Posted on 07/15/2008 7:39:29 PM PDT by DeaconBenjamin
Merrill Lynch has warned that the United States could face a foreign "financing crisis" within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world.
The country depends on Asian, Russian and Middle Eastern investors to fund much of its $700bn (£350bn) current account deficit, leaving it far more vulnerable to a collapse of confidence than Japan in the early 1990s after the Nikkei bubble burst. Britain and other Anglo-Saxon deficit states could face a similar retreat by foreign investors.
"Japan was able to cut its interest rates to zero," said Alex Patelis, Merrill's head of international economics.
"It would be very difficult for the US to do this. Foreigners will not be willing to supply the capital. Nobody knows where the limit lies."
(Excerpt) Read more at telegraph.co.uk ...
Because Ambrose Evans-Pritchard seems to specialize in apocalyptic articles, I tend to discount much of what he says.
Why, everything is just peachy with our economy.
Bartender, I'll have another 'stimlus package, and make it a double!
And Merrill Lynch? Do you discount what they say?
Do you see cause for concern when you read that Hiroshi Watanabe, Japan's chief regulator, rattled the markets yesterday when he urged Japanese banks and life insurance companies to treat US agency debt with caution. The two sets of institutions hold an estimated $56bn of these bonds. Mitsubishi UFJ holds $3bn. Nippon Life has $2.5bn.?
—snip—
Fannie and Freddie - the world’s two biggest financial institutions - make up almost half the $12 trillion US mortgage industry. But that understates their vital importance at this juncture. They are now serving as lender of last resort to the housing market, providing 80pc of all new home loans.
Roughly $1.5 trillion of Fannie and Freddie AAA-rated debt - as well as other US “government-sponsored enterprises” - is now in foreign hands. The great unknown is whether foreign patience will snap as losses mount and the dollar slides.
Hiroshi Watanabe, Japan’s chief regulator, rattled the markets yesterday when he urged Japanese banks and life insurance companies to treat US agency debt with caution. The two sets of institutions hold an estimated $56bn of these bonds. Mitsubishi UFJ holds $3bn. Nippon Life has $2.5bn.
But the lion’s share is held by the central banks of China, Russia and petro-powers. These countries could all too easily precipitate a run on the dollar in the current climate and bring the United States to its knees, should they decide that it is in their strategic interest to do so.
So, basically, whenever the Fed writes a check, it depends on foreign investors to keep the checking account solvent. What if they balk? Or what if the $$ just runs dry? What good will all these guarantees be?
Interesting times.
U.S.A.
“Too big to fail?”
Very very little here in direct quotes from the Merrill Lynch official.
And no direct quote from the Japanese regulator.
Many of the quotes supplied were from someone at "Global Insight". Never heard of it.
South Korean life insurers are shunning U.S. and European corporate bonds because of a rising risk of default and plowing money into domestic debt.
Greed fatally compromised national security. Those countries have political agendas. They can use their leverage to achieve their strategic goal in geopolitics. Not that their economy could be spared. On the other hand, if economy deteriorates bad enough, they can ditch their U.S. assets in well-coordinated moves to cripple U.S. economy as bad or worse than theirs.
When the time comes, they will enjoy forcing Uncle Sam to kowtow.
Wouldn't doing that make their holdings worthless? Or at very best, "worth less" than what they paid? Why, if they did that, wouldn't we "default" on debt held by foreign powers by declaring their actions an "act of war".
Please forgive me if these questions are ignorant. I'm just really trying to understand why countries that hold our debt would help to make that investment worthless.
| These countries could all too easily precipitate a run on the dollar in the current climate and bring the United States to its knees,
They can't eat paper. They can't ride around in it. They can't wear it. The only thing they can ultimately do with it is buy stuff from us. Driving us into the ground just makes sure they never get paid. |
Too bad we can’t post bloomberg articles. Good stuff there.
Earlier today Bernanke Chairman Ben S. Bernanke testified Before the U.S. Senate in the Fed’s Semiannual Monetary Policy Report to Congress. I commented on his testimony in Bernanke’s Hogwash.
In an unusual but encouraging development, someone besides Ron Paul is calling Bernanke on his hogwash. Please consider Bunning Statement To The Senate Banking Committee On The Federal Reserve Monetary Policy Report.
As Prepared For Delivery:
Thank you, Mr. Chairman. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and of the next.
First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan’s easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans.
Second, the Fed is asking for more power. But the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.
Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.
Third and finally, since I expect we will try to get right to questions in the next hearing, let me say a few words about the G.S.E. bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.
And for this unprecedented intervention in the markets what assurances do we get that it will not happen again? None. We are in the process of passing a stronger regulator for the G.S.E.s, and that is important, but it allows them to continue in the current form. If they really do fail, should we let them go back to what they were doing before?
I will close with this question Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention in private enterprise will be. More importantly, where does it stop?
http://globaleconomicanalysis.blogspot.com/
Tralala, let the good times roll! We’re in clover as far as the eye can see!
It’s called a stampede for the exit. A global “bank run” to get rid of dollars before they go to zero. Nobody will “want” to wreck the dollar. But they won’t want to ride the Titanic to the bottome either, once they perceive it as a lost cause. First out gets the most value. Once the stampede starts...
The fed, OTS, and OCC could of done something, but instead they kept me working my magic. Bush pandered a "culture of ownership" even if it was by mortgage fraudsters, corrupt mortgage brokers inventing credit scores, illegal immigrants, and no-doc, neg-am, option arm, exotic subprime toxic waste pushers like myself. Thanks for the 100's of millions suckers. I've already coverted it all into euros & gold and have it stashed away in offshore banks. I'm off to the country club to work on my tan. (honks european car horn)
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Really? It seems to me that the reason 'these countries' have all this paper is that we took their stuff and we gave them paper. Deloitte and Touche aside, who really has whom by the hairs? If they ever want to get any actual value for all that stuff they sold us, they need to hope that nobody 'precipitates a run on the dollar.' Because right now, all they have is dollars. We got the oil, the cars, the Wal*Mart clothes... all of it.