I think that there is a very high chance for a hard landing in the real estate sector, because we have a gigantic credit bubble. Usually these are created during the periods when credit expands at a faster pace than the economy and are followed by some kind of hardship. I do not rule out that government interventions can postpone the problem. They will bring about new misallocations of capital and maybe even make things worse. However, because China is so large I think that many sectors can still thrive in an environment where, for example, the real estate market collapses, so I do not think that the impact will be that strong.
We’ve seen what happened before with the bailout of Mexico in 1994 and the Asian crisis in 1997. If Mexico had failed at the time, we may have had a more significant setback in emerging economies in the mid-1990s, but we wouldn’t have had the depression that followed in 1998. So in my view, government intervention can postpone the problem but it may also make the situation actually worse by not letting the market clear as soon as some signs of problems appear. If, for example, LTCM hadn’t been bailed out, I
don’t think the whole system would have collapsed. Some people would have lost money, I guess Goldman Sachs and the counterparties of LTCM, but it would not have been a threat to the global financial system.
But this is what’s being presented to the public by the interventionists, who argue: ‘Had we not intervened, the whole world would have collapsed’
