness of the problem. When a local TV station started reporting on the violence, things went downhill fast.
It’s interesting that the “owners” didn’t feel the need to protect their investment by increasing security and actively prosecuting rabble rousers. Had they done so publicly, maybe their investment might have survived and flourished.
Timely article.
To take a broader perspective (on a couple of semi-related issues):
1) From a systemic point of view, a lot of the ratings danger comes from a limited historic/prospective point of view.
Historic default experience doesn’t mean a lot if the debt instruments are new (they have not been fairly stress tested in various interest rate environments and, in fact, they have only existed in the abnormal ZIRP world – which is like saying a bird can live underwater because birds almost never drown).
The prospective vision failure comes in because the agencies are implicitly assuming ZIRP forever – ignoring the long term cancer ZIRP imposes macro-economically (ie long term migration to non-repressible currencies or asset classes).
Also, as before the 2008 collapse, the agencies seem to be ignoring the systemic default correlations caused by ZIRP itself.
Alleged diversification is much less so if the putative collateral values are correlated to…unprecedented low interest rates…which both a struggling mall in Seattle and a hypervalued condo in San Diego have in common.
2) The other broad dangerous trend is the extent of debt stacking/tranching against assets whose valuation in a distressed environment is a lot more unpredictable than the agencies pretend.
More and more ZIRP starved lenders are cramming themselves into capital structures whose underlying collateral value is more and more uncertain.
This can lead to Cascade failure because defaulted lenders on one deal might very well become defaulting borrowers on another – this is the essence of the danger posed by hedge funds borrowing heavily from “safe” banks on “safe” collateral during an ultra low, “safe” interest environment.
But, again, ZIRP provides the impetus for this stupidity – it invites ever greater leverage while refusing to acknowledge that greater systemic leverage necessarily causes greater collateral valuation and valuation instability.
Sounds like this could develep into a liquidity problem and we can’t have that. Because markets. The Fed had better role out a Repo desk for CMBS backed debt comprised of single mall (or malt if you prefer) asset backed instruments.
Who is paying the credit rating agencies? Now you understand why.
Some of the shops inside the Malls have their own private guards in front looking all around!
Is this 3rd World America?
You could play full soccer on their nearly empty parking lots!
Off topic slightly but I went to the Pacific Place Mall in downtown Seattle a few days ago for the first time in a couple of years. When I moved here in 1997 I thought the PPM was the most beautiful mall I had ever seen. It’s vertical like a giant chimney built in the round with stores on every level connected with escalators and a huge skylight probably close to 100 feet above the first floor. The place is now 50-80% vacant with frontend loaders moving stuff this way and that in some kind of renovation. I asked the clerk at the AMC how long this had been going on and he said over one year. The mall couldn’t find some company to rent an empty space just for the Christmas season? A few streets down the Westlake Mall is in slightly better shape but even there it feels more like a wake.
There is so much empty space, so much. And the renters are only those that sell season stuff. It is a question if it is even wise to rent it out.
Interesting article and comments. I was reminded of another article I just read 5 minutes ago with the lead, “Boeing may curb the production of 737 Max airplanes, source says “.
Theranos?
From OilPrice…. Wall Street Gears Up For Onslaught Of Oil & Gas Bankruptcies
Investing always implies due diligence. Using rating agencies? But what do I know ? An old employer was the savvy fellow who told my best friend to buy the biggest house (in Vinyl Village) he could get financing for when I told friend to follow that 3X income formula and buy a rancher next to a park. Malls? Really? In 2019?
You know what killed our local Mall? The local (wealthy) native band with Govt financing made some deals with major tenants to move in to their developments. In one case a WalMart super centre started up as a stand-alone and the other one had Zellers, Canadian Tire, and Superstore. If located on native land taxes were to be reduced for tenants, and if natives bought anything in either location they did not have to pay GST as per treaty. It took about 3-4 years for the original mall to empty out and be re-purposed for rv and boat storage. The smaller tenants at the native development come and go with regularity. Zellers went bankrupt, became a Target, and went under as well.
Investing always implies due diligence.
It used to, but not any more. Nowadays big money is just looking for a place to land even though all the markets have been maxed out. When there’s so much capital that can’t be allocated properly it will be misallocated, but it’s got to go somewhere or it’s just going to sit in a bank account and rot away with inflation.
Aman Unamused, but credit is not capital, no matter how much the bankers try to conflate those two terms.
Tell that to the corporations capitalised on borrowed money.
You’re aware of the difference between equity capital and loan capital, aren’t you?
Neither “equity” nor “loans” are capital, both are just numbers on a spreadsheet. Just because an accountant calls it something doesn’t make it real.
Genuine capital is the surplus of production over consumption. It’s stuff, it’s people. It ain’t money, although sometimes you can buy it with money. More often you build it with sweat.
