Real Estate Bubble As Moral Failure?

2009-11-26

This really reminds me of all the navel gazing in the U.S. during and after the boom years (pre-2008). All of the moaning about how much stuff Americans buy, including large homes, was seen as the root cause of the recession. Some commentators in China are warming up to the same argument:

Yu Bin, head of macroeconomic research department of the Development Research Center, under the State Council, recently said China's realty sector had become the country's economic lifeline. If this is true, then it is dangerous and pathetic both, says an article in Qilu Evening News. Excerpts:

Economist Yu Bin has said that a steady real-estate market could prove fatal to China's economy in the coming years.

This reminds us of what another famous economist, Yi Xianrong, said in 2004. Yi warned that the realty sector would one day threaten China's overall economy. To back his statement, Yi said that skyrocketing housing prices had tied the interests of local governments and the people to the country's economy.

[ . . . ]

This reflects declining morality in society and the harsh reality of our times. The realty market is thriving on the same twisted morality principle: It doesn't matter what you do as long as you make money. This is pathetic. (China Daily)

This might indeed be pathetic, but the commentary misses the point. Maybe I'm a hopeless cynic, but people will try to make money if they have the opportunity, whether by lawful means or otherwise, depending on what the penalties are.

In the U.S. during the boom years when money was cheap, folks went out and got loans. It made sense when interest rates were very low. Did they need that cash to buy big homes and other possessions? Of course not, but that's what human beings do.

In China at the moment, real estate developers are cashing in on hot money inflows, speculators are cashing in on the fact that China's currency will one day be revalued, and so on. All makes perfect sense, yes?

Calling all this a moral failure does nothing to fix the problem. We can, and should by the way, call people to task for being greedy and rapacious, but that should not let policymakers off the hook for creating this situation in the first place.

In this instance, there is a reason why there is an asset bubble, and it has a hell of a lot more to do with China's currency regime and export policy than it does about morality. Revalue the RMB and rebalance the economy, and guess what? No more asset bubble, and a lot of those greedy fucks will move on to other deals in different industries.

Pardon my language, but polite entreaties on Op/Ed pages for people to live up to some higher moral standard is a joke. If you really want to solve a basic economic problem, you need to fix the underlying causes of the market distortion.

Tags: China Business & Economy