That hard landing in China is looking a lot more likely!

Data that has been coming out in the past several weeks has shown a distinct contraction in the economy of China.  Unlike previous monthly claims that showed that the country was achieving its predetermined growth numbers, both April and May's numbers look at best underwhelming.  Questions are now being asked if China is in a recession?

Publicly,  April's growth in imports rose a moribund 0.3%, compared to an 11% from the previous period in 2011.  The NY Times is reporting that businesses across the country have reduced consumption of  many products, including commodities such as iron ore and high-end electronics, such as computer chips.  Exports grew only 4.9% in April; half as much as economists had expected.

Preliminary data published by HSBC and the financial information provider Markit for the month of May indicates that the Purchasers Managers Index (PMI) fell to 48.7 in May from 49.3 in April.  Indexes below 50 are considered representative of a contraction.  Whereas the HSBC manufacturing index has been below 50 for seven months.  May exports similarly fell to 47.8 in May, from 50.2 in April. 

China's National Bureau of Statistics has stated that

inflation in consumer prices slowed to 3.4 percent in April from 3.6 percent in March, while producer prices, measured at the factory gate, actually fell 0.7 percent in April from a year earlier.

Chinese government indexes show real estate prices have fallen in a majority the country’s urban markets.  Housing developers have dropped prices and some have reduced activity at constructions sites to a single daytime shift, down from a continuous 24-hour work cycle.  Demand for construction workers has sharply declined.

In a different NY Times article, the plight of local business people in Xi'an, a city of eight million in northwestern China, is highlighted.  Sun Yufang, a wholesale dealer of ovens, ranges, and water heaters,  states that local  residents have nearly stopped redecorating or outfitting apartments.  She elaborates that, “We didn’t really feel the global financial crisis, but this year, we’ve really felt it — I don’t see a solution unless people start buying,”  Likewise, Yian Leilei, a wholesaler of tablecloths and car seat covers, said that "sales nose-dived after Chinese New Year on Jan. 23 and had not recovered."

Jim Walker, founder and managing director of the Hong Kong-based economic research company Asianomics, has said that the, “Property-led growth and infrastructure-led growth is just about finished".  He concludes that more stimulus funding will have limited value, since there is already an excess of infrastructure projects, including transportation projects such as airports. 

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Historically, China's economic data has been of questionable value. Senior politicians and economists within the Chinese government have said that the data, especially that arising from local offices, are frequently massaged to confirm with politburo demands.  For example, Le Keqiang, a senior communist party official, was quoted in 2007 cable released by Wikileaks that China's GDP figures were "man-made."  He explained that he reviewed only three statistics to assess the strength of the Chinese economy:

1. Bank lending
2. Electricity consumption
3. Rail cargo volume 

If one is to evaluate the economy based on these metrics only, the Chinese economy is in very poor shape.  For instance, bank lending has contracted as demand for new loans and projects has declined.  Electricity production is down m/o/m  for April, while freight cargo by rail has flat-lined.  An article on The Atlantic magazine's online site discusses these issues.

The collective declines in imports and exports, a worsening housing market, depressed labor conditions, reduced consumer confidence, and sinking inflation are representative of a serious situation that points towards a fundamental hard landing occurring in the months ahead.

Spanish society in freefall...

Spain currently has a mass unemployment rate of 24.1% and youth unemployment rate (15-24 y/o) that exceeds 50%, up from 18.2% in 2007.  In comparison Italy's youth unemployment is 29%; Portugal is 30%; and 24% of young people in France are without employment.  The Spanish economy has been contracting each of the past two quarters and is officially back in recession.  As the financial sector attempts to wade through the morass of over-development, massive consolidation of the banks and the crippling of credit has occurred.

The root cause of much of this disaster lies in the corrupt nexus between local bankers and regional politicians, which happen in many instances to be one and the same.  Lax lending standards, cheap foreign labor, and easy inflows of European capital all lead to a massive over-development.  The days of cheap credit ended with the financial crash of 2008.  Private debt was absorbed by the balance sheets of the state and ultimately the collective nations of the Eurozone.

