Can I lend you some bucks for that swamp? Practising what you preach
Greetings from my insanely overvalued Mumbai apartment!
After experiencing Japan’s bubble economy through the 80s as a near starving student, I watched how loans based on overinflated property values, led to the slow motion destruction of banks considered to be the bedrock of the Japanese economic miracle.
Sumitomo, Mitsubishi, Mitsui, Fuji, Daichi Kangyo – and Long Term Credit Bank of Japan (bought by a US hedge fund post collapse and now reincarnated as Shinsei Bank) – these were the banks who helped build Japan from the ruins of WW2… So, when things went too far and collapsed early the 90s, American economists told the Japanese to get rid of “non performing loans” and restructure.
Well, it took ten years , but they kinda did. Fast forward to 2008, and what do you know – it’s American banks who have made loans to people who can’t really pay, on the basis of you guessed it… inflated property values! Even better they managed to hawk off packaged versions to companies not even in the banking industry… think AIG.
Now the tables have turned: this week Japanese investment bank Nomura picked up Lehman Brothers Asia business and Mitsubishi UFJ is set to grab stake in Morgan Stanley. And, it’s not over yet.
Maybe my memory is too long, but it does make you wonder: Will these guys ever learn? or more cynically, is this just a way to earn a few bucks? After all, no one who earned a bit of cash selling mortgage backed securities has to pay anything back – that’s left to the American taxpayer – 700 billion USD or just 2000 bucks a head!
So let’s turn to India – the outsourcing boom, liberalisation and subsequent domestic growth have led to the creation of many jobs, but demand based on rising incomes could never justify real estate prices appreciating as they did in the past two years, yet it’s pretty clear all kinds of deals were done on the basis of these inflated assets . There’s no way of knowing exactly how far this led to some unwise banking decisions (loans!) , but in the short term things look like they didn’t quite get out of hand.
Meanwhile Indian land prices appear to have softened significantly – so could the US collapse now be a small blessing in disguise? Perhaps India has been spared a much larger crisis or, is this a boon and bust cycle India is destined to follow? What do you think?