A decade after the subprime bubble burst, a new one seems to be taking its place in the market for corporate collateralized loan obligations. A world economy geared toward increasing the supply of ﬁnancial assets has hooked market participants and policymakers alike into a global game of Whac-A-Mole... Historically, there has been a tight positive relationship between high-yield US corporate debt instruments and high-yield EM sovereigns. In effect, high-yield US corporate debt is the emerging market that exists within the US economy (let’s call it USEM debt). In the course of this year, however, their paths have diverged (see Figure 1). Notably, US corporate yields have failed to rise in tandem with their EM counterparts... In what is still a low-interest-rate environment globally, the perpetual search for yield has found a comparatively new and attractive source in the guise of collateralized loan obligations (CLOs) within the USEM world. According to the Securities Industry and Financial Markets Association, new issues of “conventional” high-yield corporate bonds peaked in 2017 and are off significantly this year (about 35% through November). New issuance activity has shifted to the CLO market, where the amounts outstanding have soared, hitting new peaks almost daily... These CLOs share many similarities with the mortgage-backed securities that set the stage for the subprime crisis a decade ago. During that boom, banks bundled together loans and shed risk from their balance sheets. Over time, this fueled a surge in low-quality lending, as banks did not have to live with the consequences... Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure compliance with their terms and thus minimize default risk – have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume... As was the case during the heyday of mortgage-backed securities, there is great investor demand for this debt, reminiscent of the “capital inflow problem” or the “bonanza” phase of the capital flow cycle. A recurring pattern across time and place is that the seeds of financial crises are sown during good times (when bad loans are made). These are good times, as the US economy is at or near full employment... The record shows that capital-inflow surges often end badly. Any number of factors can shift the cycle from boom to bust. In the case of corporates, the odds of default rise with
- mounting debt levels,
- erosion in the value of collateral (for example, oil prices in the case of the US shale industry), and
- falling equity prices.
All three sources of default risk are now salient, and, lacking credible guarantees, the CLO market (like many others) is vulnerable to runs, because the main players are lightly regulated shadow banking institutions.
.. A decade after the subprime bubble burst, a new one seems to be taking its place – a phenomenon aptly characterized by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas as “Financial ‘Whac-a-Mole.’
.. Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance(up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place.
It was a story that seemed to reinforce stereotypes of President Donald Trump: On a visit to Japan, he was handed a box of food for a ritual feeding of carp, and after doling out a few spoons’ worth, he got impatient and dumped the rest of the box all at once.
Initial reports of the food dump — like this early video from CNN — suggested that Trump acted on his own. This pushed the late-night Twitterverse and blogosphere into a tizzy. The website Jezebel posted a story headlined, “Big Stupid Baby Dumps Load Of Fish Food On Japanese Koi Pond.”
A jab at Reagan?
Donald Trump once spent nearly $100,000 to place a full-page advertisement criticizing U.S. foreign policy in the New York Times, the Washington Post, and the Boston Globe.
“There’s nothing wrong with America’s Foreign Defense Policy that a little backbone can’t cure,” the ad’s headline blares. Below, the reader finds “an open letter from Donald J. Trump” — addressed “To The American People” — “on why America should stop paying to defend countries that can afford to defend themselves.”
.. “For decades, Japan and other nations have been taking advantage of the United States,” the letter declares. “The saga continues unabated as we defend the Persian Gulf, an area of only marginal significance to the United States for its oil supplies, but one upon which Japan and others are almost totally dependent.”
“Why are these nations not paying the United States for the human lives and billions of dollars we are losing to protect their interests?” the ad continues.
“The world is laughing at America’s politicians as we protect ships we don’t own, carrying oil we don’t need, destined for allies who won’t help.”
.. Trump writes that Americans could “help our farmers, our sick, our homeless by taking from some of the greatest profit machines ever created — machines created and nurtured by us.”
“‘Tax’ these wealthy nations, not America,” suggests the tycoon. “End our huge deficits, reduce our taxes, and let America’s economy grow unencumbered by the cost of defending those who can easily afford to pay us for the defense of their freedom.”
“Let’s not let our great country be laughed at any more,” Trump’s letter concludes.
.. At the time the ad ran, there was speculation that Trump might oppose George H.W. Bush for the Republican nomination for president. The same day the ads ran, an article elsewhere in the Times reported that the developer had scheduled a trip to New Hampshire.