Put another way: which is really worth more, a idle factory full of equipment and trained workers, but whose owner is bankrupt due to mismanagement of finances, or a bank whose vaults are empty of anything other than digital credits, and whose management does little other than scheme new ways to fleece the shareholders to boost their bonuses, but which boasts $1 trillion on the balance sheet? The real capital of the nation is in the factories and workers, not in the bankers notations.
Credit vs Capital vs Money
Is credit capital? Is money capital?
This is a intriguing argument that Unamused and Wisdom Seeker are having.
Money, whether saved, borrowed, or digitized seems to control and distribute capital. Money seems to be an effective way ta have people work for those who have capital. Money has proven to be a terrible store of value.
Anybody who thinks the stock market is going to Infinity And Beyond hasn’t been paying attention to the gigantic amount of bad corporate debt that has built up.
Question, at what point in the coming corporate debt bond explosion will the Fed no longer be able to do QE to Infinity?
Even the stinking pile of low grade MBSs from the last debt explosion that the Fed QE’ed up and has been trying to offload is going to turn sour again, probably before all of it has been offloaded
So, it’ll be 2008 again, with trillions more of bad debt to deal with this time
The Fed did not save the Private MBS issuers like Lehman, right? Why will they save CLOs, etc., if armageddon happens to them? The fed has to protect the Treasury, period. Gotta have “collateral”.
It was the refusal to bail out Lehman, which the Fed wanted, that caused the financial markets to lock up and started the GFC. Lots more financial institutions were at risk because of the bad MBSs, which is how the Fed got approval to buy them up.
Now that the Fed has reinflated real estate prices, it is trying to offload those stinking MBSs as quickly as possible. But….. and Wolf has not addressed this ….. what happens if the corporate debt bomb explodes, real estate plunges again, and the buyers of those MBSs get stuck with plunging values again? Presumably these buyers will not be the big banks covered by Dodd Franks, but who knows? Pension funds? Insurance companies? Shadow banks? Japanese banks? They might all collapse, along with the highly leveraged cash burning companies with tons of debt
what happens if the corporate debt bomb explodes, real estate plunges again, and the buyers of those MBSs get stuck with plunging values again?
When, not if.
Wolf has not addressed this
Actually he has.
Things will go to heck. But not in a straight line. The collapse will occur in stages, like dominoes falling in slow motion. People who pay attention to these things know this but it’s not going to be much of a surprise to anybody.
Unamused,
I know Wolf has addressed the Fed dumping the MBSs, and the potent corporate debt bomb building up. I have not seen anything about WHO or what has been buying the MBSs or why they think these are any better investments now than in 2008. Who’s going to get screwed this time by the MBSs?
He mentioned once that Japanese banks were big buyers of the Cove Lite corporate junk bonds, so they’re gonna get screwed for sure
Agreed, Olorin.
Gandalf: the Fed is not selling Mortgage-Backed Securities (MBS). They are merely letting those they already have on the books roll off without fully replacing them. That’s a far cry from selling an asset outright.
These MBS the Fed has been tinkering with are not your run-of-the-mill MBS, but so-called agency issued securities. In short they are issued by Freddie Mac and the rest of the family, meaning they are backed by the US government. Nobody is going to lose money on this stuff.
Agency issued MBS rank just a step below US Treasuries as ultra-prime collaterals because they are very liquid: you can sell them in seconds or use them as collaterals without anybody batting an eyelid.
Agency issued MBS only cover residential real estate, and even there with limitations: for example second mortgages are not eligible and unless things have changed they don’t cover buildings housing more than four families.
That’s the reason commercial real estate is such a big problem, especially in light of what a scam WeWork was from the beginning (proving even a master investor like Masayoshi Son can be blinded by his own success and free money) and how poorly malls and other brick and mortar retailers are doing at a time of great retail sales.
Even if the government were to step in to financially back commercial mortgages (I wouldn’t put it above them), they cannot hold a gun to people’s heads and force them to shop at the mall. At the very most they can keep the zombie alive like the Italian government is doing with Alitalia.
MC01,
Ah yes, you are correct. And the story is more complicated than what you or Wolf have said
I googled and read up on what the Fed has been actually doing with Mortgage Backed Securities:
https://www.marketwatch.com/story/here-are-5-things-to-know-about-the-surge-in-fed-mortgage-bond-buying-2019-11-16
https://www.newyorkfed.org/markets/ambs_operation_schedule#tabs-2
Surprise story of the day (the part Wolf and you left out): The Fed has actually been CONTINUING TO BUY MORE MBS!
But, you guys are correct, the OVERALL Fed holdings of MBSs has DROPPED, and this has occurred through the process of the underlying mortgages behind these MBS getting refinanced as the economy picked up and interest rates from the Fed dropped.
