By Matthew Yglesias
On a policy-relevant note, Monday morning I was part of a group of people who spoke to a Vice President at the Bank of Commerce, which is one of China’s large basically state-owned banks, about various financial and economic issues and naturally the question of whether China’s experiencing a housing bubble of its own came up.
He offered a couple of interesting points in response. One was that he said China’s largest banks have a limited exposure to real estate, with it amounting to no more than seven percent of total assets as a regulatory manner. So even if big losses are coming, it’s something the system can weather. Maybe so. More interesting, he noted that in the past couple of months the Chinese government has taken regulatory steps to try to cool things down including, most notably, requiring a 50% downpayment on any second homes. The clear intention there is to make it difficult to engage in leveraged real estate speculation, thus preventing too much in the way of mania.
I won’t try to judge how effective that step will be. But it’s a reminder that it’s not as if it’s impossible for regulators to notice that something funny’s happening and then change the rules in response. It’s just necessary to not have regulators possessed of an a priori belief that systemic market meltdowns are impossible. Even if Alan Greenspan sincerely believed that there was nothing but sporadic instances of “froth” in real estate markets, he still could have acted to tamp the froth down. He just chose not to.