As readily as you can address unicorns and their mating habits.
The Fed held the narrow money supply, M1, which is the measure it directly controls, completely flat from the spring of 2005 to the spring of 2008. It is normal for that measure to increase about 4.5% per year, long term average. (The economy grows continually; if no money were added it would form an ever shrinking portion of our total wealth etc). That is what broke the real estate bubble and the commodity price bubbles. Too many people were betting on a grand inflation (and against the United States), and turned out to be completely wrong.
Next for the overseas comment, foreign holdings of US located assets are something like $20 trillion, while US holdings of foreign assets are something like $15 trillion. And the income from the two has been nearly the same, through the end of 2007 at least, because the foreign claims on the US are mostly low yield government debt, and the US claims abroad have a lot more direct investment in corporate subsidiaries and the like, which earn more per dollar invested.
Net foreign claims against the US are around 7% of our assets. In normal times, that is about as much as the asset value line grows in one year. (That averages good years with bad e.g. it was true for the decade spanning the 2000 stock market crash by 5 years on either side).
The Fed is currently allowing faster narrow money creation, yes. It is doing so because private debts are running off and demand for safe, short term investments are effectively unlimited. Otherwise put, the velocity of each dollar is in the toilet. It is parking in money funds and sitting there doing nothing whatsoever. That is why prices are falling - for houses, commodities, stocks, gasoline, etc. It is a deflation in other words, and not an inflation.
The error most quantity theory types make in this matter is they assume the demand for money is a constant. So, if there is more money in existence, they expect its value to be less, in direct proportion. But this is not remotely the case. The demand for money changes just like the demand for Chevy Suburbans or cabbage patch dolls. And when demand for dollars soars, if the quantity doesn't move then the price does, instead. Soaring price of a dollar is the same thing as collapsing price of everything else.
Which is exactly what happened last year. The US economy bottomed in March when measured in Euros. Then the dollar flew higher, and we imported asset deflation. Not inflation. Oil prices collapsed by a factor of 4. So did most other industrial commodities, ags, etc. These are not signs of inflation, but of a panic demand for money as a safe investment, and an equally panicked repudiation of everything else.
The Fed is doing the right thing. The inflation panic mongers are just trying to get their epic bets against it over the last 4 years to "come right" in the end by sheer repetition, but it isn't happening.
It will take time for what the Fed is doing to work, but it has already restored the money market (short term loans) to tolerably normal conditions. The next segment that will heal is the longer term loan market, corporate and muni bonds and the like. Rates on that stuff peaked in November and have been improving since. All the financials will show it in their first quarter results - those just won't be announced until April, so we have another quarter of panic and pain ahead of us.
As for CDSs and CDOs, they aren't remotely the same animals, and it is a measure of the amount of ignorant panic mongering abroad in the land that they are all lumped together into the same stew.
CDSs are a zero sum bet among bankers. If all of them went poof tomorrow, there would be no net gain or loss. They are not like debts, where something already changed hands and has to be repaid in full or real value has disappeared or been destroyed. We should still have exchange clearing of them, because they can cause problems indirectly. Some firm thinks it isn't taking much risk because it thinks another will back it up, but then the backup fails. But that's it. The scaremongers tote up transactions amounts in them and try to get the man on the street to believe they are debts. This is approximately like adding up every line on your checking account statement without asking whether any of them off set each other, and confusing the total transaction amount with the balance.
CDOs on the other hand were just another kind of mortgage. A small portion of them were unsound frauds, and when those exploded, everyone assumed it was true of the entire set up. It wasn't. The result has been a giant write down on the books of banks, as the same performing mortgages are valued lower to yield some higher return, because nobody wants the stuff. There were serious losses only in "subprimes", which were junk loans to begin with and never should have been made. The theory behind them was always that the collateral would be worth enough, not that the borrowers were sound. Needless to say, when house prices drop 40-50% that isn't enough.
Everyone speaks of loan losses on all the bigger market segments after that - prime mortgages, credit cards, home equity, auto and student, etc. But for all of those, the charge offs for unpaid debts are all well under the interest rates charged. You can make less money than you hoped that way, but you aren't going to lose heavily.
The banks have a problem because they lost half their capital and their capital wasn't optional. It performs a necessary social function and if it isn't fully replaced, nobody else is going to be in good shape either. Populists and blame-mongering pols can't seem to wrap their minds around the point, but it is economically impossible for everyone else to do well, if bankers are ruined. Bankers, even ruined ones, have much better credit than everyone else, they will bid higher for everything and get it, and nobody else is going to see a dime until they recover.
So, we should simply see to it that our bankers get filthy rich again and stop worrying about whether anybody "deserves" any of it. Probably everyone involved deserves about six feet of earth, but who cares? The way forward is to help bankers recover, and they can then help everyone else recover, not out of the goodness of their hearts but with greedy little dollar signs in their eyes. That's called capitalism. It works, though it needs an occasional kick in the pants, and this is one of those times.
The economy is going to recover, in relatively short order as politics goes, and when it happens the Dems - who will have had nothing to do with it, really, any more than they can cause the sun to come up tomorrow by oohing and aahing in unison - will claim they saved the day. It all conservatives manage to do in the meantime is predict endless doom, and be completely wrong, then the Dems are going to look right and conservatives are going to look like skinflint fools.
What conservatives need to do is be prepared for the economy to recover, and point out to people what actions actually help that and who does the actual heavy lifting, and it isn't Washington. OK, some of it is the Fed, and we should forthrightly say so. And the banks do need public support - opposing that out of populist idiocy is, well, idiocy. Conservatives have to remember that they are the natural party of people who have smelled money once or twice, is a free capitalist society, and stop trying to out class-war the Democrats. You never, ever will. If the people want class war, they will always elect a Dem, not a populist Republican.
The conservative economic appeal used to be, vote for us, we know how to run an economy so everyone gets rich, starting with us. Now, instead, they seem to think the way to appeal to people is to crucified financiers and stand on the street corner naked in a washboard screaming that the end is nigh. That has approximately 3 votes for dogcatcher and will never get anywhere.
Do you see this as not impacting our economy for some reason? Does this have any impact on our sovereignty might be a separate issue. Secondly, you make no mention of the hundreds of trillions of Credit Default Swaps and CDOs that are still leveraged against God knows what. Does this burden ultimately rest anywhere?