Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.
China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]:
> Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers.
> Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time.
So this is a much different reaction than the US government who protected the investors and banks.
[0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7...
[1]: archive.is link of [0] https://archive.ph/GKWmv
It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
Absent intervention, the consequences of 2008 would have been Great Depression 2. With intervention, we get to deal with a different set of problems (most of which could to be fair about it, be resolved by clamping down on tax avoidance in the financial sector.)
What systemic collapse ?
When a tree is rotten to its core, you need to either let it collapse on it own, or if it risks damaging other things when crashing, you cut it down.
One thing you do not do is prop it up and pretend that all is well.
Caterpillar, which has nothing to do with the housing market had no market for its commercial paper which financed day to day operations.
I agree 100% that the banks and housing industry should have been allowed to collapse but it had gone so far beyond that there was no choice but to bail out banks or suffer from decade long depression like the 1930’s.
... at the lowball prices they felt entitled to. Did they try offering bonds with real interest rates, say 7-10% ? I'm reminded of this recent narrative about the so-called "labor shortage".
Millions of people were buying houses by lying on their mortgage applications about their incomes and assets, getting interest-only mortgages they could barely pay, and hoping to sell the house for a profit before their fraud was discovered.
When the market moved against the fraudsters and they got caught with houses they couldn't pay for that were worth less than they owed, which is why they started defaulting on their payments. The victims weren't the people who quit paying their fraudulent mortgages, the victims were the people who were deceived into loaning them money.
At least with a central approach, regulators could come in and monitor. There wouldn’t really be a way for regulators to check home prices / the free market at such a massive scale.
To pretend that people committing fraud lost out "through no fault of their own" makes no sense, it's entirely their own fault. Legitimate buyers wouldn't be impacted- if a person buys a house to live in it, and pays for instance $3,000 per month, then the market price after purchase doesn't matter. They still live in their house and they still pay $3,000 per month.
Maybe you weren't around at that time, but there were a dozen different wildly popular TV shows about people flipping houses, people were buying houses with zero down payments, buying houses they couldn't afford because "real estate always goes up" and advice to "buy now and refinance in 6 months when the price has gone up" and all sorts of other greedy, speculative behavior. Houses in 2007 were the cryptocoins of the day, but with massive leverage by lying on mortgage applications.
Nope, nobody along the chain had any responsibility for enforcing any kind of professional standards. I mean, it's not like we have systems in place to check things like "lying".
The initial fraud happened at the level of people lying on mortgage applications.
I'm not suggesting there weren't all sorts of failures of regulators and credit rating agencies, nor that many of the financial institutions involved in trading these assets weren't complicit in perpetuating the fraud. I'm just pointing out that "bailing out" a person who committed fraud when taking out a loan isn't a good thing for society to do. I'm not trying to let anyone else off the hook for their roles in the systemic problem.
Ok, and bailing out the financial institutions and traders that perpetuated that fraud "isn't a good thing" either, AND you said that what the home buyers did was "worse" for "reasons".
Except all of the reasons you listed are exactly what those traders and financial institutions also did, and arguably they have professional duties not to do those things and to in fact report them. You're also neglecting that home buyers aren't professionals in this, they're supposed to be guided by the professionals, but the mortgage lenders were encouraging people to inflate their assets as standard practice.
Where you lay the most of the blame on this issue honestly blows my mind.
Not sure what side effects this could cause but it seems possible in principle.
Alternatively, you could just give all homeowners a loan instead - but this doesn't change the fundamental issue of subprime mortgages, so it would really just be pumping up the bubble further.
Yeah, I guess there's definitely a ton of side effects depending on which way you go.
However, the optics of giving banks more "free" money at the expense of "the people" is not good regardless. I wonder what would happen if the government extends almost-free loans to whoever has a mortgage.
I imagine a lot of people would use it to pay it, but probably a ton more would just use it to get a bigger TV, a car or something similar.
No way to win either way it seems.
Simple three step process:
- Be the leader of the CCP
- Declare that the homeowners will be bailed out
- Sit back and watch while your entire society restructures itself to bail out homeowners
I'm only half-kidding; this kind of stuff has been done time and time again, side effects be damned.
The first is that the us mortgage market is 10Tn. So it would have been required a 10x bigger bailout to do it directly.
