March 31, 2012

Bits Bucket for March 31, 2012

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March 30, 2012

The Mother Of All Scams

It’s Friday desk clearing time for this blogger. “Donald Trump is sinking millions into real estate investments, taking large risks in 2012 for the first time since ‘getting clobbered’ in the 1990s, the Wall Street Journal reported. ‘In the 1990s Trump, previously one of the biggest risk takers in the real estate business, was unable to pay hundreds of millions of dollars worth of debt,’ the Journal said. But those days are over. ‘Call me in five years,’ Trump told the Journal. ‘I view my prior investment as a sunk cost.’”

“For Donald Trump, it was a stunning landmark of the 21st century: a luxury high-rise shaped like an ocean liner and bearing his name that would turn Fort Lauderdale Beach into an international draw. In splashy brochures, Trump beckoned investors to buy into a resort that would represent ‘the finest and most luxurious experience I have created.’ Now, with the hulking, empty tower casting a shadow over one of Florida’s most popular beachfronts, investors are demanding details of the massive project’s collapse and debts of $185 million.”

“Trump, who ended his licensing agreement with the developers in 2009, has asked to be dismissed from the lawsuits, saying he only lent his name to the project. But after reviewing a host of advertisements featuring Trump and the resort, two judges have refused to release the real-estate mogul from the cases. ‘He’s going to have a hard time explaining how he didn’t approve of those ads,’ said Alex Davis, a Michigan businessman fighting to recoup a $100,000 deposit on an oceanfront studio.”

“A Toronto developer has plans under way to develop what they believe will be the first condominium building comprised of safety deposit boxes. The price of the three-inch high, 10-inch wide, 24-inch deep gold box is $3,600, with an annual fee of $109, and taxes of $64. The platinum box, which is the same length and width, but eight inches high, has a price tag of $5,500, with an annual fee of $273 and taxes of $97. As is common practice with condos, Parallax is selling the boxes as presales. ‘You have a purchase price upfront, and when you sell it, you recoup it. There’s ability to make money off it,’ says Parallax Investment Corporation’s Nigel Lawson.”

“The only thing hotter than Winnipeg’s record-breaking spring temperatures is its red-hot resale-homes market. The average selling price of an existing home in the city grew at the fastest pace in the country during the first two months of 2012, according to the report from RE/Max Canada. The report said the shortage is sparking widespread bidding wars on properties priced under $500,000, which is helping to drive up selling prices at a surprisingly fast pace.”

“‘Existing homeowners have realized substantial equity gains, especially in recent years, and many are taking advantage of the combination of historically low interest rates and equity to upgrade,’ said Michael Polzler, an executive VP with RE/Max.”

“On the surface at least, the brutal crash in the U.S. housing market, which began six long years ago, shows few signs of abating. But some industry players say early signs of a rebound are emerging. ‘We think we’re probably past the bottom now,’ says Ralph Young, chief executive of Edmonton-based Melcor Developments, which has roughly doubled its U.S. property holdings over the past year.”

“Kimberley Marr, an Ontario based real estate broker, and the author of How to Buy U.S. Real Estate: A Canadian Guide, says if you’re interested in buying U.S. property, this is the year to do it. She says home values won’t fall much further, if at all. In particular, Marr says demand for homes in the $400,000-plus range in more desirable neighbourhoods is firming up fast. ‘Inventories are down dramatically compared to a year or two ago, especially in cities like Miami, Phoenix and Orlando. I am actually seeing bidding wars now for homes in the $450,000 to $460,000 range. I was in one bidding war earlier this year with four Canadians competing for a property listed in the seven-digit range,’ she says.”

“Lori Nelson didn’t choose to leave Phoenix’s construction industry - it left her. Her three-decade career in construction ended abruptly when she was laid off in 2009, as one of 93,600 people to lose construction work in Phoenix since the industry peaked in 2006. That was the largest job drop in a single market, according to the Associated General Contractors of America. The burst of the housing bubble was largely to blame, noted Ken Simonson, chief economist for the Associated General Contractors of America. ‘Up through about 2005, there was a widespread view that people could always sell a house whenever they wanted,’ he said. ‘And then the music stopped.’”

“The Lake Havasu and Kingman area peaked in December 2005 at 7,600 construction jobs and fell to 2,300, a loss of 5,300 workers or 70 percent. After benefiting from years of retirees moving to the Sun Belt, Lake Havasu is no longer building new homes because people either cannot afford to retire or cannot sell their homes and move. ‘They’re stuck up in iceberg-land,’ Simonson said of people living in cold climes.”

