You’ll have to explain how China’s financial loss is harmful to the US for me to agree with you re .....economic sabotage.
The marvel of a market economy is that it is win-win. The downside is that it also happens to be lose-lose. Defaulting on those debt obligations will mean loss of investor and borrower confidence and failure of Fannie Mae and Freddie Mac. What this means for the real estate market in the U.S. is a massive collapse which will be felt even a decade from now. Wiping out 370 billion of Chinese loans may warm the cockles of some hearts, it also means wiping out ten times as much in American homeowner equity.
To translate what this means for the individual homeowner, is that millions of Americans will suddenly find themselves owing much more money than their homes are worth. A textbook case of cutting off your nose to spite your face.
Not to mention that while China is the largest owner of U.S. debt, it is still a fraction of the total amount. I doubt Japan, Belgium, or private investor money funneled in from the Cayman islands are going to be any happier.
>>>You’ll have to explain how China’s financial loss is harmful to the US for me to agree with you re .....economic sabotage.
Because agency debt has operated under a wink and a nod near guarantee from the federal government, the US might never be able to borrow from overseas creditors ever again... well, like Russia, we could borrow after a decade or two. At the same time, there would/might be a rush by all creditors holding all Treasury debt to unload it. Or at least sell off significant parts.
As the Chinese also hold a fair amount of US Treasury debt, they would think this Treasury debt might also be of “bad quality” and want to sell it. They might see this “welching” on Fanny/Freddie debt to be an act of economic war (they can be paranoid). Other central banks would get gittery. Then while the Chinese are nationalizing US interests in China, the US government would go belly up as it could not borrow money at stratospheric rates to pay their bloated payrolls. This means all other Treasury debt is worthless, and thus all related FDIC guarantees on momma’s bank account are worthless too.
Hope this helps.
I believe the federal government has only one option: keep Fanny/Freddie operating... on an infinite asset/equity ratio.
Unlike the case of other bankruptcies where the equity and debt holders should have been taken down to zero, the “wink and nod” guarantee by the federal government has caused us taxpayers a catastrophe.
Have you seen the numbers on their off-balance sheet guarantees? It’s quite large. Read this week’s Barron’s.
Apparently, the two combined operations have a 24:1 leverage ratio (a bank should have 10:1 I believe, but most don’t). When you throw in their off-balance sheet guarantees, the leverage ratio goes to 68:1. Currently these two companies OWN or GUARANTEE 45 percent of all mortgages in the US. This amounts to $1.7 trillion. So if only 1/4 of this is bad, Bush could kick out the illegals, take the savings from the states, and break even.
$376 Billion in Chinese Agency Bond Holdings Subject to Taxpayer Bailout Proposals.
Nuff said.