So, when a mortgage that was packaged into an MBS is refinanced by somebody, the principle remaining in the mortgage is paid off by the new mortgage (which the Fed is no longer responsible for), and the old mortgage in the MBS owned by the Fed is wiped off the books, AND, the Fed gets a hunk of cash from getting the principle paid off.
The rolling off the books process that you mentioned, therefore, has been occurring through refi’s of the underlying mortgages.
The refi’s have been coming in so fast, giving the Fed so much cash that the Fed has actually been BUYING MORE MBS with that cash.
Now, why doesn’t the Fed just let all that pile of MBS roll off? Why is it slowing down the process of decreasing its pile of MBS by buying MORE?
Somewhere, I remember reading in a post (not by Wolf, from either you or Iamafan, or somebody else), that Freddie and Ginnie were still in deep, deep doo doo, and in serious risk of defaulting again. And that is almost certainly why the Fed is continuing to prop up the MBS market
Gandalf,
I covered all that. But you may not have read it.
What you didn’t mention — this is why your explanation is confusing — is that the Fed has put a CAP of $20 billion a month as to how much of its MBS portfolio is allowed to shrink. If the principal pass-through payments and maturing MBS exceed $20 billion a month, the Fed buys MBS to keep the roll-off steady at $20 billion. Over the past few months, this roll-off has averaged about $22 billion. You can catch up on it right here:
https://wolfstreet.com/2019/12/05/fed-goes-hog-wild-with-t-bills-but-repos-drop-from-a-month-ago-and-mbs-shrink-by-22-bn/
The Fed also buys and sells small amounts of MBS under a different program to keep its fingers in the market. This program is called “Small Value Exercise Amounts.” The amounts are small given its huge portfolio. The NY Fed link you provided is the schedule of future purchases and sales. At the link below, you can download the data of the actual purchases and sales here:
https://www.newyorkfed.org/markets/ambs/ambs_schedule
Will it be like post Soviet Russia? Look what happened to pensions over there, and a few oligarchs got unbelievably rich.
Actually Wolf, I did mention that the Fed could be getting rid of its MBS much faster because the underlying mortgages are getting re-financed, paid off, maturing, whatever, quite rapidly now, in good times.
The unanswered question is why continue to buy MORE MBS to SLOW DOWN this rapid natural decrease in its MBS holdings.
It’s taken nearly two years for the Fed to shed a mere 0.35 trillion dollars of its 1.77 trillion dollars of MBS. That means it will be another EIGHT YEARS or so before the Fed gets rid of all of the MBS it has. There’s a 100% probability that another financial blowup will happen within the next eight years, which means that the Fed will almost certainly STILL be holding onto lots of MBS fir the forseeable future and will have essentially become a permanent institution for supplying money for mortgages.
The only reason I can think of as to why the Fed is still buying MBS is that it feels that this is necessary either to keep Freddie and Ginnie afloat, or to keep housing asset prices high. But that really goes beyond its original mandates.
Wolf, you were way too optimistic about the Fed being able to unwind QE. With the repo market blowup, we’ve essentially seen the Fed rapidly go right back to QE.
I do not see the Fed getting out of mortgages either, and the key for me was discovering for the first time (and maybe you mentioned it, but in such an oblique way it wasn’t clear) that the Fed was STILL buying fresh spanking new MBS
Where the heck in its charter does it say that the Fed should become a permanent supplier of money for home mortgages?
Gandalf: “It was the refusal to bail out Lehman, which the Fed wanted, that caused the financial markets to lock up and started the GFC…”
You’re probably just referring to proximate cause, but we could trace a chain of causality almost arbitrarily far. Next step would be the collapse of the GSEs Fannie Mae and Freddie Mac around the middle of the year. This zillion-dollar event is grossly underrated in the chronology of the GFC. It sparked the deflationary fire that took Lehman Bros under. Then we have the process of allowing these institutions to get so large and levered in the first place.
We could go on. The Greenspan Fed underwrote the mortgage bubble in the first place in its attempt to paper over the effects of the collapse of the stock market bubble in 2000-2002. It needed a vast reserve of borrowing capacity to inflate, and the mortgage market was big enough to serve its purpose. Then we could go back to the Greenspan Fed’s underwriting of the late nineties stock market bubble to begin with.
We could keep going all the way back to the creation of the Fed itself. Giving a small group of people such incredible power – issuing America’s currency itself, and crucially, the power to manipulate interest rates – the price of credit – is like handing your teenage son the keys to a shiny new Corvette and a bottle of Jack Daniels. He might use them responsibly …
Finster,
Yes, I agree
See my comments further down below to cb
Gandalf,
In a previous Wolf article – Trucking “Thrives on Stability, But We’re Now on a Rocky Road” – you wrote a very thought provoking post. You stated:
“The Fed and world central banks did rescue the world from falling into another Great Depression by rapidly expanding the money supply.”