Whereas the chicanery that lead to this bloody mess is a story that needs to be told, I'm interested today in discussing the impact on real people and the current generation of people who will have to pay for this economic catastrophe for the rest of their lives.  The decline and hopelessness felt across Spain has been chronicled in a number of newspapers and journals.  Here are some of the highlights.

In the Spanish daily La Pais, a 9-March article titled Generation Nimileuristra described the lives of young people who see opportunities denied and their lives stagnating with either low or no paying jobs.  

In 2005 youth unemployment was about 20%. Now [reaching] 50% while doubling the European average (22.4%) . The best educated generation has the worst outlook since the transition and feels a victim of the excesses of others...

In Spain there are 10,423,798 people between 18 and 34... Their average net income (including the unemployed), is 824 euros per month. And those who are working earn on average 1,318 euros a month (data from the Youth Council of Spain)...  Professions that seemed safe... are not. The Polytechnic University of Valencia followed the first steps in the process of engineers and architects who graduated in 2008: one in four did not reach [jobs with salaries over 1000 euros/month]. And what is worse: the [educated with jobs with salaries under 1000 euros/month] had advanced by 8% compared to graduates a year earlier.

In many cases youth are forced to abandon independence and relocate into their family's homes.

It has been established that even small levels of protracted unemployment in developed countries can have serious implications for the unemployed.  Those include reduced lifetime wages, reduced employment opportunities, and higher mental health issues.  With respect to society at large, depressed wages will promote educated youth emigrate to other jurisdictions, resulting in a brain-drain to the nation.  Undereducated and unemployed male youth on the other hand are statistically more likely to participate in criminal activity.

In many OECD countries the unemployment rate is substantially higher than the general population. An Economist article from Sept-11, 2011 discusses the various disadvantages and impacts under-employment and unemployment will have on these people.

Unemployment of all sorts is linked with a level of unhappiness that cannot simply be explained by low income. It is also linked to lower life expectancy, higher chances of a heart attack in later life, and suicide. A study of Pennsylvania workers who lost jobs in the 1970s and 1980s found that the effect of unemployment on life expectancy is greater for young workers than for old. Workers who joined the American labour force during the Great Depression suffered from a persistent lack of confidence and ambition for decades.

The implications of this situation are severe.  Not only will youth not be entering the work force, they will not be participating in the economy and doing normal things, such as buying cars, homes, furniture. So there is a negative cascade felt across the nation on all levels. Secondly, since they will not be paying taxes, who will bear the burden of maintaining the welfare state that Europeans are so proud of?   As fewer people are contributing to these pay-as-you-go programs, older generations will see a reduction in benefits.

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The financial crisis has lead to governments across Spain to drastically cut programs, services, and cash transfers to lower levels.  A New York Times article elaborates:

Just as Spain’s national and regional governments are struggling with the collapse of the construction industry, overspending on huge capital projects and a pileup of unpaid bills, the same problems afflict many of its small towns.

One town's mayor discusses his small community's problems:

“We lived beyond our means,” Mr. García said. “We invested in public works that weren’t sensible. We are in technical bankruptcy.” Even some money from the European Union that was supposed to be used for routine operating expenses and last until 2013 has already been spent, he said.

The banking upheavals have brought similar troubles to small and medium scale businesses, which represent "60 percent of the economy, and 80 percent of the jobs".  The vicious cycle has resulted in the shuttering of more than 500,000 small business according to the NY Times.  

“The cuts in credit have been so abrupt that some businesses not only lost specific projects they were working on,” said Carlos Ruiz Fonseca, the director of economy and innovation at Cepyme, Spain’s association of small and medium-size companies. “Some companies have just gone out of business.” 

How is any of this supposed to engender confidence in the international markets?  The same banks which are cutting credit lines, reducing exposure to risk, and contracting their businesses are simultaneously being downgraded by the various credit agencies.  Billions of Euros are being requested by the financial sector to keep these debt ridden entities from further collapsing and imploding the entire Spanish economy.

The net result of all these events is a society that is in freefall.  If these trends continue, not only will Europe have generated legions of angry, unemployed persons, they will have created the same foundations that gave rise to the extremists of the last century.

