Friday, July 18, 2008

the US mortgage crisis and international development


Previous posts to this weblog have discussed the relationship between the US sub-prime credit crunch, and hence the ongoing US cyclical recession, and developing countries--most specifically, my post of 6 September 2007. That this link continues to bite was highlighted today in the Lex column of the Financial Times, which noted that US Treasury data now indicates that Chinese investors now own US$376 billion of the long-term debts of Fannie Mae and Freddie Mac, which, in its guise as a government-sponsored enterprise, is the principal US mortgage lender. As Lex drily notes--and as I all but suggested last September--the People's Bank of China is now a lender of last resort to a reeling US Treasury and Federal Reserve.

How this works was nicely illustrated by a graphic in the Financial Times this week, which is at the head of this post. US mortgages are sold by lenders to potential American homeowners. The lenders sell the debts on, to large US banks or, more commonly, Fannie Mae and Freddie Mac. All three institutions bundle their mortgage debts together into mortgage-backed securities, which are sold to credit market investors--pension funds, university endowments, as well as the large global financial institutions. This is where China comes in: for they have become either a substantial component of the credit market itself; or Chinese sovereign wealth funds, which are state-backed investment funds seeking ways of earning decent returns for the masses of foreign exchange that Chinese companies and the Chinese state have been amassing, have been buying parts of the large global financial market institutions that are heavily involved in the buying of mortgage-backed securities. In either instance, then, Chinese money is propping up the US financial system, and through that, the global economy, allowing it to adjust much more slowly to the changing realities in oil and commodities that it faces.

It is ironic indeed that global finance capital has come to rely upon developing countries for their salvation, ahead of the capitalist states that support their international operations. Ironic, but now new: we have been here before, but in a different guise, during the debt crisis.

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