China Goes The Big Squeeze; Fix Freddie And Fannie … Or Else.

[Purveyor]

A high-ranking Chinese economist has put his nation's cards on the table in the global financial poker game by effectively telling the US to fix Freddie and Fannie … or else.

"A failure of US mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system", Yu Yongding, a former adviser to China's central bank, says.

"If the US government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic," Yu said in e-mailed answers to Bloomberg. "If it is not the end of the world, it is the end of the current international financial system."

It is well within the bounds of imagination. People have been thinking the unthinkable for some time.

Yu Yongding, whose statement seems to have been lost to most of the world as the Olympics came to a merciful end, is described as "a former adviser to China's Central Bank". He is possibly the most highly accredited economist in China. A list of his positions would fill a little red book.

Men like Yu Yongding don't just get up one morning and say this sort of thing. US Treasury Secretary Paulson was put on notice.

"Mac and Mae" are not looking robust. Max Fraad Wolff, an editor of the website GlobalMacroScope, made a contribution to Asia Times on Thursday that helps explain: "Fannie Mae's June 2008 statement declares a gross mortgage portfolio of $US750 billion ($A869 billion) and guarantees of mortgage backed securities and loans of $US2.6 trillion. Freddie Mac's June statement details a retained portfolio balance of $US792 billion and a total mortgage portfolio balance of $US2.2 trillion. These two giants have retained interest in over $US1.5 trillion and guaranteed over $US4.5 trillion in mortgages, mortgage backed securities and loans. There are $US11 trillion in outstanding mortgage liabilities in the US."

"The extent of the firms' guarantee commitments is global in scope. Sixty-six global central banks buy loans bundled and or backed with Freddie Mac and Fannie Mae involvement. As of June 30, 2007, foreign entities and individuals held over $US1.4 trillion in securities of US agencies such as Freddie and Fannie … They have been caught with weak financials, swollen balance sheets and escalating default, just like the homeowners they assist. The size of their retained mortgage portfolios is truly gigantic."

MORE...

http://business.smh.com.au/business/china-goes-the-big-squeeze-20080829-45q8.html

[FreakinDJ]

1. How about the USA match your 20% tariff - Bitch

[texastoast]

2. Guess who is the new superpower now?

Thanks, shrub. You got us to this point, you worthless piece of shit.

[kurth_]

3. There ya go - this is a must read

Thanks for posting.

[DemoTex]

4. Our Chinese masters are readying their repo men ..

It ain't gonna be purdy ..

[Dreamer Tatum]

14. Repo what? Under what agreement? When? How?

Or do you assume the world works like a giant rent-to-own?

[SammyWinstonJack]

16. ...

:spray:

[corkhead]

5. "we own you, bitch"

[Dreamer Tatum]

13. Not quite, not by a longshot

Anyone who thinks China is sharpening its blades or licking its chops over the situation
needs to spend a few weeks learning economics.

Try to get this: China owns a vast amount of United States currency, aka dollars. They also
own a large amount of US government securities, denominated in...wait for it...DOLLARS.

If there is a significant loss of faith in the US financial system, and therefore an exodus
of foreign capital, the supply of dollars on the world market could increase, which would
weaken China's dollar position. In fact, China would have to buy dollars to hedge its position,
with unknown effects on its own or other currencies.

China cannot "call" its debt. China cannot repossess anything. All they can do is hope the demand for
the dollar doesn't subside. They put themselves in the bucket with us.

[HamdenRice]

26. Agree in general, but there is a form of "repo" that follows these imbalances

In general your post injects much needed common sense in the discussion. But when a country runs these massive trade imbalances and causes a collapse of its currency there actually is, for practical purposes, a kind of repo.

I was a "Wall Streeter" in the early 1990s when we had a similar, if much smaller, situation with Japan -- although it seemed unprecedented at the time.

As doubts about the currency grow in the lending country, and the currency of the borrowing country slides, real assets in the borrowing country become cheaper in the currency of the lender. In the 1990s, that meant Japanese banks snapping up U.S. corporations, real estate and other assets. It was bizarre -- everything was suddenly for sale to the Japanese, from American auto manufacturing plants, to movie studios (which became Sony Pictures and Sony Music), to many of the skyscrappers in Manhattan.

Similar things happened in Latin America in the mid 80s. When the debts of Argentina and Brazil were out of countrol and their currencies collapsed, privatization immediately followed with their prize assets going to American banks.