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Update: video link about squatters taking over an vacant apartment complex, built during the construction boom, in Seville

A Government for, by, and of the Corporations

Bloomberg News has an end of the year article ("Out of Lehman's Ashes Wall Street Gets Most of What It Wants") and an interview with its lead author,  Christine Harper, on the subversion of  the financial industry reform and the underlying power of the banks over Washington DC's political class.

The past two years have seen the worst economic turn down in the American economy since the Great Depression.  The origins of this downturn emanate nearly exclusively from America's financial industry, which manipulated legislators in the 1990's to abandon historic safeguards and firewalls and then engineered novel methods to expand and grow their balance sheets.  The result was a global recession that destroyed trillions of dollars worth of capital, reduced nations like Iceland, Ireland, and Latvia into economic wastelands, and has crippled growth across the Western world. However, in that same period, the same institutions that caused so much damage and harm to the world have grown richer than ever.

The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America Corp., JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg. Goldman Sachs CEO Lloyd Blankfein, 56, and his top deputies are in line to collect more than $100 million in delayed 2007 bonuses -- six months after paying $550 million to settle a fraud lawsuit related to the firm’s behavior that year. Citigroup, the bank that needed more taxpayer support than any other, has a balance sheet 14 percent bigger than it was four years ago.

The article elaborates on how the Obama administration, from its very inception, was uninterested in challenging the banks. The inclusion of former Clinton era deregulatory stalwarts, like Lawrence Summers, and persons directly responsible for the financial crisis, such as former president of the Federal Reserve bank of NY, Timothy Geithner, lead Simon Johnson, former chief economist at the IMF, to conclude “that the banks were going to get a free pass." Reformers were politely ignored and persons that significantly challenged the status quo "were dismissed as unrealistic, misinformed, advancing ulterior motives or damaging to U.S. competitiveness."

The too big to fail (TBTF) banks are now even bigger and the legislation crafted by congress is incapable of deterring these monopolies from engaging in even more disastrous swindles.  Meaningful changes, such as the re-introduction of Glass-Steagall or even what became known as the Volcker Rule, which would "ban proprietary trading at regulated banks and prohibit them from owning hedge funds and private equity funds" was water-downed, gutted, and then abandoned altogether.

Attempts to reign in the excessive salaries and bonus structures at the big banks were immediately defeated by representatives from both the corrupt Republican and Democratic parties. 

71 percent of Americans said big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, and 17 percent said bonuses above $400,000 should be subject to a one-time 50 percent tax. Only 7 percent of the respondents said they consider bonuses a reflection of Wall Street’s return to health and an appropriate incentive.

Even though a clear majority of citizens wanted the plutocrats pay to be cut for their egregious mishandling of the economy, congress in collusion with the robber-barons would have none of it.

To ensure that none of their paid whores in congress would go off message or engage in populist pandering, lobbying efforts during the 2010 election period were thrown into overdrive.

The biggest financial companies increased their spending on lobbying in the first nine months of 2010 as they sought to influence the legislative outcome, according to Senate records. JPMorgan’s advocacy spending grew 35 percent, to $5.8 million from $4.3 million, while Goldman Sachs’s jumped 71 percent to $3.6 million.

The Dodd-Frank Act for financial industry reform was eventually passed, but:

The law won’t prevent lenders with federally guaranteed deposits from gambling in the derivatives markets, though it will place restrictions on some types of contracts and require more transparent trading and central clearing. It does little to solve the danger posed by leveraged firms reliant on fickle markets for funding.

Two decades of legislative changes have given the banks and the financial industry everything they wanted; yet that was not enough.  Today every American citizen, through the generosity of their political representatives in Washington, is forced to subsidize the incompetence and greed of the bankers.  In return you, joe-public, are given a moribund economy, marginal economic growth, reduced benefits, no retirement, a society with high structural unemployment, and the comforting thought that all those rich motherfuckers on Wall St. are enjoying their vacations in the Hamptons on your dime.

BofA forecloses despite not a single payment missed!

