Those Global Credit Bubbles Are Eerily Similar To 2007

From U.S. student debt to staggering housing inflation from London to Shanghai, there are signs of cracks invoking fear among economists of another impending financial crisis.

In the London underground — Photo: Chris Brown
In the London underground — Photo: Chris Brown
Anne-Christine Kunz and Frank Stocker

BERLIN — At first, Wesley Lim doesn’t understand the term Studentenkredit, German for “student loan.” But Lim is currently a guest German professor at Colorado College in Colorado Springs. There isn’t much call for the term in German because so few German students go into debt for their educations. It’s very different in the United States, however. Say “student loan” to Lim in English, and he understands immediately what you’re talking about.

To finance his education, the 32-year-old took out loans to the tune of several tens of thousands of dollars, just like millions of his peers. It has become entirely routine for young people in the United States to be up to their ears in debt by the time they graduate from college.

Figures show that students have borrowed $1,100 billion dollars from banks. That’s more than all Americans have in credit card or car loans. “This is slowly becoming a massive problem,” says Ellen Zentner, an economist at investment bank Morgan Stanley.

But it’s not just among students, or only in the United States, that accumulating debt is so common. Gigantic new credit and investment bubbles have been created all over the world. Many things seem to be exactly the same as they were before the financial crisis. And just as in 2007, some cracks are beginning to show. Yet most of the system’s players are stubbornly carrying on with the status quo instead of trying to correct these undesirable developments before they drive us to another crisis.

Housing inflation

Perhaps the most easily identifiable bubble is in London’s real estate market. Katrin Wagner (not her real name) is directly concerned by this. “Moldy walls and single-glazed windows that often don’t close properly seem to me to be the normal state of things here,” says the 30-year-old student attending the London School of Economics. Yet London is among the most expensive cities in the world to live in.

Unaffordable London — Photo: Maciek Lulko

Wagner lives in just nine square meters (97 square feet) in the Greater London district of Islington. She pays the equivalent of 900 euros a month for her single room. At least right now. Her one-year rental contract ends this fall, at which point she can negotiate a new one — but only if she is prepared to pay considerably more. “Price increases of between 3% and 5% are the norm,” she says. So she will probably have to move somewhere farther away from the city center.

And what is the government doing about this housing trend? Encouraging it. There is a 12 billion pound (14.6 billion euro) program called “Help to Buy” meant to encourage young Britons to jump into the property market. Buyers are required to come up with just 5% of their own money and can finance 75% on credit. The remaining 20% is financed through a kind of state shareholding that gets a piece of future sales.

The program has had an instant effect. The island’s economy is apparently booming again, but real estate prices are going through the roof. In the London districts of Southwark, Lambeth, Islington and Waltham, prices have risen by 20% in the last 12 months alone.

Andrew Sentance, a former member of the Bank of England’s Monetary Policy Committee, has been sounding the alarm, saying that the combination of low interest rates and political support programs could send prices careening out of control.

Economists are equally uneasy. “The real estate market is in danger of overheating,” HSH Nordbank experts write in a recent analysis, adding that many of the same factors that led to the 2008 financial crisis are also present here.

The situation is similar in China, the only difference being that there has been talk of a real estate bubble there for years, and its bursting is regularly forecast. But because very little has happened so far, nobody pays much attention to it, which is precisely the problem.

“I find it astonishing that most economists only mention the China risk in passing,” says Jens-Oliver Niklasch, an economist with Landesbank Baden-Württemberg. He points out that real estate prices in China have more than doubled since 2007, and in some cities prices have risen even more sharply.

In fact, Beijing has become the world’s most expensive city when considering income relative to real estate prices. Buying an apartment in China costs the equivalent of 23 annual salaries, three times more than in London.

Unsavory banking tricks ... again

But the real estate boom isn’t all that threatens to come to an inglorious end. Also hovering on the horizon is the collapse of a huge shadow banking system in China, the banks having built a parallel world in recent years by creating subsidiaries that don’t figure on their balance sheets.

These companies promise investors particularly high interest rates and extend credit outside formal channels. The amounts in question add up to about a third of economic output.

Shanghai — Photo: Jakob Montrasio

One could continue to travel around the world like this, from the real estate bubble in Denmark to the commodities bubble in Australia and the government debt bubble in Japan. The latter mountain of debt is nearly three times as high as the country’s entire economic output. Worldwide, according to Bank for International Settlements (BIS) estimates, the debt financed by the credit market has risen by one-third since 2007 to some $100 billion.

Brains have a hard time wrapping themselves around sums like that. If you put dollar bills side by side, you would have to cover something like the stretch between the sun and the present position of the Voyager space probe to cover the amount. Voyager was launched 36 years ago, and is now some 18.5 billion kilometers from the sun.

And that’s just the credit market debt. Add to that — among many other things — secured debts, sureties, retirement fund contributions and much more. To represent that, Voyager will have to keep going for quite some time.

Risky bets

Yet it isn’t so much the amount of debt that should make people nervous. It’s that investors and banks have once again thrown caution to the wind. The boom of Internet stocks in recent years demonstrates this: They are traded at exorbitant prices because investors hope that some time in the far future they’re going to pay off big. The forthcoming IPO of Alibaba, the Chinese equivalent of Amazon, is the next big story that has everybody electrified.

Banks are once again lavishly extending credit to hedge funds so that they can use the money to buy Collateralized Loan Obligations (CLOs). These are business loans pooled together and sold as securities. Otherwise, these loans weigh down bank balance sheets, but if they’re sold as CLOs they’re out of sight.

Junk bonds and leveraged loans are among other dangerous financial products currently enjoying a heyday. And yet cracks are appearing. In China, real estate investment in several provinces decreased in the first quarter — by more than a fourth in two provinces. In the U.S., 11.5% of student loans are delinquent, and in the tech sector Twitter stocks fell dramatically recently.

Especially telling is a recent paper that strategists at French bank Société Générale sent clients, in which they list all present dangers by way of explaining why they don’t believe in them. They go on to ask: "Even if we knew for sure of some surprise threat, would we as investors act differently?" The answer, they say, is no. They will continue to speculate on a perfect world, they write, while keeping a nervous eye on the exit in hopes of being the first to get out when the time comes.

For those who don’t get out in time, there’s always the state, as the last financial crisis demonstrated. But next time will the state still have enough strength to come to the rescue, and will citizens be willing to go along with it again?

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!

Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3


LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.

Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

If nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!