Later, it comes out that the beloved nobleman did not in fact kill his good-for-nothing brother. The good-for-nothing brother killed the beloved nobleman (and stole his identity). Now the townspeople want to see him lynched or burned alive, and it is only the priest who – consistently – offers a measured forgiveness conditional on penance and self-reflection.
The priest tells them:
It seems to me that you only pardon the sins that you don’t really think sinful. You only forgive criminals when they commit what you don’t regard as crimes, but rather as conventions. You forgive a conventional duel just as you forgive a conventional divorce. You forgive because there isn’t anything to be forgiven.
.. He further notes that this is why the townspeople can self-righteously consider themselves more compassionate and forgiving than he is. Actual forgiveness, the kind the priest needs to cultivate to forgive evildoers, is really really hard. The fake forgiveness the townspeople use to forgive the people they like is really easy, so they get to boast not only of their forgiving nature, but of how much nicer they are than those mean old priests who find forgiveness difficult and want penance along with it.
.. There are a lot of people who say “I forgive you” when they mean “No harm done”, and a lot of people who say “That was unforgiveable” when they mean “That was genuinely really bad”.
.. But since forgiveness is generally considered a virtue, and one that many want credit for having, I think it’s fair to say you only earn the right to call yourself ‘forgiving’ if you forgive things that genuinely hurt you.
.. To borrow Chesterton’s example, if you think divorce is a-ok, then you don’t get to “forgive” people their divorces, you merely ignore them.
.. “Master, I have been tolerant of innumerable gays, lesbians, bisexuals, asexuals, blacks, Hispanics, Asians, transgender people, and Jews. How many Virtue Points have I earned for my meritorious deeds?”
Bodhidharma answers: “None at all”.
The Emperor, somewhat put out, demands to know why.
Bodhidharma asks: “Well, what do you think of gay people?”
The Emperor answers: “What do you think I am, some kind of homophobic bigot? Of course I have nothing against gay people!”
And Bodhidharma answers: “Thus do you gain no merit by tolerating them!”
.. If I had to define “tolerance” it would be something like “respect and kindness toward members of an outgroup”.
.. We have a lot of people – like the Emperor – boasting of being able to tolerate everyone from every outgroup they can imagine, loving the outgroup, writing long paeans to how great the outgroup is, staying up at night fretting that somebody else might not like the outgroup enough.
This is really surprising. It’s a total reversal of everything we know about human psychology up to this point. No one did any genetic engineering. No one passed out weird glowing pills in the public schools. And yet suddenly we get an entire group of people who conspicuously promote and defend their outgroups, the outer the better.
.. Any theory of outgroupishness that naively assumes the Nazis’ natural outgroup is Japanese or Chinese people will be totally inadequate.
.. So what makes an outgroup? Proximity plus small differences.
.. If you want to know who someone in former Yugoslavia hates, don’t look at the Indonesians or the Zulus or the Tibetans or anyone else distant and exotic. Find the Yugoslavian ethnicity that lives closely intermingled with them and is most conspicuously similar to them, and chances are you’ll find the one who they have eight hundred years of seething hatred toward.
.. eight hundred years of the British committing genocide against the Irish and considering them literally subhuman turned into smiles and songs about shamrocks once the Irish started looking like useful cannon fodder for a larger fight.
.. outgroups may be the people who look exactly like you, and scary foreigner types can become the in-group on a moment’s notice when it seems convenient.
.. 46% of Americans are creationists. Not just in the sense of believing God helped guide evolution. I mean they think evolution is a vile atheist lie and God created humans exactly as they exist right now. That’s half the country.
.. And I don’t have a single one of those people in my social circle.
.. About forty percent of Americans want to ban gay marriage. I think if I really stretch it, maybe ten of my top hundred fifty friends might fall into this group. This is less astronomically unlikely; the odds are a mere one to one hundred quintillion against.
.. there was a thread on Reddit asking – Redditors Against Gay Marriage, What Is Your Best Supporting Argument? A Reddit user who didn’t understand how anybody could be against gay marriage honestly wanted to know how other people who were against it justified their position. He figured he might as well ask one of the largest sites on the Internet, with an estimated user base in the tens of millions.
It soon became clear that nobody there was actually against gay marriage.