The illegal and criminal machinations of the American banking industry continues to be exposed on a daily basis.  Consider this latest hor d'oeuvres that the media has overlooked.

[Bank of America] earlier this month notified Shock Baitch and his wife Lisa (Friedman) Baitch that foreclosure action will start today – Christmas eve – unless the couple agrees to put their home up for a forced sale. As of Thursday night Bank Of America has not backed down from its foreclosure threat.

Why?

Because another unit of Bank of America erroneously reported to credit agencies that the family was seeking a loan modification, ruining their credit rating and as the result putting their mortgage into default.

All this is happening even though the bank – after admitting it erred and sent a letter of apology in September – handed this case to a special unit at Bank of America that is charged with dealing with severe customer issues. It promised to notify the credit reporting agencies that the couple were not deadbeats, but were good credit risks.

This isn't some South Florida wasteland, where automated robosigners operating 24/7 are churning out bogus legal documents without any oversight.  The case in example is in Hartford, Connecticut, the historic international center of the insurance industry and thus a city and state steeped in the rigors of proper accounting and legal procedures.  As Barry Ritholtz of the "Big Picture" blog stated on this subject:

This is not about keeping deadbeats in their homes, as a few idiots and liars have asserted. The corporate sympathizers who are too busy fellating the bank to recognize what is going should be ignored. This is about fundamental property rights and the Rule of Law in the United States — nothing less.

Listen to what the homeowners in this particular case have to say about the useless bags of corrupt corporate shit that is Bank of America:

“Bank of America lied and submitted fraudulent information to the credit bureaus and now I am literally and financially paying for it,” Baitch said. “I looked into help with a consumer counseling service, but we can’t participate because our income is too low to meet the payment requirement. I looked into bankruptcy, but we have too much equity in the house. I cannot meet the minimum payments now on the credit cards and may have to default. I am in a situation that I should have never been in since [the bank] destroyed our credit and ability to refinance. All our debt should have been consolidated and I should have positive cash flow monthly not negative.”

Where is the great socialist Barack Obama on this matter? According to the press, the Obama administration is very, very mad at the perceived fraud undertaken by the banks, but on the other hand "the administration had yet to find anything fundamentally flawed in how large banks securitized home loans or how they foreclosed on them."

Well, Mr. Obama, I have for you a very real and obvious case of how the banks foreclosure process is fundamentally flawed and illegal. So while critics bloviate about the man's so-called socialist policies, he continues to carry water for the banks and refuses to hold his biggest corporate donors accountable for the their illegal behavior.

Gretchen Morgenson: Untangling The Complex Foreclosure Mess

Gretchen Morgenson, who writes a must-read weekly column in the NY Times business section goes on NPR to discuss the complete mess the banks and mortgage lending agencies have gotten the entire American economy into, through their initial mortgage securitization programs and now with their shady and illegal foreclosure practices.  To underline the severity of this situation, all 50 states have launched criminal investigations into the unsavory foreclosure activities committed by the banks.  Ms. Morgenson, unlike the hacks at the Wall St. Journal's op-ed pages, is an intelligent and informative journalist, who has been at the forefront in explaining the Great recession and the corpulence underlying America's corporate misdeeds.
 
NPR begins with the following introduction:

Since the housing bust two years ago, when millions of homeowners fell behind on their loans, the foreclosure industry has grown into a multibillion-dollar business. To deal with the thousands of defaulted loans needing to be processed, banks relied on thousands of temporary employees who often had little experience and training to handle the foreclosure paperwork.

This resulted in many mistakes being made throughout the foreclosure process. Reports of sloppy documentation — including the questionable notarization of documents, the loss of key paperwork needed to begin foreclosure proceedings and missing paperwork on original mortgages — temporarily halted foreclosure proceedings across much of the country in early October. It also triggered at least five separate federal investigations into the ways mortgage lenders have handled foreclosures.

The entire broadcast can be heard or downloaded here.