“Bank-owned homes in Middle Tennessee have been selling at an average markdown of nearly 40 percent from their original purchase prices, according to RealtyTrac. Local foreclosure expert and short-sale specialist Jim McCormack thinks the price declines reveal how exaggerated home prices were during the boom times, not how Middle Tennessee is flush with bargain deals. ‘The original purchase prices back then were phony,’ he said.”

“Jesse Hamby, who worked for a local subprime lender at the height of the housing bubble, said he understands why foreclosures have lingered. Communities were swiftly building homes for borrowers who were taking out no-money-down mortgage loans, he said. Some of those fixed rates Hamby saw in 2007 will expire this year. ‘Some people don’t realize they’re underwater until their homes are appraised,’ he said. ‘Every Saturday, you couldn’t traverse the roads without seeing moving vans. People couldn’t afford those properties, but they weren’t savvy enough to understand that.’”

“Not just buyers, but Mumbai developers too are feeling the pinch of the overheated real estate market owing to poor sales. This is evident as three property exhibitions have been cancelled in Mumbai until further notice. A study by real estate research firm Liases Foras had shown the weighted average price of a flat in Mumbai now costs more than Rs 1 crore. Liases Foras estimates that even if interest rates come down to 9 percent from the current 14-15 percent, the realty market needs to undergo a 33 percent price correction to go back to 2009 levels.”

“Pankaj Kapoor, MD of Liases Fores explains: ‘This tells us that land has almost been treated as a derivative that is traded with. It changes hand from owner to builder to PE funds and rises in value through the process. But nothing is created. With all capital being lost, realty has become the mother of all scams.’”

“Every Tuesday evening dozens of homeowners who cannot pay their mortgages gather in a cramped community centre near Madrid’s main bullring to discuss strategy to fight their banks. Newcomers, many of them immigrants from South America, take turns speaking about how close they are to eviction. In the early 2000s it was easier for a poor immigrant to buy a house than to rent. Landlords in Spain typically ask for a 6-month or even 1-year rental deposit, whereas banks pitched home loans with no downpayment.”

“Some brokers set up storefronts and painted themselves as non-profit groups aiding immigrants. ‘The risk management was zero. They gave loans for everything,’ said Jose Antonio Garcia Rubio, economic secretary for the United Left, a minority political party.”

“Carlos BaInos, whose Association of Victims of Foreclosures helps them negotiate with their banks, says a new law to allow people to hand in the keys to the bank with no penalties might set off a dangerous wave of defaults. ‘The banks are largely to blame, but the home buyers know they share the blame too. I tell my clients learn your lessons, don’t get over your head in debt. Everyone was buying a house, even people who shouldn’t have,’ he said.”

“London outperformed the rest of the country, with a monthly price rise of 1.4 per cent and an annual rise of 4.2 per cent, with average property prices now £354,300. A beach hut with unforgettable views, but no running water, has been put on the market for an eye-watering £145,000. The one-room wooden building on the beach at Mudeford Spit, Dorset has stunning views across to the Isle of Wight, but has no mains electricity or toilet. Despite this it is expected to attract a lot of interest after a neighbouring beach hut sold recently for £126,000.”

“To their friends and neighbours, Samuel and Lorna Moore enjoyed a lifestyle similar to the rich and famous, splashing out thousands of pounds on luxury status symbols including a helicopter and top-of-the-range rally car. Their company later went into liquidation, owing millions. Sister companies controlled by the family are believed to owe up to £20m to the Presbyterian Mutual Society (PMS), whose collapse required a bailout by the taxpayer.”

“The PMS also loaned money to Moore Associates (NI) and Li Developments — both part of the SHM Group controlled by Mr Moore — in early 2008, close to the peak of the property boom. But then the bubble burst, with the value of development land plummeting by up to 90% while properties saw their value halved. Last December the PMS appointed receivers to properties owned by Moore Associates (NI) and Li Developments. The portfolio, which stretches from Dervock in north Antrim to Fivemiletown in Co Tyrone, includes a row of vacant terraced houses in Ballymoney.”

“Yesterday the Belfast Telegraph spoke to Samuel Moore about his family’s financial situation. Mr Moore said he did not wish to comment on any of the issues put to him by this paper which included his family’s debts and their portfolio of empty properties strewn across Northern Ireland. But Mr Moore did say that the purchase of a custom-built World Championship specification rally car in January 2008 was made while ‘things were going well.’”

