Evergrande is not a “Minsky moment” or the next Lehman Brothers
Today, some fear that the potential default of Chinese real estate conglomerate Evergrande on its debts could be the next “Minsky moment” – a Lehman Brothers event that could spark yet another global financial contagion.
I’m sorry, but I don’t buy it.
For starters, a Minsky moment doesn’t 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 that asset prices that inflate in value must always collapse.
If, yes, speculative bubbles can burst, it is not true that what goes up must always come down.
Witness, if you will, the Australian real estate market.
It is true that the Chinese authorities are seeking to organize a “deleveraging” of their banking sector and to inflate real estate prices.
Xi Jinping admirably remarks that “housing should be for living, not for speculating.” But Australians know only too well that when faced with a choice between making housing more affordable and keeping homeowners happy, and the economy slows down, this latter concern often wins out.
The undemocratic nature of the Chinese system makes it difficult to know what they will do.
But it should be noted that the very cumbersome that many fear will trigger a disaster can also be quickly used to rectify any mess that is larger than expected.
Whether it’s a bailout, a forced marriage, a business split into several parts, or an injection of funds from local governments, the Evergrande situation can unfold from several ways.
What seems unlikely is that Beijing wants to explode its borrowing boom in a way that puts an abrupt end to its economic miracle.
If so, it would indeed be bad news for the Australian iron ore exporters who fueled China’s construction boom. But if that were to happen, it’s likely that interest rates here would stay low for longer. The irony being that it would likely help fuel even more borrowing and raise house prices here.
Finally, I don’t think comparisons to Lehman are appropriate – precisely because of the terror that sentence still invokes. The Lehman Brothers collapse was indeed a calamitous event – so much so that I doubt anything like this could ever happen again.
Public disdain for the big cats on Wall Street was at its height when US authorities allowed Lehman Brothers to go bankrupt. Since then, most of the world has realized that the only thing worse than investment bankers is a global financial system in which they don’t exist to arbitrate the orderly flow of capital.
The Lehman collapse once and for all revealed the deeply interconnected nature of modern finance. It is impossible to know exactly who owes what to whom. It turns out we’re all in the same boat.
Welcome to the world of “too big to fail” and what economists have called “moral hazard” – the ability of participants to do reckless things, knowing they will be bailed out by governments. As it turns out, the only thing worse than moral hazard is when governments fail to step in to keep the system from going bankrupt.
The truth is, as both the GFC and now the coronavirus pandemic have reminded us, governments are holding the savings in their hands. They can choose to crush them or save them. And given the deeply unpopular nature of recessions, governments have shown a growing willingness to intervene.
In doing so, they have accumulated impressive debts themselves, which, in the end, can be financed and sustained as long as, in the minds of the markets, it is better than the alternative of massive economic contractions.
None of this is to say exactly how things will play out in China. I expect we will hear a lot more about China’s real estate issues. But my rule of thumb is, if something sounds too scary to be true, it probably is.
And I guess the world, including China, has learned its Lehman lesson.
Jessica Irvine is an economics editor.
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