The degree of duplicity, fraud, and ineptitude exhibited by the major players in this decade long fiasco, should make everyone who has a stake in the viability of the American economy, to demand that everyone -politicians, corporations, bankers, loan agents, bond rating agencies, economists, and homeowners- all pay a severe penalty for engaging in what is likely the world's largest instance of criminal fraud.  Nothing else is acceptable, because these same devious pick-pockets will only re-emerge emboldened and unleash another wave of catastrophe upon the financial world if left unpunished.

Barry Ritholtz tells consumers to sue the banks

Barry Ritholtz, who blogs at The Big Picture, tells everyone who may have encountered or been harmed by the blatant and unequivocal fraud orchestrated by the banking and mortgage lending industry, to file criminal charges against the relevant parties, demand local AG's pursue litigation, and engage the media/political classes to expose the situation further.

If you have been in any way personally harmed by the illegal actions of any bank, law firm, process server, or loan servicing agency, you MUST file criminal charges.

If your home was broken into by a firm to change the locks illegally, that is breaking and entering, and conspiracy. If the wrong bank filed a foreclosure action, if the wrong house was foreclosed upon, its time to go criminal prosecution route.

Go to the local police department, fill out the requisite forms. Then go to your District Attorney’s Office or County Prosecutor’s office, and ask to speak to someone in charge. Tell them you want to prosecute. You can also contact your state Attorney General about the same. Follow up with written letters, that you send you your local newspaper and the NYT, WSJ, USA Today.

If any local DAs balk — some will know bank execs from the political groups and golf courses — let them know you will keeping a written record of all of this, and you plan to make sure that their opponent in the next election knows all about their bank coddling ways. When they stammer, hammer them about their opponent’s interest in who is and isn’t a bank bitch.

Corporations that get free speech rights also have liability for their own criminal actions. Its way past time we start forcing those responsibilities to have some meaning.

This is not about keeping deadbeats in their homes, as a few idiots and liars have asserted. The corporate sympathizers who are too busy fellating the bank to recognize what is going should be ignored. This is about fundamental property rights and the Rule of Law in the United States — nothing less.

In my previous post, I advocated the identical strategy.  Unless people want to be disenfranchised, abused, and perennially molested by the corporate degenerates on the street and their paid henchmen in congress, then the only recourse left is the courts.

Ralph Nader on the Foreclosure Mess

Ralph Nader, America's pre-eminent consumer advocate, posts an article relating to the current foreclosure mess and the banks wholesale evasion of legal practices arising from the securitization process.

He begins by saying:

This time the big banks and mortgage servicing companies, with their long, one-sided fine print contracts, may have outsmarted themselves. The newspaper headlines and the network television news are blazing news of the erupting fraudulent foreclosure process. This long-overdue coverage is generating public visibility and suddenly hundreds of thousands of foreclosures may be questioned due to what one commentator delicately called “flawed paperwork.”

He then outlines the mortgage-securitization chain through which, "The matrix of interconnected fine print contracts became too routinely robotized."  Meaning, that the banks disregarded specific requirements, such as notarization, to save themselves money and accelerate the repeated sale of these mortgages to investors across the globe.  Nader quotes the Washington Post on this matter:

“mortgages were created, and sold, sliced and diced, packaged and repackaged so quickly that financial firms had neither the time nor the patience to file paperwork in local courthouses as the loans were traded. By using MERS, lenders were able to reassign loans quickly and cheaply but often the chain of ownership was not accompanied by an official paper trail. …These problems contributed to the use of flawed and fraudulent paperwork, including backdated assignments and forged documents.”

The only reason any of this is coming to light is because consumers were willing to challenge the bankers in court and force them to confirm that they were in fact eligible to serve foreclosure upon those persons home.  It is only when people stand up for themselves and challenge institutional corruption and the status quo, will real changes be made to the system.  Voting for these corporate stooges in congress won't help.  Only by hitting the greedheads in their pocket and forcing them to defend themselves in court will the marauding pirates of casino-capitalism be held at bay.