.. In a thread with 10,401 comments, a thread specifically asking for people against gay marriage, I was eventually able to find two people who came out and opposed it, way near the bottom. Their posts started with “I know I’m going to be downvoted to hell for this…”
.. Only one percent of LWers were normal everyday God-‘n-guns-but-not-George-III conservatives of the type that seem to make up about half of the United States.
.. similar to other elite universities, had a faculty and a student body that skewed about 90-10 liberal to conservative – and we can bet that, like LW, even those few token conservatives are Mitt Romney types rather than God-n’-guns types. I get my news from vox.com, an Official Liberal Approved Site. Even when I go out to eat, it turns out my favorite restaurant, California Pizza Kitchen, is the most liberal restaurant in the United States.
.. I have created an outrageously strong bubble, a 10^45 bubble. Conservatives are all around me, yet I am about as likely to have a serious encounter with one as I am a Tibetan lama.
(Less likely, actually. One time a Tibetan lama came to my college and gave a really nice presentation, but if a conservative tried that, people would protest and it would be canceled.)
.. One day I realized that entirely by accident I was fulfilling all the Jewish stereotypes.
I’m nerdy, over-educated, good with words, good with money, weird sense of humor, don’t get outside much, I like deli sandwiches. And I’m a psychiatrist, which is about the most stereotypically Jewish profession short of maybe stand-up comedian or rabbi.
I’m not very religious. And I don’t go to synagogue. But that’s stereotypically Jewish too!
.. The defining factors of Judaism – Torah-reading, synagogue-following, mother-having – are the tip of a giant iceberg. Jews sometimes identify as a “tribe”, and even if you don’t attend synagogue, you’re still a member of that tribe and people can still (in a statistical way) infer things about you by knowing your Jewish identity – like how likely they are to be psychiatrists.
.. The Red Tribe is most classically typified by conservative political beliefs, strong evangelical religious beliefs, creationism, opposing gay marriage, owning guns, eating steak, drinking Coca-Cola, driving SUVs, watching lots of TV, enjoying American football, getting conspicuously upset about terrorists and commies, marrying early, divorcing early, shouting “USA IS NUMBER ONE!!!”, and listening to country music.
.. The Blue Tribe is most classically typified by liberal political beliefs, vague agnosticism, supporting gay rights, thinking guns are barbaric, eating arugula, drinking fancy bottled water, driving Priuses, reading lots of books, being highly educated, mocking American football, feeling vaguely like they should like soccer but never really being able to get into it, getting conspicuously upset about sexists and bigots, marrying later, constantly pointing out how much more civilized European countries are than America, and listening to “everything except country”.
.. (There is a partly-formed attempt to spin off a Grey Tribe typified by libertarian political beliefs, Dawkins-style atheism, vague annoyance that the question of gay rights even comes up, eating paleo, drinking Soylent, calling in rides on Uber, reading lots of blogs, calling American football “sportsball”, getting conspicuously upset about the War on Drugs and the NSA, and listening to filk – but for our current purposes this is a distraction and they can safely be considered part of the Blue Tribe most of the time)
.. And I genuinely believed that day that I had found some unexpected good in people – that everyone I knew was so humane and compassionate that they were unable to rejoice even in the death of someone who hated them and everything they stood for.
.. Then a few years later, Margaret Thatcher died. And on my Facebook wall – made of these same “intelligent, reasoned, and thoughtful” people – the most common response was to quote some portion of the song “Ding Dong, The Witch Is Dead”.
.. You can talk all you want about Islamophobia, but my friend’s “intelligent, reasoned, and thoughtful people” – her name for the Blue Tribe – can’t get together enough energy to really hate Osama, let alone Muslims in general. We understand that what he did was bad, but it didn’t anger us personally. When he died, we were able to very rationally apply our better nature and our Far Mode beliefs about how it’s never right to be happy about anyone else’s death.
On the other hand, that same group absolutely loathed Thatcher. Most of us (though not all) can agree, if the question is posed explicitly, that Osama was a worse person than Thatcher. But in terms of actual gut feeling? Osama provokes a snap judgment of “flawed human being”, Thatcher a snap judgment of “scum”.
.. I started this essay by pointing out that, despite what geographical and cultural distance would suggest, the Nazis’ outgroup was not the vastly different Japanese, but the almost-identical German Jews.
And my hypothesis, stated plainly, is that if you’re part of the Blue Tribe, then your outgroup isn’t al-Qaeda, or Muslims, or blacks, or gays, or transpeople, or Jews, or atheists – it’s the Red Tribe.
