A decade on from the housing crash, new risks are emerging

Shadow banks originate around half America’s mortgages




During the broadcast of the 39th Super Bowl in 2005, there was an advert for mortgages from a firm called Ameriquest.

“Don’t judge too quickly,” ran the slogan. “We won’t.” Ameriquest also sponsored the half-time show, where Paul McCartney opened with “Drive My Car”.

Two years later and the firm was no more, part of the wider crisis in the mortgage market which prompted a global recession and nearly caused the financial system to collapse.

Eleven years after that, at the 50th Super Bowl, a similar advert appeared for a different lender, Rocket Mortgage.

A magician, a cyclist and even a toddler try to use the app to apply for home financing. “Push button, get mortgage,” the slogan read.

By the Super Bowl in 2018 Rocket said it was the country’s largest mortgage lender, leading some Americans to wonder whether any lessons had been learned at all from the global crash.

Certainly the regulatory system for banks has been transformed. In the 2000s most financial regulation was “microprudential”, focusing on the soundness of individual banks. Now “macroprudential” regulation is the norm. The idea is to ensure that the financial system as a whole can withstand nasty surprises.

“Macropru” is useful in a world of low interest rates. When borrowing is cheap, households can bid up house prices to unsustainable levels. But since raising interest rates does not square with the needs of the broader economy, targeted measures are required.

Since the early 2000s the number of rich countries using macro-prudential policies has doubled. In Britain not more than 15% of new mortgage lending can be for houses worth more than 4.5 times the borrower’s income. Singapore and parts of Canada now restrict purchases by foreigners.

All this can put the brakes on rapid credit growth. For high-risk borrowers, getting a mortgage is harder than it was, which is one reason why home ownership among the young has fallen. Banks have scaled back their mortgage operations. “The mortgage business… has experienced increasingly lower returns as new regulations add both sizeable costs and higher capital requirements,” wrote Jamie Dimon, the boss of jpMorgan Chase, in 2016.




But new risks are emerging. In recent years non-bank mortgage lenders (a group of non-deposit-taking lenders that includes Quicken Loans, which offers Rocket Mortgage) have proliferated. They now originate around half of America’s mortgages (see chart). A growing number of economists argue that regulators need to keep a closer eye on these firms.

Many non-bank mortgage lenders are seizing market share because they offer genuinely useful products. Safe Rate, based in Chicago, offers a new type of mortgage. When local house prices decline, so do borrowers’ monthly mortgage repayments.

The benefit for the borrowers is that they save money and are less likely to default. The advantage for investors is that, by preventing foreclosures, more mortgages will be kept going and it is less likely that house prices across a region will spiral downwards.

Some non-banks, however, exist purely as a means to get around strict bank regulations. In America non-banks are more loosely regulated and supervised than traditional banks. One paper found that an increasing regulatory burden accounted for some 60% of non-bank growth in 2007-15. (In countries like Britain the difference in regulatory burdens between banks and non-banks appears smaller and the growth in their lending is lower.)

Mortgage credit in America is not rising as fast as it was in the early 2000s. According to official data, only a small share of Quicken’s loan-book is in trouble.

Yet many non-banks remain highly reliant on short-term funding from traditional banks, so if wholesale markets froze again, many Americans would quickly lose access to mortgage finance.

Rather than keeping mortgages on their balance-sheets, non-banks tend to sell them on—not the best incentive to be ultra-cautious, says Amit Seru of the Stanford Graduate School of Business.

Non-banks also seem particularly likely to serve less creditworthy borrowers.

Until regulators start properly grappling with non-bank lenders, the job of regulating America’s mortgage market will be only half-done.

Chinese copper traders declare force majeure over coronavirus

Buyers of commodity have cancelled or delayed shipments due to deadly outbreak

Sun Yu in Beijing


Multiple Chinese copper buyers said they had cancelled or delayed overseas orders © Reuters


Copper traders in China, the world’s largest buyer of the metal, have asked miners from Chile to Nigeria to cancel or delay shipments as the deadly coronavirus outbreak hits demand.