Foreclosure Fraud: Case Example from Florida

Despite protestations from Wall Street bankers and their crooked henchmen in congress, massive criminal fraud has been exposed in the ongoing housing foreclosure fiasco.  Major mortgage dealers, such as GMAC, Bank of America, and Ally Financial Inc. have stopped foreclosure proceedings across the country out of concern of their standing in the situation. As has been apparent for more than a year, much of the fine details surrounding exact ownership of individual homes is either incomplete or missing, given the widespread securitization process.  In order to evade actual laws, the banks simply used third party intermediaries to generate missing documentation and bogus signatures out of thin air.  To us layman that's called fraud.

In the following egregious case, Bank of America foreclosed on a Florida man's home in which the bank didn't even have a mortgage for!  As usual, the bank disregarded the customer's complaints for months until the local press became involved.  Once confronted with their incompetence and potential criminality, they then issued their standard "our mistake" line of bullshit.

If Americans don't demand that every person, banker, and entity involved in this massive fraud scheme are sent to jail and banned from ever working in the industry, then the country is no more a nation of laws than any other third world shit-hole bereft of a transparent system of government and independent judiciary.
 

Lauderdale man's home sold out from under him in foreclosure mistake
September 23, 2010
By Harriet Johnson Brackey, Sun Sentinel
 
When Jason Grodensky bought his modest Fort Lauderdale home in December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.

Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a government-backed lender. "I feel like I'm hanging in the wind and I'm scared to death," said Grodensky. "How did some attorney put through a foreclosure illegally?"

Bank of America has acknowledged the error and will correct it at its own expense, said spokeswoman Jumana Bauwens.

Grodensky's story and other tales of foreclosure mistakes started popping up recently across South Florida. This week, GMAC Mortgage, one of the nation's largest mortgage servicers and a major mortgage lender, told real estate agents to stop evicting residents and suspend sales of properties that had been taken from homeowners in foreclosure. The company said it might have to "correct" some of its foreclosures, but was not halting those in process.

In Florida courts, which have been swamped with foreclosure cases for several years, mistakes "happen all the time," said foreclosure defense attorney Matt Weidner in St. Petersburg. "It's just not getting reported."

And the legal efforts required to resolve a foreclosure mistake are complicated. "Unwrapping it is like unwrapping Fort Knox," said Carol Asbury, a Fort Lauderdale foreclosure attorney. "It's very difficult."

The process is under increasing scrutiny, as Florida's court system struggles with the mountain of cases that have resulted from the housing crisis.

Grodensky said he spent months trying to figure out what happened but said his questions to Bank of America and to the law firm Florida Default Law Group that handled the foreclosure have not been answered. Florida Default Law Group could not be reached for comment, despite several attempts by phone and e-mail. Grodensky said he has filed a claim with his title insurance company, but that, too, has not resulted in any action.

It wasn't until last week, when Grodensky brought his problem to the attention of the Sun Sentinel, that it began to be resolved.

"It looks like it was a mistake in communication between us and the attorneys handling the foreclosure," said Bauwens.

Krugman on the Limits of American Exceptionalism

Paul Krugman compares America's current mortgage morass, associated with the unfolding home ownership and foreclosure fiasco, to that which was encountered during the Asian financial crisis.

After the Asian financial crisis of 1997-1998, it was often said that a key barrier to recovery was the uncertain state of property rights: so much debt had been run up during the boom, and there had been so many defaults in the bust, that it was no longer clear who owned anything. Plus, these countries lacked clear legal procedures, and in general suffered from insufficient rule of law. All this was said, of course, in a tone of superiority: we Americans had solved such problems.

He also states, America's mortgage crisis dwarfs anything that occurred in Thailand and Indonesia by orders of magnitude. 

The crony-capitalists and casino-players on Wall St. have made a mockery of America's international reputation as a safe and secure center of investment.  Gimmickry, sleight of hand agreements, unequivocal fraud, and legislative and regulatory arbitrage were all employed by the MBA ass-clowns in the banking and mortgage industry to secure profits for themselves without taking into account the long-term risk to either their businesses or the nation.  The end result will be a decade of lost growth for America and given that somewhere within that same period another potentially catastrophic economic collapse may occur, based on historic trends and the belief by many economists that an even larger shock lies in wait given the failure of most governments to adequately address the root causes of the great recession, capitalism as we know it today may collapse.