“The Anti-Eviction Taskforce protests are happening with ‘increasing frequency’ and argues that there is ‘no moral reason why any individual or family should be threatened with eviction from their home’. Independent TD Joan Collins says their aim is ‘that there will be no evictions or repossessions of family homes in Ireland.’ Does that mean that broke developers living in plush multi-million euro pads get to keep their ‘family’ home? Perhaps not – other protesters say that they are against the ‘forced removal of ordinary people from their homes.’ Still, how does one define ‘ordinary’? Does it include the accountant who made a ‘last-ditch bid to save €2m family home,’ as the Irish Independent headlined recently?”

“Similarly, the notion that people will be ‘removed, thrown out on the streets and left to fend for themselves’ is emotive nonsense. There is a welfare safety net in Ireland. Many people opted not to saddle themselves with massive mortgages during the bubble years. Instead, they rented. Will Deputy Collins give these people a free house as well?”

“Stories of individual difficulty can tug at the heartstrings, but the narrative being spun quickly unravels when one looks beyond the surface. Take the high-profile case in Laois recently, where a crowd of people prevented a repossession order being carried out. The property in question had been bought in 2003 and a top-up loan taken out in 2006. Shortly after that, the person fell into arrears. Despite being in arrears for six years – twice as long as he was meeting his mortgage repayments – he was allowed to remain on in his property.”

“Another person writes: ‘In 2008 I believed that if I didn’t get on the housing ladder now, I never would as prices were increasing by the day … the house I chose cost €315,000, very cheap for the time.’ One can sympathise, but the reality is that the bubble had burst by early 2007 and prices were tanking in 2008, when it became obvious that further big falls were inevitable. Nor was €315,000 ‘very cheap’ – average house prices peaked at €311,000 in February 2007.”

“Forget all the populist Land League rhetoric. Loans to Irish residents increased from €110 billion in January 2003 to €350 billion by December 2008. The mortgage market just went nuts. As for the banks, remember that the Irish taxpayer now owns AIB, Permanent TSB, EBS, Irish Nationwide and Anglo. The taxpayer has pumped billions into the banks, and it is in the taxpayer’s interest that as much of this money as possible is recouped.”

“That doesn’t mean turfing out people who have fallen into arrears – it is only right that an effort be made to accommodate those who may, in the long run, be able to emerge from their current difficulties. Many people borrowed sums that they will never be able to repay, however, and it’s time that everyone – house owners, bankers and politicians – faced up to this ugly reality rather than simply wishing it away.”

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Bits Bucket for March 30, 2012

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March 29, 2012

Bits Bucket for March 29, 2012

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March 28, 2012

Bits Bucket for March 28, 2012

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March 27, 2012

Totally Upside Down Forever

OC Metro reports from California. “Construction is underway on the first of what may ultimately be 14,000 new homes and apartments east of San Juan Capistrano on one of the last and largest parcels of undeveloped land in Orange County. Many of the homes in Sendero are slated to be priced between $330,000 and $700,000. An improving economy and the success of the Irvine Company over the past two and a half years selling homes in Irvine, particularly those priced under $1 million, has now buoyed CEO Tony Moiso’s belief that the time is right to jump-start his biggest and final development. ‘You never know, but all the signs are telling us that now is the time to get back into the market,’ Moiso said.”

The Victor Valley Daily Press. “A private investor who recently bought 233 abandoned housing lots in four Victor Valley subdivisions plans to sit on them until the housing market picks up, according to a broker involved in the deal. Construction halted after the housing market collapsed and a bank foreclosed on the properties.”

“In a separate recent transaction, another Southern California private investor bought 142 lots at the Tuscany III subdivision. During the past four years, investors have come into the High Desert, slowly buying up housing subdivisions as prices plummeted. A Newport Beach investor, for example, has purchased nearly 1,000 lots in Hesperia, according to Russ Blewett, Hesperia mayor and a former housing developer.”

“In February 2006, an average home in the desert sold for $327,561, according to data compiled by Larry Trombley of Century 21 Rose Realty. This year during the same month, a home averaged $116,812. Blewett said it’s good news that speculators are purchasing cheap housing lots from banks. The investors will maintain the lots and sell them to homebuilders for profit when the market starts recovering, he said. ‘I wouldn’t let banks own anything,’ Blewett said. ‘Frankly, they don’t know what to do with it.’”