I was, and remain very curious about your reasoning for this, that curiosity being magnified by your commentary above. (Though I recognize that your support for the FEDS initial actions in 2008 doesn’t mean you condone their actions thereafter.)
I have read much from Paulson, Bernanke, Geithner, Buffet, etc. who seem to think the actions taken saved the world. I think they are just speaking their book.
I think the actions taken damaged Capitalism and free markets. These actions have contributed to the rise of views represented by AOC (Alexandria Occasion Cortez) and others clamoring for MMT. And why not clamor for MMT? If welfare is good enough for Wall Street and Buffet, why is it not good enough for little people?
I read Geithner’s book. He’s a hero in his mind. But he didn’t support, with cause and effect, why his actions were necessary …….. other than to save insiders. To favor one class of people and business over another.
AIG and Goldman Sachs should have gone under. But Bush, sucker that he was, and Obama, sellout that he was, gave cover to massive undeserved bail-outs that benefitted the profligate and corrupt, and was detrimental to fairness and the prudent.
And now, years later, we must concern ourselves with it being “2008 again, with trillions more of bad debt to deal with this time”
cb,
That viewpoint comes from the standard Monetarist economic theories of why the Great Depression happened, and the reasoning is dominated by the fact that after the Crash of 1929, the Fed responded by RAISING INTEREST RATES (and the Republican trifecta Federal government RAISED TAXES to keep the Federal budget balanced – can you believe that???)
The theory is that the Crash caused a freeze up in financial liquidity, as the highly leveraged banking industry that had lent money to buy stocks suddenly saw their collateral and money disappear into the ether.
In previous financial panics, which had occurred at about every 20 year intervals in the US ever since its founding, extremely wealthy individuals had often stepped in by providing enormous loans to various needy institutions (including the Federal government) to help solve the liquidity crisis (and profiting handsomely).
But the Crash of 1929 was bigger than anything ever before, and the Fed was playing a bigger role than ever before, and its choice to raise interest rates almost certainly made what was already a very bad financial liquidity crisis into the horror show of the Great Depression.
Ergo, this:
“I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
— Ben Bernanke, Nov. 8, 2002
That, in a nutshell is the standard monetarist theory of why the Great Depression happened, which I agree with.
Now, the problem has been that once the Fed went to ZIRP and QE, it got hooked worse than a heroin addict and could not bring itself to raise rates up again. Every time it tried, the economy hiccupped.
In 2015 when it tried to stop QE, the economy slowed In late 2018, when it started raising rates, the stock market started going down.
At some point, the Fed needs to normalize QE and the interest rates, otherwise this mass flood of easy money, as even it now realizes, is fueling a massive debt bomb of ever increasing proportions, which will explode one day, and when that explosion happens, even the Fed will not be big enough to stop it.
Thank you for your response. What do you think would have happened had we not bailed out the The Big To Fail Banks, Goldman Sachs, AIG etc.?
Is it improper to assume that those makers of bad bets, over leverage, and in many cases corruption would have just been been fed their just deserts? Is it improper to assume that liabilities and assets would have sorted themselves out. Would the distribution of those assets be any less equitable than the distribution TARP, QE etc. has brought us?
cb:
If the banks weren’t bailed out, all the overpriced assets – houses, malls, etc. would have been placed on the open market. Price discovery would have been found, banks would have closed. People would have lost money, but also would have lost debt.
Sometimes reality hurts, but pain is required for bad habits to be stopped.
Price discovery only works somewhat for manufactured goods. Not for per-existing homes in which sentiment is most important. House prices would have crashed (as in loosing 9/10 not 2/3 of their value) and the debt market would have stopped existing. All main street banks for instanced would be closed. It sounds nice to have an economy based on morals but in reality that economy sucks and it is not like it will kill bad habits because the next generation does not experience it.
Char –
Why would asset and housing prices dropping be bad? Cheap prices are good.
Prarie –
I think you are exactly right. Further, we wouldn’t have such a sick wealth gap, with a large segment of society as debt slaves. Concentrated wealth and power is dangerous to free markets. A deserved debt wind-down now and then helps solve that.
I should mention that what started this idea that having the Fed flood the financial world with easy money during a crisis seems to have started in 1987 when Greenspan did it in response to the brief stock market crash, and everything quickly smoothed out.
Now, while it’s clear that having the Fed step in to expand the money supply during a crisis helps to stabilize financial institutions what has NOT been thoroughly debated is whether ZIRP or TARP worked at all to revive the economy once it had spiraled down into a locked up position.
I remember people kept complaining that they were not seeing the benefits of TARP, that there were still no jobs.