Evaluating the Likelihood of China Crashing

The overall question of China’s economic situation remains enigmatic. Earlier this year several leading experts expressed grave concerns related to the distinct possibility that China would crash. Renowned short-seller James Chanos was the first to publicly state that his company was actively analyzing methodologies to prosper from an anticipated Chinese economic crash. He considers China to be “on a treadmill to hell” because of its addiction to pushing growth through property development. A point belied by the fact that as much as 60% of the country’s GDP is now contingent upon construction related activities.

In February, Ken Rogoff -Harvard Professor, former chief economist at the IMF, and author of the critically received historical economic analysis ‘This Time it is Different’- warned of a collapse of China’s debt-fuelled bubble. Rogoff refutes the conventional arguments offered over the past decade that China cannot have a crash. History he insists provides no example where an emerging market nation did not succumb to a crisis that sent growth plummeting and markets crash. “You’re starting to see that collapse in property and it’s going to hit the banking system,” states Rogoff in Bloomberg BusinessWeek.

In the past couple of months, a tidal-wave of fund managers have turned on China. Marc Faber, publisher of the Doom, Boom, and Gloom report, anticipates that China will have a hard landing by the first half of 2011. Whereas Hugh Hendry, a UK based hedge fund manager, is developing a stand-alone fund that will exploit the upcoming failures of the Chinese economy.

As of this month, the Shanghai stock market remains at its lowest point in sixteen months. Much of China’s GDP growth can be directly correlated to the value of property, which has soared 40% in the past 18 months alone. Despite attempts by the communist government to quietly reign in excessive speculation and overleveraging in the housing and commercial real estate market, unsustainable growth patterns persist. According to Bloomberg, property prices in 70 Chinese cities rose 12.4% in May; the second-fastest pace on record.

A number of analysts are predicting that any correction will not harm the overall Chinese economy. Optimists point to the fact that “Shanghai’s sales of new homes fell 57 percent in the first six months of the year,” implying that an orderly correction shall occur. Bloomberg news posts the assertion of one analyst that China’s property boom is “cash-driven” rather than “leverage-fuelled,” and as a result, the same dynamics that occurred in the US housing market would not be replicated in China.

On the other hand, a report by Fitch rating agency issued earlier this month and discussed in the NY Times,

Said Chinese banks were increasingly engaging in complex deals that hid the size and nature of their lending, obscuring hundreds of billions of dollars in loans and possibly even masking a coming wave of bad real estate and infrastructure loans.

The report also highlights that Chinese regulators have understated loan growth “in the first half of the year, by 28 percent, or about $190 billion.” The level of deception and fraud occurring in the Chinese banking industry, coupled with the financial innovations created to explicitly conceal risk, are the hallmark attributes of an economic system that is in the early spasms of crashing.

Overall, given the inherent conflict of interests of local governments, who have a vested interest in property speculation, infrastructure expansion, and show projects necessary to enhance their reputations and meet growth quotas, it is unreasonable to assume that these same persons and/or entities would voluntarily halt their long established and until now profitable practices. Established corruption, currency manipulation, a lack of transparent legal rights, collusion of state banks with local businessmen, revolting masses, and an ever growing list of skeptics of the “Chinese miracle” portend that even if the property bubble does not crash the economy, there resides many unstable and troubling fault lines that can.

More Investors Convinced China will Crash

There has been a number of articles in the past few weeks outlining the distinct possibility that the Chinese economy, due to inherent corruption, an unstable credit bubble driven by housing speculation, and a poorly regulated financial system, is posed, at the very least, to have a hard crash that will spill over into the rest of the global economy.

According to the NY Times, "Mr. James Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc."  Chanos' hedge fund, Kynikos Associates based in New York, foresaw the demise of Enron and a number of other high-flying companies whose profits were too good to believe.  As is frequently stated by the financial industry, "Past performance is not indicative of future earnings."  So how valid is Mr. Chanos' opinion on this subject?

