China Adopts Capitalism: Will NOT Bail-out Insolvent Corrupt Billionaire Class (Here's WHY!)
China’s proposal of a 300 billion Yuan bank loan to rescue the housing sector is obviously a tiny amount compared to the amount outstanding. At first glance, it looks odd that the proposal orders banks to play the role of lender of last resort instead of the central bank. For most countries facing such a huge crisis, the central bank printing money and injecting liquidity is almost the designated act.
Interestingly, however, the People’s Bank of China did not do anything like this, and there was not even a rate cut cycle.
The reason for such inaction might be several-fold:
First is due to infighting. The billionaires are potential threats to the existing government. The wealthier they are, the bigger the threat (aka the more corrupting influence they hold). By creating a housing crisis, most billionaires would fall back to being millionaires. They hold less power to corrupt public officials and politicians this way. Common sense.
Second, policy inaction could result in a sharper cliff fall, which will end the crisis sooner rather than later. The sooner they allow the market to adjust for failure, the sooner it will heal itself and things can go back to normal. THIS DOES NOT HAPPEN IF DEBT INSOLVENCY IS CONSTANTLY BAILED OUT!
A third but intuitive reason is the standard bad consequences of excess currency creation (aka debt). China did this experiment in the 1940s. The massive money printing led to hyperinflation, which collapsed the currency and, finally, the political regime. The existing ruling regime knows such history well.
By allowing the markets to crash, and some debt-insolvent billionaires to go bust, the economy will recover itself, naturally, and become solvent once again. This is the nature of free market capitalism. Bankruptcy happens, just as natural as wealth creation happens. There are booms, there are busts. Government intervention is rarely a good solution, and in fact, often creates many more problems (as we in the West often see today!)
