One of the greatest challenges for the American system of government, and which has been laid bare by the current financial crisis is: “What do politicians do when their constituents ask for something which will win them votes in the short-term, but will prove disastrous in the long-term?” This is a very important question which has not been discussed or debated enough. Instead, most westerners naturally assume that it is better, especially when compared with China’s form of government.
Jack Perkowski, author of Managing the Dragon, has several posts on his blog which talk about the reasons and decisions for the current global credit crisis. They are the best explanations I have seen so far for what is happening and I highly recommend reading them.
For Chinese, home ownership is very important, just as it is for Americans. But Chinese would never think of asking the government to pre-approve their purchases regardless of their credit ranking. In fact, so far, there is no national credit-ranking system in China and many families save hard to make a down-payment for their home (which most Americans would call an apartment). Along with saving for their child’s education, this is the single largest expenditure they will make in their lives. Most RE transactions are cash transactions. And what is most interesting is that the private home ownership ratio (by percentage) is higher in China (70-80%) than the US’s 69% (source: Hoover Institution), even though the US had a system which, until very recently, offered free housing to all comers, without any qualifications. Very ironic that a country which is nominally Communist has a higher rate of home ownership than a country which has a free elected government and until recently, actively subsidized home ownership up to 100%, isn’t it?
This then raises a very good question: “If China has a higher home ownership rate than the US without offering junk loans which have led to the global credit crisis, then what was the whole point of the US incentive schemes, of which Fannie Mae and Freddie Mac, as well as the leading investment banks were such an important part of?” Jack Perkowski’s articles answer this very well. You see, the US built an ecosystem which turned banks into sales outlets for loans, then bundled these loans up and fed them to the global markets, where they are now causing so much grief.
Politically, and on the legislative level, this was part of a complex scheme which, at the end of the day, amounted to buying off different voting constituencies to win their votes. Which is a fancy way of saying “vote buying”.
With all the overbuilding which has happened in China’s cities, I would shudder at the thought that many of these residences were pre-approved without down payments the American way. This is why although there is overbuilding, the Chinese economy can still ride out the dips better than the US and global economy can.
Looking at the US now, it shows the danger of letting legislators who do not understand the economic consequences of their actions have too much power over complex economic issues.