6 ms·

So is this still "the next Lehman brothers"? Or have we moved on to something else?

chalst 5y ago
It's Lehman-like in that I don't think China will be bailing anyone out. 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.
- WhisperingShiba 5y ago
  I think the complicating factor is that the Chinese housing market is where the people of China attempt to have savings. A major housing market panic in China could create a lot of despair and unrest in China.
  - jjoonathan 5y ago
    Which would challenge CCP legitimacy, which would push the CCP to rely on the time tested tactic of blaming someone else and going to war over it. I really, really hope I'm wrong about that.
    - WhisperingShiba 5y ago
      Most people in the world do not actually want war. I'm quite confident that, while we have not evolved past being mean to each other and dumb scarcity mindsets, that the average person knows that any warfare is bad for them.
    - whimsicalism 5y ago
      The CCP has a long way to fall - it is much more popular among its populace than our government is and we aren't seeing substantial armed rebellion here yet. The dynamic in China is that the central government is overwhelmingly popular and the local governments are more derided.
      - stickfigure 5y ago
        Eh? We just voted the guys in charge out last year. No need for armed rebellion, but same results. What happens in China when public sentiment shifts is anyone's guess.
        chalst 5y ago
        It used to be the case that the CCP was decentralised: the regions had their own parties that were not ideologically answerable to the central party. Then, popular unrest could lead to the leader losing support of the regions, which could lead to the leader being deposed. Mao liked it this way, because his popularity in the regions strengthened him against his enemies in the central party. 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.
dageshi 5y ago
China doesn't have a convertible currency, it might cause turmoil in China but I don't see how it can effect the rest of the world much.
- rossdavidh 5y ago
  If Chinese billionaires have to start selling a lot of overseas real estate, equities, cryptocurrencies, etc. to pay off debts because the CCP put them in a small room with a terminal and said "pay off this debt or bad things happen to you", then it can absolutely affect the rest of the world. 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.
JumpCrisscross 5y ago
> is this still "the next Lehman brothers"? 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.
- nostromo 5y ago
  > They’re wilfully deflating the bubble American policymakers ignored in ‘08. 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.
  - whimsicalism 5y ago
    They knew it was too hot, but the market failure in the bond rating market hadn't been identified so they were operating off of flawed information. The real failure of the Fed was being way too tight monetarily after the crisis started though.
    - tomputer 5y ago
      It looks like they went from too tight to too loose: https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE I’m not an economist but that graph looks unhealthy.
      - whimsicalism 5y ago
        Monetary base is irrelevant without looking at velocity (https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V) The Fed has been much more on point this time around than it was in 2008.
mattbrewsbytes 5y ago
Like software Q&A's the answer might be "it depends". 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.

It's Lehman-like in that I don't think China will be bailing anyone out. 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.

WhisperingShiba 5y ago
I think the complicating factor is that the Chinese housing market is where the people of China attempt to have savings. A major housing market panic in China could create a lot of despair and unrest in China.
- jjoonathan 5y ago
  Which would challenge CCP legitimacy, which would push the CCP to rely on the time tested tactic of blaming someone else and going to war over it. I really, really hope I'm wrong about that.
  - WhisperingShiba 5y ago
    Most people in the world do not actually want war. I'm quite confident that, while we have not evolved past being mean to each other and dumb scarcity mindsets, that the average person knows that any warfare is bad for them.
  - whimsicalism 5y ago
    The CCP has a long way to fall - it is much more popular among its populace than our government is and we aren't seeing substantial armed rebellion here yet. The dynamic in China is that the central government is overwhelmingly popular and the local governments are more derided.
    - stickfigure 5y ago
      Eh? We just voted the guys in charge out last year. No need for armed rebellion, but same results. What happens in China when public sentiment shifts is anyone's guess.
      - chalst 5y ago
        It used to be the case that the CCP was decentralised: the regions had their own parties that were not ideologically answerable to the central party. Then, popular unrest could lead to the leader losing support of the regions, which could lead to the leader being deposed. Mao liked it this way, because his popularity in the regions strengthened him against his enemies in the central party. 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.

dageshi 5y ago

China doesn't have a convertible currency, it might cause turmoil in China but I don't see how it can effect the rest of the world much.

rossdavidh 5y ago
If Chinese billionaires have to start selling a lot of overseas real estate, equities, cryptocurrencies, etc. to pay off debts because the CCP put them in a small room with a terminal and said "pay off this debt or bad things happen to you", then it can absolutely affect the rest of the world. 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.

JumpCrisscross 5y ago

> is this still "the next Lehman brothers"? 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.

nostromo 5y ago
> They’re wilfully deflating the bubble American policymakers ignored in ‘08. 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.
- whimsicalism 5y ago
  They knew it was too hot, but the market failure in the bond rating market hadn't been identified so they were operating off of flawed information. The real failure of the Fed was being way too tight monetarily after the crisis started though.
  - tomputer 5y ago
    It looks like they went from too tight to too loose: https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE I’m not an economist but that graph looks unhealthy.
    - whimsicalism 5y ago
      Monetary base is irrelevant without looking at velocity (https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V) The Fed has been much more on point this time around than it was in 2008.

mattbrewsbytes 5y ago

Like software Q&A's the answer might be "it depends". 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.