LA Observed. “KB Home has made a bunch of mistakes over the past two years by purchasing land in foreclosure-plagued markets. From the Wall Street Journal: ‘In mid-2010, for example, KB bought land for nearly 700 new homes in Riverside and San Bernadino Counties in California, with a plan to finish development quickly and sell homes within six months. That plan, the order numbers show, hasn’t worked out as the company hoped. According to Metrostudy, KB Home has 43 active communities selling homes in five California counties and 42 active communities in central Florida, both areas with huge foreclosure problems. ‘They invested a lot of capital in the Inland Empire last year, and that’s a lousy market. It’s still one of the worst markets in the country,’ said John Burns, a consultant based in Irvine, Calif. ‘They put their eggs in the wrong basket.’”

The Desert Sun. “Shenandoah Springs Village was going to be exclusive. Mod homes within minutes of Interstate 10 backed by an emerald-green golf course and powered by hydrogen fuel cells and solar panels. A hotel-type concierge would run your errands during treatments at the spa and wellness center. The price tag for a piece of paradise: $500,000.”

“Four years later, five model homes sit vacant, picked over like roadkill. Los Angeles-based homebuilder Ronald Safren’s five models aren’t the only never-occupied ‘new’ houses abandoned in the Coachella Valley. The Cove’s dozen or so neighbors still wonder what will happen. Just two of the homes appear to be occupied. Some of the windows are boarded. A local phone number for Innovative Communities has been disconnected.”

“Ken McClintock bought his lot nearby for $90,000 and put a funky manufactured home on the property, hoping to capitalize on proximity. When The Cove lagged, he and a partner gave up their dreams of developing their own neighborhood on the other side of the wall. In 2008, the retired night club owner sold his home in Long Beach and moved into the manufactured unit in the desert.”

“Lots in the area now sell for $10,000. Cove homes originally listed for $400,000. Sanding a wooden table in his driveway, McClintock shrugs about his lost investment. He feels older and wiser. ‘Nobody could predict what was going to happen,’ he said.”

“Once the lawsuits are resolved, Shenandoah Springs will be significantly downsized — to a couple hundred homes at most. Price tag: mid-$300,000, tops. Shenandoah’s developers hope to revive the project. ‘We have to pick up the pieces,’ said Safren.”

Bakersfield Californian. “Homeowners in the northwest Bakersfield subdivision of North Pointe have resorted to erecting signs on their lawns to protest what they say is a change in neighborhood building standards that allegedly are lowering the value of their houses. When Jennifer Yester bought her four-bedroom, three-bathroom house in North Pointe, the sales agent assured her the community would be upscale. Yester liked what she heard, and paid $420,000 for a new home. The owner of the land sold the last 25 lots all at once to Farrow Homes. The new builder’s models stunned Yester and many others who had purchased places from the original builders.”

“They start in the upper $200,000s. ‘I thought, wow, we’re going to be totally upside down forever,’ Yester said. ‘I’ve heard maybe 40 people say they’re just going to walk away, which means we’re going to have a ton of abandoned homes and that’s going to be a nightmare.’”

From Bakersfield Now. “The Menis family has lived in southwest Bakersfield since 2004. They watched their home in the Southern Oaks development be built from the ground up. When the nation went through the economic downfall, the Menis family felt it, too. For two years, they didn’t make a payment, and they watched the price of their adjustable-rate mortgage skyrocket. ‘The payment got up high enough to pretty much where you couldn’t make them,’ Ken Menis said.”

“Like most Americans, they tried to get a modification and even tried to short-sell the home. But, eventually, they were forced into bankruptcy. Not knowing where else to turn, they sought legal help. The attorney found several items the Menis’ loan paperwork that the family couldn’t have imagined. ‘When (the attorney) looked at the (loan paperwork), right there he said these signatures don’t look the same,’ Menis said.”

The Modesto Bee. “Regulations are stricter, pay has dropped and times are tough for real estate appraisers, but there was guarded optimism at last week’s Appraisal Institute conference in Modesto. Bank-owned properties, short sale properties and traditional owner-occupied homes too often are appraised as being worth about the same, but Mark Verschelden said they shouldn’t be. The 22-year appraising veteran said Stanislaus County’s traditional owner-occupied homes have been selling for about 20 percent more than bank-owned foreclosures.”

“‘They’re not letting us bring these home values back up,’ said Verschelden, explaining his frustration. ‘But somebody’s got to get in and show there are differences in value from a vacant foreclosed house and the owner-occupied home across the street.’”

