Why China Is in the Business of Building America's Houses

There's a government that wants to invest in the United States. That might seem hard to believe amidst our age of local austerity. But it's easy to find. Just go west. Keep going west. Seriously, keep going west. Okay, stop when you reach east. It's China.

The big news is that the Chinese Development Bank might pour a cool $1.7 billion into a pair of stalled San Francisco housing developments. Yes, the same Chinese Development Bank that typically makes infrastructure investments in the developing world.

Welcome to Third World America.

It's great that China wants to invest their money here. It's not-so-great that we won't make these kind of investments ourselves. There's no good reason not to. And there are plenty of good reasons to do so. For one, it's the way out of our economic funk. The recovery doesn't feel like one because people still want to save more than they want to invest. But that's impossible. Saving and investment have to equal each other. The result is a still depressed economy -- without enough investment to put everyone back to work.

The chart below shows the share of private fixed residential investment in the economy. See the recovery?

It's not that there aren't good investment opportunities. Ask the Chinese Development Bank. Of course, it's not just multibillion housing developments that could use some cash. It's housing in general -- especially multifamily units. It sounds crazy, but we actually have a housing shortage now. That's what happens when building stops for five years. It's why rents are rising so fast in so many places.

House building is picking up now, but not nearly as much as you'd expect. It's still too hard to get a loan. Look at the difference between junk bond yields and 10-year Treasury yields. In other words, how much extra riskier borrowers have to pay. This is admittedly an imperfect measure, but it gives us a sense of how tight credit is for most would-be borrowers.

It's not 2008, but it's not normal either. The spread between what risky and risk-free borrowers have to pay now is at levels we typically associate with a recession.

Welcome to economic limbo. We're not quite in a recession, not quite in a recovery. There's enough pent-up housing demand to set off an economic virtuous circle -- if only it wasn't, well, pent-up in our banks. This credit bottleneck isn't enough to send us back into recession, but it does make us more vulnerable to shocks from abroad.

If only there was a government that could borrow for cheap and invest in our infrastructure. Besides China, of course. A government that could borrow for 1.6 percent for 10 years. Like ... us.

We won't win the future if we wait for China to invest in it for us.