So is this still "the next Lehman brothers"?
Or have we moved on to something else?
Or have we moved on to something else?
No, and it never was.
With Lehman, the banks stopped lending to Lehman and then to everyone else. In China, Beijing can let Evergrande default while compelling lending to peripheral players. Thise players know this. The market knows this. That makes contagion risk de minimis. (For Western central banks, the analogous policy tool is “extraordinary measures,” i.e. committing to buying everything in sight.)
Keep in mind that Evergrande is defaulting because Beijing implemented debt limits. They’re wilfully deflating the bubble American policymakers ignored in ‘08. I’m a China hawk. But this whole episode is a show of strength for their system.
They've been using real estate as a place to stash everything bad for a while:
https://noahpinion.substack.com/p/what-if-xi-jinping-just-is...
The Fed was aware of the real estate bubble and tried to deflate it in 07-08. But it's hard to deflate a bubble gradually without triggering a catastrophic downturn.
The Fed played a huge role in triggering the recession. They intended to deflate the housing bubble, but didn't realize it would cause several banks to implode and risk the entire financial system.
The real failure of the Fed was being way too tight monetarily after the crisis started though.
https://fred.stlouisfed.org/series/BOGMBASE
I’m not an economist but that graph looks unhealthy.
The Fed has been much more on point this time around than it was in 2008.
It's not Lehman-like in that the company isn't a tangled octopus in the middle of the financial system. Lots of investors exposed to developing markets will get burned, but I don't think the knock-on effects will be huge.
A major housing market panic in China could create a lot of despair and unrest in China.
I really, really hope I'm wrong about that.
The dynamic in China is that the central government is overwhelmingly popular and the local governments are more derided.
What happens in China when public sentiment shifts is anyone's guess.
I don't really follow the minutia of today's politics in China, but my impression is that Xi has taken away power from the regions. If so, then this former route for change may have been blocked.
Now, given how many things in the US are at terribly inflated prices, especially housing that people need to live in, maybe in the long run it's a good thing. But between here and there it could be quite turbulent.
Imagine there are EU/US banks that have loaned money to Evergrande or any related domino that may fall.
I imagine a loan from a bank is listed as an asset for the bank because they are charging interest monthly and it produces income for the bank. Now they don't have that income because the company isn't paying. It now moves to the liability part of the balance sheet.
One of the elements of the 2008 crisis was mortgage backed securities, bundling of mortgages sold as a security. What if these banks have done the same thing with Commercial mortgages/bonds? How many derivatives are based on these loans/bonds Evergrande isn't paying on? Zero, then likely no "contagion". Many? maybe they are isolated to China?
I think its likely an onion that is peeling back its layers and we don't know the full impact until its done.