“Disparities between sales prices and appraised values can cause conflict, especially when a low appraisal kills a deal. ‘People don’t understand the whole appraisal process,’ said Walter Watson, another independent Modesto appraiser. ‘Our job isn’t to control values. It’s to report on what’s going on in the market.’”

The Santa Cruz Sentinel. “Rob Cornett has spent six months looking to buy a four-bedroom home in Watsonville for his growing family. He’s comfortable borrowing $330,000. But even though prices have fallen by half in some cases from the boom years and interest rates are near historic lows, which should favor buyers, he’s stumbling at the starting blocks. ‘I grew up in Watsonville. I live in Watsonville. I’d like to own in Watsonville,’ said Cornett.”

“Cornett wanted to make offers for 34 Villa St. and 113 Kingfisher Drive, homes that previously sold for $450,000 to $500,000, but cash investors beat him to the punch. ‘We never got to see the inside (of 34 Villa) because they required an offer to be submitted first,’ he said.”

“Cornett makes too much money to qualify as low income but doesn’t have $60,000 to put 20 percent down for a conventional loan. He has saved up more than $10,000 but wants to keep it in reserve for emergencies or repairs the new house might need. So instead of putting down 3.5 percent for a Federal Housing Administration loan, he’s opting for a USDA program that would guarantee the loan and let him borrow 100 percent of the purchase price. That makes his offer weaker than those putting more money down or paying all cash.”

“By the end of last week, Cornett thought he might get 40 La Hacienda for $343,000, with a $11,000 credit due to repairs needed. Then he learned he had to qualify for a loan from Bank of America, the loan servicer, even if he didn’t plan to get a loan there, and the deal was off. ‘They don’t offer zero down,’ he said.”

Bits Bucket for March 27, 2012

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March 26, 2012

Bits Bucket for March 26, 2012

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March 25, 2012

A Lingering Hubristic Belief

I suggested a topic on China’s housing bubble. “We’ve seen some big changes come out of the housing bubble. Much of the turmoil in the EU can be attributed to the housing mania. But will it lead to the downfall of the regime in China? Consider this: ‘The breakneck speed of China’s economic development has not only created structural imbalances but also social dislocation. Nearly 300 million rural people (and rising) constitute its floating migrant population working on urban industrial and construction sites. They are not entitled to urban residency because of their rural residency registration. According to the last official estimate, China experienced, in one year, 90,000 cases of social unrest, big and small. The government has stopped compiling and issuing statistics on this. Corruption is now endemic and getting institutionalised, affecting even the higher levels of the bureaucracy and government.’”

“The Bloomberg columnist William Pesek, quoting a report to this effect said: ‘The wealthiest 70 members of China’s legislature added almost $90 billion to their bank accounts last year.’”

A reply, “Rich people in China are targets of extreme envy. Local government officials are not above bringing bogus charges against landowners, and imprisoning entire extended families, in order to simply take over their holdings. It’s one motivation for the rich folks to get out of Dodge, and pay any amount, just to live in a place where the rule of law is observed.”

“In some ways, it’s better being rich in a poorer country–you can buy a better class of servants, for one thing. But ‘we’ (which to a wealthy Chinese person is: the US, Canada, Western Europe, Australia, or New Zealand) have a long-established tradition of property rights and contract law. The idea is to protect the individual property owner from arbitrary and capricious taking of the property by anyone who happens to be richer or more powerful. Such a basic protection simply does not exist in China. Everything you own is up for grabs at all times. Of course, rich people are not stupid; they have their sponsors, their protectors. But they may know all too well how easy it is for the game to change, for a successful predator to become a victim.”

“It’s a very stressful existence. After a while, you can’t sleep at night. You lose what peace of mind your wealth has bought you. At that point, nice quiet neighborhoods in, say, Vancouver, look pretty good. Better than a Chinese prison cell by a long shot.”

To which was said, “Do they still think that’s here? I’ll admit we’ve got it better than them, but I’m not feeling 100% confident that things will stay that way.”

The Taipei Times. “Hong Kong may face renewed risks of a housing-price bubble as interest rates remain low, Hong Kong Monetary Authority chief executive Norman Chan said. ‘On my radar screen, another risk emerged. That’s the risk we encountered back in 2009: the renewed risk of a housing price bubble,’ Chan said. The territory’s low mortgage rates mean ‘real interest rates are hugely negative. Lots of people have come to the conclusion that they buy brick and mortar, tangible assets, and could preserve their purchasing power,’ he said.’