Multiple Chinese copper buyers said they had scrapped or postponed overseas orders by declaring force majeure since the end of January, when Beijing began to report a surge in coronavirus infections.

Copper, a barometer for the health of the global economy, is the latest commodity to fall victim to the epidemic.

China’s efforts to contain the virus, ranging from restricting highway traffic to extending the lunar new year holiday, have affected industrial activity and raised concerns about growth in the world’s second-biggest economy.

Chinese buyers of liquefied natural gas have also considered declaring force majeure, a clause that identifies natural disasters or other unavoidable catastrophes as cause for not fulfilling a contract.

“Coronavirus has had a huge impact on copper demand as downstream users [involved in processing raw copper] have stopped acquiring raw material,” said a manager at Guangzhou Zhongshan Trade, a non-ferrous metal trading firm in southern China that focuses on copper and antimony.

Guangzhou Zhongshan earlier this week asked suppliers in Chile and Somalia to delay shipments of 500 tonnes of copper worth about Rmb25m ($3.57m) for at least a week. It has also cancelled a preliminary contract with a seller in Somalia and has stopped placing new orders.

“The epidemic is not just a China issue, it is a global problem,” the manager said, adding that its customers had not objected to its decision.

Business activity at Guangzhou’s port — one of the biggest in China for commodities trading — has plunged with fewer than a third of workers on duty, the manager added.

In coming weeks at least a dozen other Chinese copper buyers could use force majeure to try to renegotiate copper import contracts, said traders in the city. Guangzhou is about 1,000km south of Wuhan, the outbreak’s centre.

Copper users, ranging from car companies to home appliance makers, face a plunge in sales if the outbreak continues to worsen.

Consultancy Wood Mackenzie said demand for copper-related products could suffer “further disruptions” after more than a dozen provinces imposed restrictions on people’s movements in a bid to contain the disease.

That has prompted copper traders to embrace the use of force majeure, even if it comes at the expense of their business partners.

“Sellers have to accept our terms because the disease has made business contracts invalid,” said an executive at Shenzhen Yongfulu, a copper trader in southern China with annual revenues of about Rmb40m.

Yongfulu imported 4,000 tonnes of copper last year. The company asked its suppliers in Chile and Somalia to postpone shipments of 400 tonnes of copper for at least two weeks.

A plunge in Chinese purchases would send shockwaves through the global copper market. The nation accounts for half of global consumption of the metal, according to the International Copper Study Group. Copper futures traded in Shanghai have fallen 8 per cent since the beginning of this year.

The coronavirus epidemic, which has killed more than 600 people and infected thousands more, has rattled China’s supply chains. Local smelters have continued to operate, but the decision to shut down roads in cities across China has caused delays in them receiving raw materials.

The practice of force majeure is controversial. Dan Harris, a lawyer who has worked on force majeure cases against Chinese firms, said an overuse of the clause will hurt Chinese copper importers in the long run.

“Legally, these Chinese companies may be in the right,” said Mr Harris. “But [copper sellers] are going to remember that. A year from now they are not going to sell to those Chinese companies.”

Trump’s Backward March on Trade

After three years of the Trump administration, the economic costs of "America First" are continuing to mount, with global trade and GDP growth slowing and investment in decline. Ironically, the biggest loser has been America.

Anne O. Krueger

krueger23_Joshua LottGetty Images_trumpmagahat


WASHINGTON, DC – Following America’s disastrous 1930 Smoot-Hawley Tariff Act, the subsequent international trade war, and eventually World War II, the United States went on to lead the world toward a more open multilateral trading system. In 1947, the international community adopted the General Agreement on Tariffs and Trade, which would later become the World Trade Organization. Under this international body, trade was bound to the rule of law and the principle of non-discrimination among trading partners.

The system has been a huge success. Over the past seven decades, world trade has grown almost twice as fast as real output. And owing to US leadership, there have been ongoing multilateral negotiations to lower tariffs, remove other barriers (such as quantitative import restrictions), and facilitate trade expansion.