The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.  But many analysts now say that money, along with huge foreign inflows of speculative capital, has been funneled into the stock and real estate markets.  A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 one that Mr. Chanos and others have called wasteful and overdone.

The implication is that the great illusion of growth and prosperity that continues to be exalted by investors and politicians alike, will not last.   As they also say in business, it's a matter of simple "mean reversion."

Thomas Friedman in yesterday's NY Times OP-ED pages, will not accept any such arguments about declining Chinese supremacy.  He retorts that China is sitting on two trillion dollars worth of foreign currency reserves, the country is finally finding its stride by finding efficiencies in its vast transportation infrastructure, capable managers and entrepreneurs are returning to the country in droves, and vast numbers of students are enrolled in college and university programs.  Collectively, China's best days, in his opinion, are still in front of it and we in the West best get used to it.

That argument is fine and in the long-term, China may well do better than woeful and stagnating Japan or the once heralded Asian-tigers of the Pacific south-east.  However, Friedman fails to address the central premise of his opponents, in that there is obviously a credit bubble brought on by massive state stimuli to mostly state owned and inefficient businesses.  How long is this affair supposed to continue, in which the central government keeps pouring capital into questionable economic endeavors with equally limited return?  Three of the top five banks in the world (by capitalization) are now Chinese.  Does anyone really know what is on their books and how confident we should be about their debts?

The Washington Post, elaborates on lending practices by Chinese banks:

The government has helped pump up the property market by keeping interest rates low, the currency undervalued and the fiscal spigots open. Standards for bank lending have been lax, with lending rising at a 30 percent annual pace in 2009, according to a report by the Los Angeles-based bond investment firm Pimco.

Recent housing bubbles, that were created elsewhere, also have had similar attributes: rampant speculation, apartment and home prices doubling over the period of months, loan applicants lying about income, regular people with average incomes being priced out of the market due to geometric growth patterns, and officials and real estate agents boasting that price corrections were not probable given regional dynamics.

Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.

Enough data has been seen by this blogger, that I can confidently state that those banking on gossamer winged dreams of future growth derived from corrupt plutocrats, are probably the same persons who learned nothing from the past economic catastrophe and are thus bound to repeat the follies of their predecessors.

The Drowning Pool: underwater mortgages

Deutsche Bank is predicting that nearly half of all mortgages across US will be "underwater" by 2011; meaning that in half of the current cases, the outstanding mortgage will be larger than the market value of the house. Analysts estimate that 41% of prime conforming loans will be underwater by the Q1 of 2011, up from 16% at the end of the Q1 2009. Even worst, 90% or more of loans in the city of Las Vegas and across parts of Florida and California are predicted to be underwater by 2011.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said.

The following table summarizes the overall situation.

Welcome to 'nightmare on main street' America.

When the history books are written, it won't be the Soviet Union, Fascist German industrialists, the Chinese, or immigrant Latinos who brought America to its knees. It will be recognized that the true enemy of the state were the high-rollers of casino-capitalism and their moneyed whores in Congress who sold 300 million Americans down the toilet for personal greed.

More lies about Housing from the MSM

Today's headlines posited that, "New house sales in the US jumped by 11 per cent in June, providing some of the strongest evidence yet that the market has bottomed out after being savaged for three years."

Yeah! I was so over this recession, I could use a new house or two! But wait...

Floyd Norris at the NY Times looks at the numbers and tells a different story.

Somehow a headline that says “sales fall 21 percent from year-ago levels” would not sound the same as the headlines that are now running ... To put it another way, this was the second-worst June since they began counting new-home sales in 1963. It was not quite as bad as June 1982, when the country was mired in a deep recession and interest rates were sky high. Then 34,000 new homes were sold.

Norris elaborates: "There are twice as many households in America as there were then, so relative to population this was the worst June ever, by far."

Another attempt to inflate confidence in the market, where none should exist. While things are somewhat less worst than six months ago, the fundamentals remain the same with respect to national unemployment, individual debt, rising health care costs, and declining manufacturing across the USA. When the MSM and economists conspire to sell fables about the recovery, it only encourages the same short-sighted entities that originally created this mess to pursue the same infernal objectives.