“Interest rates being ‘too low for too long is always associated with a bubble phenomenon,’ Federal Reserve Bank of St Louis President James Bullard said at the same conference in the territory. ‘It’s not just a US policy, but a G7 policy.’ Borrowing costs in Hong Kong usually follow those set by the Fed because the territory’s currency is pegged to the US dollar.”

The Brisbane Times. “China would be demanding less Australian coal because it was already in a ‘hard landing’, JPMorgan Chase chief Asian strategist Adrian Mowat said. ‘If you look at the Chinese data, you should stop debating about a hard landing,’ he told a Singapore conference. ‘Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate any more, it’s a fact.’”

“Chinese Premier Wen Jiabao said this week that home prices were still far from reasonable levels. His comments fuelled concerns the government would maintain restrictions on the property market even if they threatened to slow economic growth. ‘One should be concerned about what’s happening in the China property market,’ Mr Mowat said. ‘People are too complacent.’”

“Yale University professor Stephen Roach, a former non-executive chairman for Morgan Stanley in Asia, said concerns about a hard landing were ‘vastly overblown. I don’t think the banking system will collapse and the property bubble will burst,’ he told a conference in Shanghai. ‘These are all exaggerations.’”

McClatchy Newspapers. “When Chinese Premier Wen Jiabao warned at the recent National People’s Congress of ‘chaos in the market’ from China’s sky-high home prices, he put to rest speculation that the government might soon end the tight controls it’s imposed on the country’s real estate market. The cost of homes in major cities has risen tenfold in the past decade and doubled in the past three years as the country’s breakneck growth has generated huge incomes for a fortunate few.”

“Prices climbed so fast that many of the newly rich didn’t even bother to rent out the investment properties they’d bought. They simply held on to them, secure in the knowledge that the properties will be worth more next year.”

The New Republic. “The fall-out from Chinese Premier Wen Jiabao’s urgent calls this month for political reform—which was quickly followed by the ousting of a top regional official, Bo Xilai, from the party leadership—have fanned whispers of a secret succession war within the party’s top ranks. ‘Power is increasingly decentralized to different factions,’ says Victor Shih, a political scientist at Northwestern University. Whereas the top party figure once had supreme authority, attention now ‘must first and foremost’ be paid ‘to the interests of the factional groups,’ Shih told me, for it is the core elite from these groups ‘that ultimately decides policies, promotions, and even the political survival of the President of China.’”

“But whatever their disparate objectives, each faction has gained from China’s furious economic growth, with wealth and political power increasing as a result of money flowing freely through their respective spheres of control. How convenient, then, that they also hold the purse-strings of finance through China’s state-controlled banks—banks whose reserves can be quickly mobilized for extending loans to projects championed by influencers in the party. It stands to reason why these vested interests haven’t been eager for the easy money to stop, and in fact have been cheerfully flexing their political muscles to direct investments into their own jurisdictions.”

“‘As long as you have politically powerful enterprises, as long as you have a banking sector which is dominated by the state and the Chinese Communist Party, there will be very high incentives to over-invest,’ Shih says.”

“Redundant infrastructure, empty luxury apartments, and half-completed commercial projects sit everywhere in China, with more popping up for the benefit of the developers and politicians involved. ‘Pegging its currency to the dollar and keeping interest rates low created perfect conditions for a bubble around 2005 to 2007,’ Edward Chancellor, an authority on financial bubbles and author of Devil Take the Hindmost, told me. ‘Then, massive stimulus in response to the global financial crisis in 2009—the extension of easy credit—really made it possible for the bubble in real estate and infrastructure, especially, to grow.’”

“‘The trouble with bubbles is once they are inflated, you must carry on with inflating them,’ Chancellor says, because ‘if investment stops growing, you get a contraction of credit and falling asset prices.’ To keep things going, it seems that banks are now making loans to each other and effectively expanding the money supply; but this, in turn, drives up the threat of inflation. ‘I suspect that the endgame is the breakdown of the Chinese credit system,’ Chancellor adds.”

“There remains among some—commentators, officials, casual spectators of this unfolding drama—a lingering hubristic belief that imbalances in China’s state-directed economy can always be controlled and corrected through political means. Yet it is clear that the present model of Chinese state-direction is not only what inflated this investment bubble to begin with—it’s also now making it impossible to take the right course of action to fix it. ‘There is no bubble in history in which the government has not been intimately involved,’ Chancellor says. ‘Those who say that China’s state-directed economy is a different case have forgotten that.’”

Bits Bucket for March 25, 2012

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March 24, 2012

Bits Bucket for March 24, 2012

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