But in 2017, US President Donald Trump’s new administration abandoned America’s longstanding commitment to the open multilateral trading system, opting instead for a power-based approach to international economic relations. Under the new dispensation, “might” supposedly makes “right.”

The result has been disastrous. Trade relations between the US and its major international partners are now fraught. The global growth rates of both trade and GDP have fallen sharply, and growth projections are being downgraded as further evidence of the economic damage caused by US trade policies comes to light.

One early step by the Trump administration was to impose a 25% tariff on imported steel and a 10% tariff on aluminum. This policy hurt Canada, the European Union, Mexico, and Japan – all US friends or allies – but not China, which accounted for only 2% of US steel imports at the time. It is estimated that the metal tariffs have cost Americans $900,000 per year per job “saved.” Worse, US employment in steelmaking has continued to decline, and US steel exports have remained flat since the tariffs were introduced in early 2018.

Since then, Trump bullied Canada and Mexico into renegotiating the North American Free Trade Agreement, which has now been replaced by the US-Mexico-Canada Agreement. The revised deal tightens US regulations on imports of automobiles and auto parts, and requires that 40-45% of Mexican auto workers be paid at least $16 per hour by 2023. For comparison, that is tantamount to introducing a pay floor for US autoworkers of more than $75 per hour – obviously an unthinkable proposition.

The Trump administration has also forced a “renegotiation” of the South Korea-US Free Trade Agreement, with the main result being to restrict imports of steel from South Korea and to prolong a US tariff on imported light trucks.

And then there is the Trans-Pacific Partnership, which the Obama administration negotiated with 11 other Pacific Rim countries (excluding China) and signed on February 4, 2016. Immediately upon taking office, Trump withdrew America from the TPP, leaving the remaining signatories to salvage the deal, which they have done under Japanese leadership. As a result, US exports to those countries are now subject to much higher tariffs than is trade among the remaining 11 members.

Then came Trump’s trade war against China, which has both undercut global trade and brought the bilateral relationship to its lowest point since the aftermath of the 1989 Tiananmen Square massacre. Even with the “phase one” agreement that has just been signed, the average US tariff on imports from China will be around 19%, up from 3% before the trade war. Worse, the US has gained little from the process. Yes, the latest deal includes a Chinese commitment to import more US agricultural and other products. But to represent a “gain,” those additional purchases would have to be great enough to compensate for the lost exports of 2018-19.

Trump’s trade wrath has affected other countries as well. The US has imposed additional tariffs on imports from Turkey, Brazil, Argentina, and several developing countries, including India, which would otherwise be eligible for preferential tariff treatment under US law. Now, US-India relations are deteriorating.

The US has also deployed economic and secondary sanctions against a wide range of countries. While some sanctions are obviously justified (such as those against countries involved in terrorism), the Trump administration has expanded the use of this tool with abandon. The US is now enforcing sanctions against more than 1,000 countries, businesses, and individuals per year.

Moreover, the US has even threatened tariffs on $2.4 billion worth of French imports in retaliation for France’s plan to introduce a domestic tax on digital services. And that comes on top of the $7.5 billion in annual levies that the US is permitted to impose on imports from the EU as part of the resolution to a dispute between Airbus and Boeing. Fears of a US-EU trade war have created a cloud of uncertainty over auto producers and many other sectors around the world.

Finally, as if all of this were not damaging enough to the global trading system, the US refuses to allow for new appointments to the WTO’s Appellate Body, which has now been rendered powerless to resolve bilateral trade disputes. In the absence of a functioning enforcement mechanism, national governments have much less incentive to abide by their WTO commitments.

Ultimately, America is the big loser. The Trump administration’s efforts to reduce the US trade deficit have reduced imports from China, but imports from countries like Vietnam have risen sharply. Global investment and output, meanwhile, have fallen, partly as a result of the trade uncertainty. US exporters to the TPP successor countries now find themselves at a disadvantage. And America itself is no longer trusted as a leader in the world trading system.