Since we keep hearing about what a huge percentage of the US economy is from consumer spending and services, perhaps giving that $1 trillion of TARP money directly to the American consumer through a UBI -Universal Basic Income – would have worked a lot better. Instead of Trump’s $1 trillion extra Federal deficit being given to corporations via a corporate tax cut so they could do stock buybacks, perhaps that extra Federal deficit could have gone directly to Americans to continue UBI to further spur the economy
“Now, while it’s clear that having the Fed step in to expand the money supply during a crisis helps to stabilize financial institutions”
During a crises, without the FED goosing the money supply, would not stability still be reached. You might have some institutions go under, certain creditors might loose money, and assets might change hands; but isn’t that a good thing?
And hasn’t Greenspan turned out to be quite the joke?
cb,
The part you’re missing in the story is that Lehman was deliberately allowed to go under. There was some sentiment initially when Lehman got in trouble to try to rescue it. This idea was immediately shot down.
And so Lehman DID go under, under that “you might have some institutions go under” scenario.
And then the next thing you knew it turned out that all the vast amount of putrid, shady, highly leveraged debt Lehman had generated had been spread all over the world, to other banks, all the way to Iceland, etc., and …. the US and world financial markets froze up, because, suddenly, all that money was gone. Money markets froze up. Banks no longer had the liquidity to even generate paychecks for their corporate customers. This led to a cascade of bad juju happening in the economy, as corporations no longer had business, started laying employees off en masse….
This was the dreaded contagion that led to the GFC of 2008. Unemployment shot up to 10% during the GFC.
In contrast, in 1933, at the heart of the Great Depression, unemployment in the US was 25%. Unimaginable today – one fourth of the working people of the US without work or the means to buy food. No Food Stamps/SNAP, no Social Security, no SSI, nothing.
In 2008, the Fed reacted by immediately dropping rates to zero, the start of ZIRP. It needed to re-inflate the empty coffers of the banking and financial institutions ASAP, with free money, to get the economy going again and to prevent the monetary freeze up from spreading the contagion to relatively healthier parts of the economy. And I believe it did succeed in that mission. Unemployment in the US did not shoot up to 25%
The problem, of course is that the US economy became addicted to cheap money.
And I believe that the REAL reason is that the financial and corporate laws and regulations governing debt in this country have been loosened up since 1980 to historically bad levels.
After the GFC, there were some efforts to rein things back, with Dodd Franks trying to bring back some semblance of financial sanity to the big banks of the US. The problem is that Dodd Franks was at best a half hearted effort, and all the other shady over leveraging going on in the rest of the economy was ignored.
Without strict laws and regulations, there’s nothing to prevent corporations financial structures from turning cheap money and blowing it up into bad debt and creating another crisis again.
With strict laws and regulations, it doesn’t matter how cheap the money is – banks and shadow banks, and corporations, and any other economic structure handling large sums of money can’t turn it into bad, overleveraged debt that will blow up in the future.
So, what’s REALLY needed is to go back to the strait jacket tight rules and regulations that governed the United States during the 50 years between 1930 and 1980, when Glass – Steagall was merely one of a whole host of laws and regulations that prevented finance from being turned into a gambling casino.
Gandalf,
You are a good writer.
Though not an accomplished student of the matter, I agree with you that the laws and regulations regarding debt are bad. I also think the FED is bad. Finance should not be a gambling casino, with the FED picking winners and losers. Dodd Frank is sorry legislation.
Where we differ is our outlook on the necessity of the FED’s actions in 2008 and the next couple or so of years thereafter. I don’t object to the FED deliberately letting Lehman go under. I object to the FED not also deliberately letting other Institutions such as Goldman Sachs, AIG, etc. go under. Instead the FED bailed them out and further bastardized the system even beyond what they had already done with their earlier mis-management. And thereafter they had the gaul to characterize themselves as Saviors. I have not seen that “Savior” case supported with other than platitudes and generalizations. And until that case is proven or at least clearly supported with cause and effect, the only responsible position I see is to assume and voice that the assertion is propaganda.
If Lehman was loaded with putrid, highly leveraged debts they deserved to go under. They did, and good assets at Lehman wound up being owned by others. What was worthless disappeared. If other parties were affected, that says something about their leverage and imprudence. If those parties found themselves wound down, with good assets surviving to rightful owners and liabilities being reconciled in accordance with their value, or lack thereof, that’s as it should be.
“all that money was gone” — how could that be? Where did that money go? Maybe creditors became more scrutinizing, and were slower to part with money based on suddenly recognized weak collateral. Less credit in the system. Sounds like the perfect remedy for an overleveraged system. Leads to falling asset values, which is great for those wishing to purchase assets.
Also, I’m not following “Banks no longer had the liquidity to even generate paychecks for their corporate customers.” I didn’t know banks were responsible for meeting corporate payrolls. I thought payrolls should be generated out of sales revenue and working capital.
At any rate, viable businesses, including banks, with prospects to repay can borrow money, at a price. Or they can sell, at a price. The market can address these things.
