2012-12-19 —

Arguably the most intriguing business story of the past month has been taking place back in San Francisco, where a group of U.S. developers is planning the biggest real-estate expansion there since the 1906 earthquake. The group--which includes Lennar Corp., LENĀ -0.48% Ross Perot Jr. and others --isn't getting financing from an American bank or pension fund.

No, the money, some $1.7 billion of it, is coming from the China Development Bank, a policy arm of the Chinese state, which normally backs undertakings from low-income housing to the Three Gorges Dam.


the most upsetting thing about the San Francisco plan isn't what it says about Chinese encroachment. It's what it says about U.S. business.

Burned by awful land deals before the financial crisis, American pension funds and banks simply weren't prepared to make such a large loan as the one made by the Chinese, a person familiar with the negotiations says. Nor were they comfortable with the length of the projects, which will go on for two decades, this person adds.

This is the bitter fruit of what we've been pointing out for the last 5 years, which is that the bailouts (including the Fed's general propping up of the financial markets) can only avert immediate collapse; they cannot bring back a vibrant financial economy. In fact, these "props" only serve to perpetuate a state of dependence and hence lack of legitimate speculation and business investment.

The Fed's policies have made "debt deflation" and hence capital ossification permanent. Look to Japan for the example of what to do wrong (which we are following) and Iceland for what to do right (hint: only one of the three is experiencing healthy growth despite going through a major financial crisis).

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