.. One of the ways we know that racism is a giant all-encompassing social factor is the Implicit Association Test. Psychologists ask subjects to quickly identify whether words or photos are members of certain gerrymandered categories, like “either a white person’s face or a positive emotion” or “either a black person’s face and a negative emotion”.
.. If subjects have more trouble (as measured in latency time) connecting white people to negative things than they do white people to positive things, then they probably have subconscious positive associations with white people.
.. what the test famously found was that even white people who claimed to have no racist attitudes at all usually had positive associations with white people and negative associations with black people on the test.
.. there have been several studies where people sent out a bunch of identical resumes except sometimes with a black person’s photo and other times with a white person’s photo, and it was noticed that employers were much more likely to invite the fictional white candidates for interviews.
.. Once again, discrimination on the basis of party was much stronger than discrimination on the basis of race.
.. People have been studying “belief congruence theory” – the idea that differences in beliefs are more important than demographic factors in forming in-groups and outgroups – for decades.
.. people were more likely to accept friendships across racial lines than across beliefs
.. One of the best-known examples of racism is the “Guess Who’s Coming To Dinner” scenario where parents are scandalized about their child marrying someone of a different race. Pew has done some good work on this and found that only 23% of conservatives and 1% (!) of liberals admit they would be upset in this situation. But Pew also asked how parents would feel about their child marrying someone of a different political party. Now 30% of conservatives and 23% of liberals would get upset.
.. I’m not saying people of either party have it “worse” than black people, or that partyism is more of a problem than racism, or any of a number of stupid things along those lines which I am sure I will nevertheless be accused of believing. Racism is worse than partyism because the two parties are at least kind of balanced in numbers and in resources, whereas the brunt of an entire country’s racism falls on a few underprivileged people.
.. Every election cycle like clockwork, conservatives accuse liberals of not being sufficiently pro-America. And every election cycle like clockwork, liberals give extremely unconvincing denials of this.
.. My hunch – both the Red Tribe and the Blue Tribe, for whatever reason, identify “America” with the Red Tribe. Ask people for typically “American” things, and you end up with a very Red list of characteristics – guns, religion, barbecues, American football, NASCAR, cowboys, SUVs, unrestrained capitalism.
.. That means the Red Tribe feels intensely patriotic about “their” country, and the Blue Tribe feels like they’re living in fortified enclaves deep in hostile territory.
.. Here is a popular piece published on a major media site called America: A Big, Fat, Stupid Nation. Another: America: A Bunch Of Spoiled, Whiny Brats. Americans are ignorant, scientifically illiterate religious fanatics whose “patriotism” is actually just narcissism. You Will Be Shocked At How Ignorant Americans Are, and we should Blame The Childish, Ignorant American People.
Needless to say, every single one of these articles was written by an American and read almost entirely by Americans. Those Americans very likely enjoyed the articles very much and did not feel the least bit insulted.
.. But I think the situation with “white” is much the same as the situation with “American” – it can either mean what it says, or be a code word for the Red Tribe.
.. Imagine hearing that a liberal talk show host and comedian was so enraged by the actions of ISIS that he’d recorded and posted a video in which he shouts at them for ten minutes, cursing the “fanatical terrorists” and calling them “utter savages” with “savage values”.
If I heard that, I’d be kind of surprised. It doesn’t fit my model of what liberal talk show hosts do.
.. That fits my model perfectly. You wouldn’t celebrate Osama’s death, only Thatcher’s. And you wouldn’t call ISIS savages, only Fox News. Fox is the outgroup, ISIS is just some random people off in a desert. You hate the outgroup, you don’t hate random desert people.
.. Not only does Brand not feel much like hating ISIS, he has a strong incentive not to. That incentive is: the Red Tribe is known to hate ISIS loudly and conspicuously. Hating ISIS would signal Red Tribe membership, would be the equivalent of going into Crips territory with a big Bloods gang sign tattooed on your shoulder.
.. What would Russell Brand answer, if we asked him to justify his decision to be much angrier at Fox than ISIS?
He might say something like “Obviously Fox News is not literally worse than ISIS. But here I am, talking to my audience, who are mostly white British people and Americans. These people already know that ISIS is bad; they don’t need to be told that any further. In fact, at this point being angry about how bad ISIS is, is less likely to genuinely change someone’s mind about ISIS, and more likely to promote Islamophobia. The sort of people in my audience are at zero risk of becoming ISIS supporters, but at a very real risk of Islamophobia. So ranting against ISIS would be counterproductive and dangerous.