Part of the FEDs charter, questionable as it was, was to be a lender of last resort, NOT a giver of last resort, NOT a picker of winners and losers. If I am wrong on any of the NOT’s then the FED should not exist, as it very probably should not anyway.
And I agree. If we must have the FED, FDIC insurance, etc. appropriate regulation is needed, Glass Steagal in particular.
And if the system were to be bailed out, it should not be bailed out from the top down.
cb,
As morally satisfying as letting Goldman Sachs and the other purveyors of bad debt go down the tubes would have been, doing so would have almost certainly re-created the truly massive financial liquidity crisis that became the Great Depression.
Letting Lehman go down the tubes by itself was enough to generate the lesser liquidity crisis that started the GFC.
Now, you might disagree with that, but I’m pretty sure 99% of the economists of this world agree with me on that.
About banks not being able to generate payroll checks in the early days of the GFC – True story! The brief liquidity crisis caused by the Lehman failure drained the cash reserves of many banks, to the point that they actually no longer had enough real money to cut the payroll checks of their corporate customers.
You have to go back to the original purpose of banks to understand how that happened.
People, businesses, corporations, generate income, real money, from some sort of profitable activity. Now, if you’re Pablo Escobar, you might want to keep all that drug money in dollar bills hidden in your own vault, and pay your cartel employees yourself with cash from that vault, but everybody else will hold their income stream in a bank and you will send the bank your incoming revenues and direct the bank to pay out regular bills for you, and, if you are a business, those regular Billpays will include corporate payrolls.
For a big corporate client of a bank, the constant flow of money, incoming revenue receipts versus outgoing bills, charges, and payroll, can easily get into the millions of dollars.
Money is the lifeblood of an economy, and if the flow seizes up for any reason, like having a heart attack, the economy can die
So how was it that banks couldn’t meet payroll for their corporate clients early in the GFC?
Well, this goes back to the repeal of Glass Steagall, a law passed during the Great Depression which flat out BANNED banks from lending out money for speculative purposes that had no effective collateral, like stocks. Lending money for stocks was what had caused the mass bank failures after the Crash of 1929. That caused money flows to seize up – a liquidity crisis- which the Fed made WORSE by tightening the money supply, and this cascaded into the Great Depression
In the GFC, it was the credit default swaps which Lehman had generated and convinced banks and other financial institutions around the world to fund that caused the initial liquidity crisis.
CDS are fundamentally nothing more than insurance policies for bonds or other forms of debt. When nothing bad happens with that debt, the buyers of the CDS have wasted their money and the sellers of the CDS have made pure profit, which is why in normal time, CDS are a great income source for financial institutions
These CDS however were backing subprime mortgages and MBS, which started to fail in record numbers, leaving the banks that had funded them minus their money and holding onto worthless pieces of electronic paper
So these overleveraged banks literally were drained of cash, having used the cash that their customers had deposited with them to do their daily business for these shady investments.
Now, you might say, what about the FDIC? If the bank fails, and the account is under $250,000 the taxpayers/FDIC guarantee the principle of the money in that account.
BUT, the FDIC guarantee does nothing to guarantee the NORMAL BANKING FUNCTIONS of that bank. Having drained its cash reserves, that bank would not be able to come up with the cash to do all the Billpays and payroll of its customers.
The river of money had frozen up
The only way to solve the problem was for the Fed to go to ZIRP and lend massive quantities of money to these banks at zero interest – essentially giving these banks the money to start up their normal functions again.
Doing that, bailing out Goldman Sachs, AIG, etc., was necessary to prevent the contagion of the debt bomb explosion and liquidity crisis from spreading further into the economy, and re-creating the Great Depression with its 25% unemployment rate
The missing part that should have been done was a full return to Glass Steagall and the other strict regulations of the 1930-1980 era
Gandalf,
Let’s boil down out essential difference. You think the bank bailouts in 2008 saved the Financial system.
I think the bailouts damaged the financial system. They prevented a natural liquidation and bank restructuring to take place, through the free market, which would have cleaned up credit weakness and replaced incompetent and corrupt practitioners with their betters. Instead the bad practitioners remain in place. The incompetent and corrupt have been rewarded, and are now bigger and more powerful than they were.
We are still subject to the larcenous “To Big To Fail” bailout practices; Digitized money forever, huge housing and asset prices, rewarding of insiders, the wealth gap, and a debt-slave economy. Do you call this saving the Financial system?
You don’t solve bad practice by doubling down with more bad practice.
“As morally satisfying as letting Goldman Sachs and the other purveyors of bad debt go down the tubes would have been, doing so would have almost certainly re-created the truly massive financial liquidity crisis that became the Great Depression.”
I appreciate the intention of your responses, but this is just an easily made assertion that has been used ad nauseum by the beneficiaries and practitioners of the bailout. Why do you save purveyors’ of bad debt? So they can issue more bad debt? They aren’t needed. Take them over and wind them down.
