Tuesday, Jul 22, 2008
"There are no good options."
international herald tribune: Is America too big to fail?
The central banks of China and Japan are on the hook for hundreds of billions of dollars worth of Fannie's and Freddie's bonds - debts they took on assuming that the two companies enjoyed the backing of the American government, argues Brad Setser, an economist at the Council on Foreign Relations.
Commercial banks from South Korea to Sweden hold investments linked to American mortgages. Their losses would mount if American homeowners suddenly couldn't borrow. The global financial system could find itself short of capital and paralyzed by fear, hobbling economic growth in many lands.
Posted by malct @ 11:34 AM (322 views) Add Comment
3 Comments
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1. drewster said...
This was posted yesterday; it's a worthy article which unfortunately didn't draw many comments. If people think certain large banks are "too big to fail", i.e. too big to default on their loans, then how about America itself? Foreign central banks are large holders of US treasuries. None of them can "cash in" their holdings for fear of sparking a collapse, leaving the rest of their holdings worthless. They would much rather see America's economy recover so that their T-bonds maintain their value, but I can't see how that would happen?
2. malct said...
sorry drewster, it came up as a valid article, I missed it yesterday
it's the interdependence that grips me
There was a bloke called Norman Angel who got ridiculed for saying wars could happen because of economic ties - in 1913
he was later sort of proved right when it was followed by and economic disaster - oh and another war - oh sh!1
3. icarus said...
In order to sustain US borrowing from Asia US interest rates were as high as 5.5% a year ago. Any cut in IRs was always going to put pressure on the system in which Asia exported to the US and parked the resulting surpluses with the US (dollar reserves) in order to enable the US to finance those imports. The lowering of US IRs to combat the threat of recession and bank failures has severely weakened that system. That, plus the Fed's decision not to publish the M3 (broad money supply) figures - meaning there's something to hide, has increased Asian concern about the wisdom of holding dollars and has heightened the dilemma of central banks in other countries as explained by drewster @1.
To what extent, therefore, is the demand for dollars dependent on the fact that not just oil but most commodities are traded in dollars (and on exchanges situated in the US). And do Iran and Venezuela possess the same WMD that Saddam had - the threat to set up an oil exchange trading in a currency other than dollars?