.. So here’s somewhere I have a genuine chance to reach people at risk and change minds. Therefore, I think my decision to rant against Fox News, and maybe hyperbolically say they were ‘worse than ISIS’ is justified under the circumstances.”
.. But my sympathy with Brand ends when he acts like his audience is likely to be fans of Fox News.
.. In a world where a negligible number of Redditors oppose gay marriage and 1% of Less Wrongers identify conservative and I know 0/150 creationists, how many of the people who visit the YouTube channel of a well-known liberal activist with a Che-inspired banner, a channel whose episode names are things like “War: What Is It Good For?” and “Sarah Silverman Talks Feminism” – how many of them do you think are big Fox News fans?
.. If he attacked ISIS, his viewers would just be a little confused and uncomfortable. Whereas every moment he’s attacking Fox his viewers are like “HA HA! YEAH! GET ‘EM! SHOW THOSE IGNORANT BIGOTS IN THE OUTGROUP WHO’S BOSS!”
.. Brand acts as if there are just these countries called “Britain” and “America” who are receiving his material. Wrong. There are two parallel universes, and he’s only broadcasting to one of them.
.. Think of Brendan Eich as a member of a tiny religious minority surrounded by people who hate that minority. Suddenly firing him doesn’t seem very noble.
.. If you mix together Podunk, Texas and Mosul, Iraq, you can prove that Muslims are scary and very powerful people who are executing Christians all the time – and so we have a great excuse for kicking the one remaining Muslim family, random people who never hurt anyone, out of town.
.. When a friend of mine heard Eich got fired, she didn’t see anything wrong with it. “I can tolerate anything except intolerance,” she said.
“Intolerance” is starting to look like another one of those words like “white” and “American”.
“I can tolerate anything except the outgroup.” Doesn’t sound quite so noble now, does it?
.. The outgroup of the Red Tribe is occasionally blacks and gays and Muslims, more often the Blue Tribe.
.. The Blue Tribe has performed some kind of very impressive act of alchemy, and transmuted all of its outgroup hatred to the Red Tribe.
.. Even the Nazis, not known for their ethnic tolerance, were able to get all buddy-buddy with the Japanese when they had a common cause.
.. Research suggests Blue Tribe / Red Tribe prejudice to be much stronger than better-known types of prejudice like racism. Once the Blue Tribe was able to enlist the blacks and gays and Muslims in their ranks, they became allies of convenience who deserve to be rehabilitated with mildly condescending paeans to their virtue. “There never was a coward where the shamrock grows.”
.. Spending your entire life insulting the other tribe and talking about how terrible they are makes you look, well, tribalistic. It is definitely not high class. So when members of the Blue Tribe decide to dedicate their entire life to yelling about how terrible the Red Tribe is, they make sure that instead of saying “the Red Tribe”, they say “America”, or “white people”, or “straight white men”. That way it’s humble self-criticism. They are so interested in justice that they are willing to critique their own beloved side, much as it pains them to do so.
.. every Blue Tribe institution is permanently licensed to take whatever emergency measures are necessary against the Red Tribe, however disturbing they might otherwise seem.
.. I had fun writing this article. People do not have fun writing articles savagely criticizing their in-group. People can criticize their in-group, it’s not humanly impossible, but it takes nerves of steel, it makes your blood boil, you should sweat blood. It shouldn’t be fun.
.. I imagine might I feel like some liberal US Muslim leader, when he goes on the O’Reilly Show, and O’Reilly ambushes him and demands to know why he and other American Muslims haven’t condemned beheadings by ISIS more, demands that he criticize them right there on live TV. And you can see the wheels in the Muslim leader’s head turning, thinking something like “Okay, obviously beheadings are terrible and I hate them as much as anyone. But you don’t care even the slightest bit about the victims of beheadings. You’re just looking for a way to score points against me so you can embarass all Muslims. And I would rather personally behead every single person in the world than give a smug bigot like you a single microgram more stupid self-satisfaction than you’ve already got.”
.. But if I want Self-Criticism Virtue Points, criticizing the Grey Tribe is the only honest way to get them. And if I want Tolerance Points, my own personal cross to bear right now is tolerating the Blue Tribe.
.. And when they are good people, they are powerful and necessary crusaders against the evils of the world.