“Letting Lehman go down the tubes by itself was enough to generate the lesser liquidity crisis that started the GFC.
Now, you might disagree with that, but I’m pretty sure 99% of the economists of this world agree with me on that.”
I think the GFC was perking along just fine before Lehman – Bear Sterns, Fannie and Freddie, etc. As for the liquidity crises – who’s word do we have for that? In the book Meltdown, by Thomas E. Wood Jr., on page 49, he quotes a list of studies, some from FED economists that said the systemic illiquidity claims were false scare tactics.
“About banks not being able to generate payroll checks in the early days of the GFC – True story! The brief liquidity crisis caused by the Lehman failure drained the cash reserves of many banks, to the point that they actually no longer had enough real money to cut the payroll checks of their corporate customers.”
If this was true, this should have been solved without saving the bad actors. It wasn’t. The FED failed.
“You have to go back to the original purpose of banks to understand how that happened.
People, businesses, corporations, generate income, real money, from some sort of profitable activity. Now, if you’re Pablo Escobar, you might want to keep all that drug money in dollar bills hidden in your own vault, and pay your cartel employees yourself with cash from that vault, but everybody else will hold their income stream in a bank and you will send the bank your incoming revenues and direct the bank to pay out regular bills for you, and, if you are a business, those regular Billpays will include corporate payrolls.
For a big corporate client of a bank, the constant flow of money, incoming revenue receipts versus outgoing bills, charges, and payroll, can easily get into the millions of dollars.
Money is the lifeblood of an economy, and if the flow seizes up for any reason, like having a heart attack, the economy can die”
Lack of blood flow kills a body. Lack of money flow can restructure an economy. Instead of a good restructuring, we saved a lot of scumbags, while watching others who suffered float down the river. Another black eye for the FED, Treasury, Bush, Obama, and Congressmen who presided over the fleecing.
“So how was it that banks couldn’t meet payroll for their corporate clients early in the GFC?
Well, this goes back to the repeal of Glass Steagall, a law passed during the Great Depression which flat out BANNED banks from lending out money for speculative purposes that had no effective collateral, like stocks. Lending money for stocks was what had caused the mass bank failures after the Crash of 1929. That caused money flows to seize up – a liquidity crisis- which the Fed made WORSE by tightening the money supply, and this cascaded into the Great Depression
In the GFC, it was the credit default swaps which Lehman had generated and convinced banks and other financial institutions around the world to fund that caused the initial liquidity crisis.
CDS are fundamentally nothing more than insurance policies for bonds or other forms of debt. When nothing bad happens with that debt, the buyers of the CDS have wasted their money and the sellers of the CDS have made pure profit, which is why in normal time, CDS are a great income source for financial institutions
These CDS however were backing subprime mortgages and MBS, which started to fail in record numbers, leaving the banks that had funded them minus their money and holding onto worthless pieces of electronic paper
So these overleveraged banks literally were drained of cash, having used the cash that their customers had deposited with them to do their daily business for these shady investments.”
Obviously, there was a lot of corruption, incompetence and mis-management involved. That’s why there should have been more forced restructuring. Again the FED failed.
“Now, you might say, what about the FDIC? If the bank fails, and the account is under $250,000 the taxpayers/FDIC guarantee the principle of the money in that account.
BUT, the FDIC guarantee does nothing to guarantee the NORMAL BANKING FUNCTIONS of that bank. Having drained its cash reserves, that bank would not be able to come up with the cash to do all the Billpays and payroll of its customers.”
If a bank fails, it should be taken over and wound down.
“The river of money had frozen up
The only way to solve the problem was for the Fed to go to ZIRP and lend massive quantities of money to these banks at zero interest – essentially giving these banks the money to start up their normal functions again.
Doing that, bailing out Goldman Sachs, AIG, etc., was necessary to prevent the contagion of the debt bomb explosion and liquidity crisis from spreading further into the economy, and re-creating the Great Depression with its 25% unemployment rate”
Well That’s what they sold us. From my perspective, an unbelievable assertion. Just take over the bad actors and wind them down. You can gift yourself or newcomers just as easily as you can gift bad actors.
“The missing part that should have been done was a full return to Glass Steagall and the other strict regulations of the 1930-1980 era”
Agreed. And this exemplifies why they should not be believed in any way.
I appreciate the back and forth, but I don’t want to alienate you. I think you are forthright, and I appreciate your work. We just see this completely differently.
and another thought:
You are in good company. John Mauldin, in a recent article titled Prelude to Crisis, wrote:
“Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis.”
This position seems to be constantly reasserted and just as constant is the lack of support to justify it. The FED, Geithner, Paulson and crowd must love this.
This pro FED “lender of last resort” position is often furthered without calling out caveats, such as the position that IF the FED were to inject liquidity, that liquidity should be well collateralized and expensive. (and preferably with restrictions and penalties attached, rather than Bonuses for Bankers)
In any case, it’s a mistake to justify it as all, as the FED creates their own crisis. They are not heroes for any actions regarding their own “corrupt” mess.