The second is that someone has to decide who get a mortgage and one what property and at what rate etc. The government would need to do that too. And it seems cheaper and easier to use the existing companies that get the fed (?) To hire 1m real estate people and managers etc.
Reason 3 is that that would have been fine for mortgage holders. But what about everyone else who used those banks? Commercial loans, bon mortgage debt, insurance services, a whole bunch of very important economic processes would have suddenly ground to a halt. Mortgage holders were the main thing bailee out. But not the only thing.
But then house prices will fall, the economy will falter and interest rates on loans will go up.
And when that happens people who were previously fine will suddenly start defaulting too.
This is the problem with contagiousness, moral risk etc. If you don't bail out the first (worst) group to default, you rapidly find that people who were fine before are now no longer creditworthy.
To be clear, I'm not arguing this is fair or right or "should" be. I'm just explaining the decision that a theoretical politician would face.
Does not follow. Whether house prices fall and/or the economy falters is not out of your control, nor are they certain. It depends entirely on the choices made in the size of payout, the payout schedule, and enumerable other factors that can be managed to some extent.
Home buyers weren't innocent in all of this, but the worst predators were the ones that were bailed out, so the moral risk argument doesn't justify the choices made IMO.
So then what?
You either bail out so many people that fewer than 1% of people default. That's basically a 100% bailout right?
Or you don't and then prices fall.
And as soon as prices fall, suddenly construction stops and more people lose their jobs and people are underwater and consider defaulting strategically even if they don't "have" to.
I really agree about buyers not being innocent. I really do. It's by far the least reformed group in the 2008 shit show of fraud.
But this isn't a moral position. It's a practical one. And you can't punish those people or they'll take their neighbours (and elected officials) down with them...
Falling prices are fine because homes were overvalued virtually by definition of the circumstances at the time. Your argument assumes this would lead to a run away effect rather than it all reaching a fixed point, but this claim isn't justified.
My position isn't that home owners were the worst actors here, but that the bailout should have gone to home owners rather than the banks; the moral hazard argument applies to both, but at least in one arguably most people get to keep their homes and you're not rewarding the people whose professional responsibilities were to assess risk and properly manage financial instruments.
I'm just claiming that this wouldn't have required a full/100% bailout, just like we didn't fully bail out the banks and let some fail.
If you take the same amount of money and just give it to the banks and they foreclose on the homeowners the banks are also OK. But the homeowners are fucked.
Guess which of those two options we chose following the 2008 financial crisis.
Just paying off loans for homeowners with bad mortgages would also have been horrible - you're essentially rewarding bad quality loans. And how else would you bailout homeowners?
And also it’s telling that you don’t even consider the idea that the homeowners could have gotten similar treatment, ie a favorable loan that enabled them to eventually pay the principal back.
Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.
>Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.
It is, to an extent, but a loan is much less of a reward than someone paying off your debt. That's also why new regulations were introduced so that future behavior likes this from banks wasn't incentivized.
The people defaulting on their mortgages were people who had committed fraud by lying about their incomes and assets in order to take out massive loans they could never repay, because they thought they could flip the house for a profit before paying any principal. Foreclosing on those people is the good and right thing to do, they were criminal fraudsters not victims.
Of course, the ripple effect when half the market turns out to be fraudulent is that prices go down when the bubble bursts which also hurts legitimate buyers who bought at inflated prices, but that's secondary to what caused the wave of defaults.
Yeah no. Pretty sure that there were a few things happening inside the banks that helped create the problem.
I choose to assign blame to the parties with the most power and knowledge to have prevented the disaster.
No, why would they do that? They're saying that they'll pump money into the economy to prevent a price slump from causing other defaults, there's no expectation whatsoever that there will be any compensation to bondholders; losing money if the company defaults is part of the bond investment business. China might offer some assistance (e.g. subsidized loans) to some affected local companies for domestic policy reasons, but they're very unlikely to gift money to foreign investors in this case.
In other words, there's probably far less spillover into the rest of the world because the rest of the world simply couldn't lend evergrande that much money in the first place.
This results in private pensions funds being devalued, meaning alot of "early out" pensioners might return to working, if the investment collapse spreads. It will also continue to drive the market value of flats in western cities even more upwards, as they become a AAA-haven for china fleeing capital.