You can already see this process happening here and now. That's why there is all this discussion of "sovereign wealth funds" -- the Gulf states are exchanging dollars for real assets.

If the Chinese unpeg their currency from the dollar, and the dollar collapses, expect a flood of sovereign wealth investments and Chinese bank and corporate investments in the U.S. We'll become an economic colony -- which is probably a good thing considering how short sighted, greedy and incompetent the current crop of American corporate managers has proven to be.

[Tierra_y_Libertad]

6. I remember when we condemned them for being Communists.

Now, we condemn for being smarter Capitalists than we are.

The irony is delicious.

[Neshanic]

8. "The irony is delicious." The real irony is they are still Communists.

And we paid them to take us down, with the lowest price...."Always".

[Tierra_y_Libertad]

9. "The capitalists will sell us the rope with which we will hang them." V.I. Lenin

Lenin must be laughing his ass off in his mausoleum.

[bronxiteforever]

7. This is all about USA decline. "a bankrupt nation is a defenseless nation" Pres. Eisenhower

and McSame wants more tax cuts.

[Pavulon]

11. 13,843,825 Million GDP (US)

4 times that of china

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

the real numbers

[flamingdem]

17. No wonder Susan Eisenhower came over to the light and supports Obama nt

[Pavulon]

10. Japan, Germany, China

in that order secure us dept. China is a peon nation that does cheap labor. They are being undercut right now by their neighbors in a race to the bottom.

The US economy, even during a slow growth stage, is generating many times more wealth then china.

Best forecast is 2020 all things equal.

[Doctor Cynic]

12. Will they send Shaolin masters to break Ben Bernanke and GWB's kneecaps?

[0rganism]

15. "the end of the current international financial system"

Is that necessarily a Bad Thing?

[Marsala]

23. Do you consider the end of the world to be a bad thing?

That's the same sense in which they mean it. The collapse of the current global financial system would be Very Bad. Great Depression level bad. Reform to head off catastrophe is infinitely preferable to letting the whole system crash and rebuilding it from scratch.

[Greyhound]

18. Or else, what...

there is nothing that they can do. They have tied their currency to ours in order to ensure that they will always be able to underbid us, so as our currency is devalued theirs sinks too. They cannot call our loans due, they own bonds that pay set interest for a set time, so there's no threat there.

They are in the hole they dug for us, with us.

Now, if this could in fact collapse the fractional reserve central banking system we, they, and the whole world, would be far better off (except of course for the parasites that the system supports).

If only...

[coalition_unwilling]

19. If China begins unwinding its

dollar positions and curtails its future purchases of US Treasury paper, dont you think that would have major repercussions for the US?

[Greyhound]

20. That would very difficult, if not impossible, if they let the Yuan float or peg it

to a different currency, their products become more expensive for us to buy and they still cannot survive without our market to sell into. The Indians are not ready and the Europeans don't want enough of their crap to stay in business.

Now, it could possibly unwind the whole fractional reserve central banking model, which would be a great thing for us and the rest of the world in the long run.

The short-term would be a huge disruption, but escaping the Ponzi scheme of our current system would offset the turmoil. In any case, what happens here effects the whole world anyway, so we might just as well create a positive effect after going through the pain.

[coalition_unwilling]

21. If China uses the greenbacks

from its current account surplus to buy Euro-denominated debt rather than US debt, then demand for US debt will decline. When demand dealines, price declines.

That means, at the least, higher interest rates for the US, since yields\interest rates move inversely to prices.

Higher interest will constrain the impact of any fiscal stimulus. Am I missing anything?

[Greyhound]

22. No, probably not missing anything. We could opt to slow borrowing immediately and stop soon,

that would help with the rise in interest rates, but it is not likely that our "leaders" would do that, so you're probably right in that.

I think that we're too far down the road for any fiscal stimulus package short of a national movement like the 30s to make any real difference and the domination of our government by corporations will preclude anything like that happening. I'm sure Washington will pour hundreds of billions of dollars into the corporate welfare trough, but as we've seen for decades, it will simply fuel their agenda and impoverish us further.

There are just too many storms coming and they all originate with the bizarre notion we bought 40 years ago that making rich people super-rich would somehow benefit us all. We abandoned being the world's supplier to become the world's consumer and now we're broke, that's all there is to it. The bills are too high and exceed our income, once the stone drops, how can the ripples be stopped?

[krawhitham]

24. They could make it hard for us to get oil

[Greyhound]

25. Really? How so? I haven't considered this angle. n/t