With geopolitical tensions growing, the US needs allies now more than ever. But many will be hesitant to engage with the current administration. In the end, Trump’s unilateral trade policy has achieved the opposite of its objectives, many of which could have been met through multilateral cooperation.


Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University.

Russia’s Puzzling Moves

By: George Friedman


Over the past few weeks, two odd things have happened in Russia. The first is that Russian President Vladimir Putin has restructured the government. During his state of the nation address last week, he announced constitutional changes that could lay a path for him to hold on to power beyond 2024, when his current term ends. He also shook up the Russian security command about a month ago and has been moving governors around like chess pieces.

Such changes take place in many governments, but the moves are usually understated to increase power without creating a sense of urgency. Putin’s changes were not all that radical given the circumstances, but he went out of his way to make them look radical by removing longtime senior officials like Dmitry Medvedev, who will now serve as deputy chairman of the Security Council.

The second thing that has happened has less substance but is much stranger. Putin has made a series of statements that Poland started World War II, and that the Hitler-Stalin pact was forced on Russia by British and French deals with Germany. The substance of the statements is not worth debating; the Hitler-Stalin pact was no ordinary alliance, but a treaty by which Germany and the Soviet Union would together invade and divide Poland, which they proceeded to do.

The claim that Poland started the war mirrors Hitler’s claim that Poland was invaded to protect Germans from Polish brutality.

It is revealing, however, that Putin felt it necessary to reopen the question of who started World War II at this time.

Putin is not a casual man, so he didn’t do this carelessly. After announcing the shakeup of the Russian regime, he decided to charge Poland, France and the U.K. with responsibility for World War II, cleansing Russia of any wrongdoing in allying with Hitler.

At the very least, this is going to make France’s stated intentions of getting much closer to Russia more difficult.

For the French, the claim that they caused the war by reaching agreements with Nazi Germany will strike a chord.

It will also make it harder for the Germans to get closer to Russia.

For the Germans, whose primary historical goal is to allow World War II to slink into the past, the last thing they want to do is engage in a discussion of who caused the war.

To try to make sense of this we must remember that the Great Patriotic War, as World War II is called in Russia, is seared into the Russian national conscience.

In making this charge, Putin is trying to cleanse Russia of responsibility for the war.

By claiming that Poland, in some way, forced the Russians and Germans to invade Poland, he portrays Russia as an unqualified victim. In doing so, he reaches out to far-right forces in Europe who have argued that Hitler was forced into war.

This is politically important.

The European right has risen, and a segment of it wants to rewrite history. The Russians have toyed with supporting a rising right wing for years, and this places Russia in that position. Putin is claiming that it was not the totalitarians but the liberal democracies that started World War II, and that therefore the liberal democracies’ claim to moral superiority is false.

The problem is that by stating this so bluntly, Putin alienates France and makes Germany uneasy. It will be harder now for the Germans and French to collaborate with the Russians, although not impossible.

Nearly all NATO members have condemned Putin for his view of the origins of World War II – something that he knew was coming; so why did he make this charge now?

The key, I think, was the charge against Poland. Putin is not expecting a war against France or Germany, but he is worried about Poland, and that has to do with Belarus, which shares borders with Poland to its west and Russia to its east. Belarus is sandwiched between the Baltic states and Ukraine.

The Baltics are in NATO, and Ukraine, though shifting a bit, is still hostile to Russia. For Russia, these western buffers were indispensable, and losing them poses a threat to its national security.

Russia's European Buffer Zone


Belarus is key here. If Belarus were to be integrated into Russia, the West’s defense of Poland, which houses U.S. troops, becomes much more difficult. But if Belarus were to switch to the West and NATO troops were deployed, the defense of Smolensk and even Moscow would be difficult.

The Russians have an initiative underway to integrate Belarus with Russia, but in recent weeks, Belarusian President Alexander Lukashenko has been signaling an interest in maintaining good relations with the West.

