The Intervention by USA Government in the Foreclosure Crisis has Increased the Trust of Foreign Creditors
January 6th, 2009
For many years before the foreclosure tornado hit America warnings had been coming in about the falling dollar. Foreign capital was exiting from an over-leveraged USA market. At the root of the foreclosure crisis was the soured mortgage backed securities. But the intervention of the government in this time of crisis has increased the trust of the foreign creditors and they are cautiously testing the waters again and are not completely going away.
Since the last ten years or so the foreign investors had been gobbling up mortgage-backed securities, bonds and equities issued by Fannie Mae and Freddie Mac. The main buyers have been from China, Japan and UK as well as oil countries of the Middle East. Foreign financing led to heady borrowing and consumer spending in America leading to a bubble as assets were inflated in the running greed for more money.
A good number of economists felt that this trade deficit could not continue indefinitely and that the foreigners would soon get tired of the pale returns. The drama would run out of steam and the tide would withdraw pell-mell leaving behind rotting carcasses. And this is exactly what happened but with a different order of events.
While the pundits were focusing on one crisis another one stealthily sneaked up and took them by surprise. For quite some time cheap foreign finance had been a bonanza for American consumers, house owners and also the investors. The free flowing money caused interest rates to fall including the mortgage rates.
Simultaneously many emerging countries benefited by recycling dollars and sending it back to USA. China had taken in the maximum amount of dollars. Export of Chinese goods had created factories to mushroom in China creating jobs for thousands. But China and the other countries had started to get worried about the real worth of USA assets.
During the first nine months of 2008 net purchases by foreign countries of long-term securities of America fell by 30% compared to the previous year, but it was still $520 billion. The net purchases of treasuries shot up by 150%, with the purchases by China increasing by 50%. But its purchases of other securities decreased in 2008 in comparison to 2007.
With imports from China decreasing the consumption in America has also gone down. The tendency right now is to move away from risky assets to safer Treasury.
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- Lenders Being Legally Challenged for Activating Predatory Lending
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- With Foreclosures and Unemployment Continuing it is Doubtful if Recession is Over
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