Until very smart people opt out of justifying FED actions, we will remain stuck with the FED “corruption” that we have.
“I want to see rating agencies improve their performance before they contribute to another meltdown.”
I want Peace on Earth and Goodwill towards Humans, but that’s also unlikely to happen in this Crazy Capitalist, Dog-Eat-Dog world. This world says nothing is more important than making a buck, and the easiest way to make a buck is to be crooked.
St. Nick:
True.
And, my reply is to the above individuals on the effects of the actions taken in the GFC.
To wit: The US financial system refused to be fed several spoonfulls of Castor Oil to “remedy” the economic gangsterism that brought on the GFC. The future will require that we all take a whole bottle of said remedy. We had a chance to modify and ameliorate a extremely harsh reaction to the GFC; we chose not to.
It is “in your face” that any up-tick in interest rates will produce more than a “hiccup” in our system.
We are all caught up between a rock and a hard place now.
Refusing to restructure our system after the GFC and re-apply regulations like Glass Steagal only shows our inability to discipline the markets when they can’t discipline themselves because the monetary agglomerates are undisciplined.
I have to repeat what has been said too many times:
“This is not going to end well.”
Why would any rating agency believe a single property, even with multiple businesses on this single property, should have such certainty that a loss of greater than 50% of asset value is virtually impossible?
They don’t. Not really. But they have to promote the illusion that the commercial opportunities are still there, even though the real economy and the purchasing public are pretty much squeezed dry by financial extraction. So they’re cutting it too close on unrealistic expectations and verging into desperation.
It’s indicative of the underlying fallacy to so-called ‘supply-side economics’ which assures destructive market imbalances. Demand should lead supply, and bad things happen when it’s the other way around.
AAA for one object. even if it was 1995 i would say no mall is worth AAA
AAA? Maybe in the 1970s before retail got overbuilt, but now there’s a lot of junk and more all the time. AAA these days is more than of couple of notches too high.
The modern day rating agencies and guarantors are about as credible as that used car salesman who just sold you a 15 year old Chevy that was only driven 10,000 miles only on Sunday.
Was in a mall today (Newark Bay Area CA) looking for boots for the grand daughter. This mall has lost Sears and JC Penny as anchor stores. I judge the vacancy rate to be at least 30%. Did not find boots so I went home and ordered on line. That will be my last trip to this mall.
On Black Friday, the Destiny USA Shopping Mall in Syracuse, New York was evacuated after a shooting in the food court.
Gun advocates will assure you the only solution to this sort of problem is for everybody to bring their firearms to the mall.
Online shopping may have surpassed brick and mortar store sales.
https://www.cnbc.com/2019/04/02/online-shopping-officially-overtakes-brick-and-mortar-retail-for-the-first-time-ever.html
SASB bonds…learn more insanity every day it seems!
Mega Malls are dinosaurs, relics of a past when people not only bought cars but drove them everywhere uncaring on how much the fuel to drive them would cost. Of a time before online shopping and any food you want delivered at home. Mega Malls that still survive do so by keeping offering promotions and discounts and or by having a good location. Grandfathered Mega Malls from a time before laws forced them away from being near city centers still make money.
The rest? Keep dreaming.
Fuel prices might have gone down in the USA thanks to all the fracking but cars gor more expensive and salaries haven’t really risen.
Even clothes and shoes are being bought online, if only because you can return them if they are thw wrong size.
Worse, abandoned mega malls are becoming commonplace. And have so for over twenty years.
To sum up, let’s those white elephants urban monsters die already.
Miami just announced they are building a monster sized mall complex. So much for the dead mall theory.
Steam locomotives are still being but, doesn’t mean it is not a death technology. The time that every 100k people had their mall is over. Maybe there is a future of a mall in the big cities of America.
Some words seem to have been lost
Steam locomotives are still being build but that doesn’t mean it is not a death technology.
The USA still uses coal to power part if thr the eletric grid, just because somethinh is completely obsolete it doesn’t mean it won’t keep going despite that. People still use fax machines, VHS tapes survived over a decade after movie DVDs were a thing and so on.
Oh and while Blue Ray is going well in some places, worldwide DVD movie sales still outnumber Blue Ray movie sales.
Everybody knows that shooting heroin and/or chasing the dragon will ruin your life, yet the number of heroin users worldwide has been rising for years now.
Everybody knows that a for-profit dog-walking app is unlikely to ever turn a dime and makes zero economic sense, yet Wag has been flooded with investor money.
Everybody knows that malls are a terrible investment these days, yet the number of dumb money funds pouring money into them has been rising for years now.
In short just because it’s a terrible idea it doesn’t mean people won’t pour untold risches into it. ;-)