Belarus is a flashpoint on this frontier. Lukashenko wants to maintain its free movement, Russia wants to lock it in, and Poland does not want to see more Russian troops on its eastern border. For Russia, settling the Belarus question is a vital matter.

For Poland, even with more limited, though quite good, forces, this would cause a fundamental crisis and involve the United States. And this issue is moving to some sort of decision. The West does not want a shift, but Russia doesn’t trust the West and claims that its absorption of the Baltics into NATO already violated Moscow’s understanding with the West.

So there has been significant tension between Poland and Russia over Belarus. Belarus is important enough to Russia to consider military action – and the two countries have staged huge war games near Poland’s border in the past. Poland may see any such move as indicating war, if not now then later.

If a conflict were to break out, Russia would want it blamed on Poland. By raising the question of how World War II started, Russia is trying to change the perception of Poland from a victim nation to a historical aggressor. And by so doing, Putin may also be warning the Poles, and the Americans as well, not to believe for one minute that war is out of the question.

In this sense Putin’s restructuring of the Russian government makes sense. It was an unwieldy bureaucracy that would have difficulty aligning its economy with military action. Therefore, it is reasonable to wonder whether Putin’s attempts to redefine history and the government were designed as preparations for war, or for victory by intimidation.

Readers will recall our ongoing concern with Belarus and Poland. The best bet is that this is primarily signaling that Putin will not bend on Belarus, and not that he intends or expects war.

But the actions meant to signal and the actions meant to prepare for war are easy to confuse.

Reshaping the government and reshaping history inevitably open the door for conflict.

As Detroit Quits India, China Drives In

Chinese auto makers may find the big Indian car market just as difficult as their Western peers have

By Jacky Wong





India’s vast but volatile auto market has tripped up many foreign car makers. Chinese manufacturers looking for growth abroad could be next.

General Motors completed its withdrawal from India last week, when it agreed to sell its remaining manufacturing plant to China’s Great Wall Motor.

The U.S. auto giant stopped selling cars in the country in 2017 but kept making them for exports. Just a few months ago, Fordsigned a deal to transfer its Indian assembly factories to a joint venture with local rival Mahindra & Mahindra.

As American auto makers reverse out of the market, Chinese ones are driving in. Great Wall wants to enter the market with sport-utility vehicles under its own Haval brand as well as electric cars. MG Motor India, a subsidiary of state-owned Chinese auto maker SAIC Motor,launched its Hector SUV in the country in June.

Chinese car makers may be looking to India for growth as their home market slows: China’s auto sales fell 8.2% in 2019, the second straight year of decline. India has a lot of potential, with roughly the same population as China but a much lower level of car ownership. A similar strategy has worked for Chinese smartphone makers, which now dominate the Indian market.




MG’s Hector was launched in India in June. Photo: Anindito Mukherjee/Bloomberg News


Selling cars is different from selling smartphones: Consumers change their phones more often than their wheels, and don’t need the same level of after-sales service from their phone suppliers.

But Chinese car makers do have one advantage over more established peers: They have experience in adjusting their products to serve a low-income market.

MG’s Hector has sold very well so far, as it offers many premium features at a relatively affordable price.

India’s utility-vehicle market, which includes SUVs and people movers, has been a bright spot, growing 13% last year.

However, investors shouldn’t underestimate the challenges for Chinese brands entering India.

For one, the wider car market is in bad shape. Sales of vehicles, including both passenger and commercial vehicles, dropped 13% last year.

A crackdown on nonbank lending has hit funding for new car purchases, while stricter regulations have raised prices. These clouds may eventually lift, but India’s record of erratic economic policy-making points to ongoing risks.

Chinese manufacturers are also going up against established titans. Japan’s Suzuki, through its subsidiary Maruti Suzuki,has around half of India’s car market, having been in the country for nearly 40 years.

Other Japanese and Korean companies, which are famed for selling quality cars at affordable prices, are fighting for the rest of the market.

Finding growth at home is getting much tougher for China’s auto makers, but that doesn’t mean expanding abroad is an easy option.