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Won’t Be Fooled Again, Part II

January 11, 2010

Chinese Real Estate

On the eve of US banks announcing what are expected to be large bonuses following a rapid reversal in fortunes led by a trading and speculating strategies, the head of the Financial Stability Board is warning lenders to learn from past lessons before they give the world economy a mulligan.  The Wall Street Journal reports in its January 11, 2010 edition that, 

“Mario Draghi, chairman of the FSB and governor of the Bank of Italy, said banks ran the risk of of overrating the strength of the economic recovery and recklessly returning to dangerous old habits even as “substantial fragilities” remained in the system.

‘The general situation is much better than we could have expected a year ago but, at the same time, it is not as good as the market thinks it is,’ Mr. Draghi said at a news briefing Saturday night after the group’s biannual plenary meeting.

“Moreover, he added, banks must pay more attention to compensation practices with an aim toward ensuring that pay policies don’t encourage dangerous speculation. Those comments come as banks prepare to announce large bonuses for staff following a year of surprisingly strong performance.”

Meanwhile, China’s cabinet is worried that its overheated real estate market is heading for the same fate as the USA’s.  Noting that house prices in Shanghai and Beijing have doubled and redoubled over the last four years, the Washington Post reports that 

Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.

The article quotes a variety of folks arguing that of course it’s a bubble, but it’s not close to bursting, or China’s economy is “different” and therefore not likely to suffer the same consequences as the US and EU.  One observer even recycles former Citigroup Chairman Charlie Prince’s unfortunate metaphor from the height of the bubble, saying “at some point the music will stop.”  

Dance on, dance on.


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