It’s been 13 years since the 2008 recession that saw Lehman Brothers once deemed ‘too big to fail’ collapse, which set off panic in markets around the globe that was due to the US housing crisis. Now another housing crisis appears to be on the horizon as speculation on Chinas’ largest property developer Evergrande, could collapse due to high amounts of debt.
The question is will Evergrande be the new Lehman brothers? Will the Chinese government bailout Evergrande?
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From SMH 28.09.21
I still remember where I was the weekend in 2008 when Lehman Brothers collapsed. I was working in the press gallery of Parliament House in Canberra as our office TV flicked up footage of shell-shocked investment bankers – archive boxes in hand – emerging from the bank’s New York headquarters onto the streets of Lower Manhattan.
By Monday, our time, it was all over. The US investment bank had filed officially for bankruptcy, making it the largest corporate bankruptcy filing in American history.
Only then did the “shitstorm” that was the US subprime crisis – to borrow a phrase from Kevin Rudd – begin to batter the shores of the Australian economy.
Whilst we’d heard of troubles in the US housing market, the bankruptcy of Lehman Brothers was the contagion event that seeded the global financial crisis around the world.
A month later, I was busily reporting on the Rudd government’s first $10.4 billion stimulus package containing $900 cheques in the mail. There was plenty more where that came from.
Australia, as it turned out, was relatively sheltered from the economic ravages of the GFC, thanks to Rudd’s stimulus, interest rate cuts and the fact our largest trading partner, China, was also forced into unleashing massive stimulus to protect its economy, which it did with gusto.
But the sudden seizure of the world’s financial system caused rippling debt crises around the world, including heavily indebted European nations.
Commentators subsequently invoked the phrase “Minsky moment” to describe the event, so named after the US economist Hyman Minsky and his work on financial crises. In popular parlance, the term has come to mean the moment in time before asset prices, after a long run up, suddenly come crashing back to earth.
Today, some fear the potential default by Chinese real estate conglomerate Evergrande on its debts could prove the next “Minsky moment” – a Lehman Brothers style event which could spark another global financial contagion.
I’m sorry, but I just don’t buy it.
For starters, a Minsky moment does not mean what you think it means.
While Minsky was indeed a skilled economic communicator who understood the interconnected role of finance and the real economy, he never produced a formal thesis which says asset prices which inflate in value must always come to a crashing end.
While, yes, speculative bubbles can burst, it’s not true that what goes up must always come down.
Witness, if you will, the Australian property market.
It is true that Chinese authorities are seeking to engineer a “de-leveraging” of their banking sector and inflated property prices.
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Xi Jinping makes the admirable point that “housing should be for living in, not for speculation”. But Australians know only too well that faced with a choice between making housing more affordable and keeping property owners happy and the economy ticking along, the latter concern often wins.
The non-democratic nature of China’s system makes it hard to know what they will do.
But it’s worth noting that the very heavy-handedness that many fear may spark disaster can also be swiftly used to rectify any bigger than anticipated mess.
Whether it’s a bailout, a shotgun marriage, a breakup of the company into component parts or an injection of funds from local governments, there are many ways the Evergrande situation can play out.
What seems unlikely is that Beijing will want to detonate its borrowing boom in such a way that brings its economic miracle to an abrupt halt.
If it did, that would indeed be bad news for Australia’s iron ore exporters who have fed China’s construction boom. But if that happened, it’s likely interest rates here would stay lower for longer. The irony being that that would probably help fuel even more borrowing and rising house prices here.
Finally, I do not think comparisons to Lehman are appropriate – precisely because of the the terror that phrase still invokes. The collapse of Lehman Brothers was indeed a calamitous event – so much so that I doubt something of its kind will ever be allowed to happen again.
Lehman’s collapse revealed once and for all the deeply interconnected nature of modern finance. It’s impossible to know exactly who owes what to whom. Turns out, we’re all in this together.
Welcome to the world of “too big to fail” and what economists have called “moral hazard” – the ability of participants to do reckless things, safe in the knowledge they’ll be bailed out by governments. Turns out the only thing worse than moral hazard is when governments don’t step in to protect the system from going bust.
In truth, as both the GFC and now the coronavirus pandemic have reminded us, governments hold economies in their palms. They can choose to crush them, or they can choose to save them. And given the deeply unpopular nature of recessions, governments have shown increasing willingness to step in.
None of this is to say exactly how things will pan out in China. I expect we’ll hear a lot more about China’s property woes. But my rule of thumb is that if something sounds too scary to be true, it probably is.
And my guess is the world, including China, has learnt its Lehman lesson.