China’s Housing Bubble and European Banks

The Italian people rejected a constitutional referendum, forcing Prime Minister Renzi to resign. This has been seen as yet another populist revolt against the establishment. Italy has for a long time had trouble with corruption and policy failures, not to mention that it’s had 63 governments in 70 years. Italy has even tried a Donald Trump as Prime Minister, in the billionaire Berlusconi. Like working-class Americans, the Italians thought Berlusconi would bring business skills to the government, but were disappointed with him. No doubt Americans will likely be disappointed with Trump since the government does not run like a business; you have to have an act of Congress for virtually anything you do. That takes a long time, and if Trump does get the bill to his desk, it won’t look like what he wanted after all the changes to the language are made.

Italy’s prototype to Trump failed. Renzi rose to power as an anti-establishment insider, a paradox that was hard to manage. However, he did manage it quite well. His mistake was that he, like Prime Minister David Cameron, tied his office to the vote (both seemed like they would win their respective referendum at first). As mentioned in a previous post, the current banking system causes a wealth transfer to the Tertiary and Quaternary sectors. So naturally, there is going to be some animosity against the perceived “elites,” who receive the benefits of a wealth transfer. Italy has struggled with its economy for some time now, being one of the “I’s” in the term PIIGS. Citizens in developed countries around the world are tired of footing the bill every time a bank messes up, especially when their own wealth is invisibly being taxed. Renzi’s constitutional proposal could have helped the banks be bailed out by the Italian government, which is now viewed as unlikely. However, only time will tell. Since Italy is the 8th largest economy in the world, there will be a lot of pressure to save the banks, and kick the current crisis down the road for another date so that a “economic contagion” is prevented. Populist uprisings will likely continue for a time since governments keep blaming the wrong causes and proposing solutions that are like heroin: it may feel great at first, but is much worse for you in the long-run.

If the populist maintain their opposition in Italy, their economy may actually get the medicine it needs. It will be painful for everyone, but the economy will be much healthier in the long-run. The malinvestments certainly need to be liquidated and let the entrepreneurs properly allocate saved capital.

That is Italy; then there is Germany. Deutsche Bank is three times the size of Lehman Brothers, the failure of which kicked off the 2008 banking crisis. It appears to be in worse shape than Lehman Brothers by looking at its financial statements. Prime Minister Merkel stated that she will not bailout Deutsche Bank, letting the bank lie in the bed they made. Deutsche Bank is one of the most important international banks operating today, and Deutsche Bank is desperate to survive causing it to make riskier moves, finding itself in trouble with US authorities. Deutsche Bank has had the luxury of relying on the German government to back it up, creating a moral hazard. However, as the recent populist uprisings have shown, encouraging banks to risk the economy is no longer politically acceptable.

There is some good news for Deutsche Bank. Trump’s company is practically dependent on Deutsche Bank. Although Trump stated he would step away from his business, his name and legacy are attached to his business, there is probably good reasons why he would want Deutsche Bank to survive, at least in some form.

That is Italy and Germany; then there is China. Yes, still bad news for the world economy. And it’s a story that we have all heard before. A housing bubble. A big bubble. The Chinese government’s interventions, like in the US, have caused the bubble, and are currently trying to intervene more to put an end to the housing bubble. However, these are simply not working. China is an important trading country, but its currency is not a reserve like the US Dollar, or seen as safe as the Euro (though the Euro is looking less safe than was once thought). The bubble probably won’t be as harmful as the US housing bubble, but it will certainly cause some pain that won’t be forgotten anytime soon.

Despite the political (and economic) turmoil in Italy, stocks quickly regained their losses, and the Euro reached a two-week high against the dollar. However, this is likely due to a nugget of good news: retail sales rose the highest they have been in two years in October. Families and investors will certainly need to keep an eye on these things. The market has not reacted to these imminent failures, but the failures will happen sometime soon.


Learn the causes of the US Housing Bubble (it’s not the free market!) and support this blog by purchasing Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.

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