Podcast: Brad Setser Explains The China Thing

At a recycling drive in Brooklyn, Chinese goods piled up.

Bob Sacha

 

Debt, to most of us, is something you pay. But to creditors, it's also something you sell. Mortgage agencies like Fannie Mae and Freddie Mac issue so-called mortgage-backed securities to investors -- including, notably, China. Roughly put, we buy tons of Chinese goods, and the Chinese loan us the money back through securities so we can buy more.

Got it?

The numbers involved here are enormous, billions mounting into trillions. Brad Setser, an economist with the Council on Foreign Relations, has spent the last years obsessively researching China's buying of American debt.

What scares him is the idea that China would stop buying the debt -- meaning it would stop financing American mortgages and our general standard of living. An extra jolt: Setser says the Chinese can't go on buying this way forever.

He explained this all to us in a way I could almost completely understand. It's so good, I'm going to listen twice (click above or download).

Laura Conaway

3:49 PM ET | 09- 8-2008 | permalink | comments (0) | e-mail post

From The Comments: Blame Republicans? I Don't Think So

J Baker writes:

I understand the need to provide stability to this market and to bail out the Chinese Central Bank, but why do the Republicans always spout that they are the Party of less government and then do the exact opposite. As a SMALL shareholder of Freddie I get clobbered, the Chinese get saved, and the Republicans get away with more BS about what they stand for...

We are strictly non-partisan here, at Planet Money. In fact, we find that economic foolishness is truly bipartisan.

I do not see how you lay the blame for Fannie and Freddie on the Republicans, alone. NPR's Peter Overby provided a handy list of the many folks from both parties who have helped Fannie and Freddie avoid the kind of scrutiny that would have prevented the current crisis. The company has close ties to Dems and Republicans, to Obama and McCain and both Bill and Hillary Clinton.

Adam Davidson

3:41 PM ET | 09- 8-2008 | permalink | comments (0) | e-mail post

From the Comments: Who Is To Blame? All Of US

I like this from David Lentz:

There are people responsible for this, and at several levels. First and foremost are the crooked managers and greedy consumers who willingly assumed huge amounts of risk that they knew they could never repay, and got rewarded for that.

Second, are the elected representatives (senators and representatives) who created Fannie and Freddie to push the pedal to the metal and drive rates lower, to get a happier voting public.

Finally, there is the public that voted in these clowns and will in all likelihood continue to keep them in office, well-fed and obscenely compensated for wrecking the nation.

There is a solution, merely vote against incumbents, regardless of party, each and every time you vote.

Otherwise, the people should be happy with their lot -- after all, they are responsible for it.

I think it's a fair point. There has been tons written over the past seventy years condemning the crazy, highly risky nature of Fannie Mae and it's younger sibling, Freddie Mac.

Any of us could have made this a cause over the years. We didn't. Why? Well, who is going to have a big movement to reform the risk management of quasi-government insured secondary mortgage market companies. Doesn't have the same sex appeal of whales and nuclear weapons and the like. We ignored it. Makes sense to me that we did. We all did. Everyone reading these posts and writing comments. Also, until a few months ago, most Americans were quite happy to get a cheaper mortgage without investigating the systemic risks associated with a government guarantee of cheap mortgages.

By ignoring the issue, we let lobbyists and congresspeople write the rules as they wanted to.

Now, we're all paying a price. And we're all looking for someone to blame. I kind of like Lentz's approach. It's Shakespearean: "The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings."

Adam Davidson

3:33 PM ET | 09- 8-2008 | permalink | comments (0) | e-mail post

Answering the Comments: Blame The Free Market?

Rob McAleavy argues:

It is time to seriously look at solid and functional regulation. We hear so often that "free markets" will cure all, and that regulation only hampers these markets. Time and again, these "free markets" fail us -- Savings & Loan, Energy (Enron), Mortgages, Credit Cards(?), health care - essentially due to greed, corruption, ignorance and the demonizing and complete absence of intelligent and forceful regulation. "Free Markets" are never free -- they simply favor some over others. It is time to polish the word "regulation" and put it in its rightful place, hand-in-hand and side-by-side with Free Markets to balance them.

This is certainly a crucial question right now. There are many, many people on the left and the right and the center and all over who think the message is clear: we need more regulation of financial markets to prevent these crazy shenanigans.

I'm going to sit out that debate for right now. We'll be having it a lot here, I think, over the coming weeks and months.

But I will say . . .

Continue reading "Answering the Comments: Blame The Free Market?" »

Adam Davidson

3:25 PM ET | 09- 8-2008 | permalink | comments (0) | e-mail post

From the Comments: Socialist Nationalization?

Maria Schneider wrote in to say:

We shareholders will be wiped out with this takeover of Fannie and Freddie. I thought our legal system was a warranty and would prevent the government from stealing from the people. We would expect the nationalization of Fannie and Freddie to be dictated by dictatorial governments such as Cuba or Venezuela. Or is this government a national socialist one?

They are stealing from the rightful shareholders of the company. We trusted the government and their cronies. I am sure their profits will soar with this measure. This is a legal system that protects the little guy, it was anyway until this government came into office. And one thought they were conservative republicans... [This] is an act of thievery.

Maria, as a shareholder in Fannie and Freddie, I can only imagine how awful a day this is for you. Indeed, you trusted that these quasi-governmental agencies were being well run and that they are safe. Over the last few months, you've seen the value of your shares collapse. Today, the nail was hammered in the coffin.

I will speak some harsh truths to you, though. . . .

Continue reading "From the Comments: Socialist Nationalization? " »

Adam Davidson

3:15 PM ET | 09- 8-2008 | permalink | comments (0) | e-mail post

Let The Carnies Explain Freddie And Fannie

See, it works like this.

Bob Sacha

 

When the news gets tough, the tough reporter heads to Coney Island. Adam Davidson, on the right in the picture above, turned to a carnie for help in explaining the Fannie Mae and Freddie Mac bailout.

Basically, the game here is that the U.S. buys more from China than China buys from us. China then lends us that money back, so we can buy more Chinese stuff. The way they do that is by buying bonds from Fannie Mae and Freddie Mac. And seriously, that's the whole deal -- the simple version of the whole deal, anyway.

Listen here, and you'll understand this giant game of Kentucky Derby in three minutes. Promise.

Laura Conaway

12:10 PM ET | 09- 8-2008 | permalink | comments (0) | e-mail post

Fannie And Freddie Got You Feeling Apocalyptic?

Rob Paterson paints it black.

Via

If the financial news has you feeling green around the gills, know that you're not alone.

Friend, social media guru and former investment banker Robert Paterson spies the worst in the Fannie Mae and Freddie Mac collapse. Paterson writes, "It is not a blip. It will get much worse. I say this because we have been here before. There is a pattern to what is going on."

He charts that pattern -- and I mean literally charts it -- back to the great European financial collapse of 1348. And we're sending a hug to Prince Edward Island, because whether he's right or wrong about our impending doom, he at least is also charting a solution.

Laura Conaway

10:19 AM ET | 09- 8-2008 | permalink | comments (2) | e-mail post

The Fannie And Freddie Bailout, In 10 Easy Links

If you're looking to understand today's announcement about the U.S. government swooping in to rescue mortgage agencies Fannie Mae and Freddie Mac, you could start with a New York Times article that appeared on Friday:

"Main Bank of China Is in Need of Capital"

The story detailed the problems that China's central bank faces as its investments in the American economy have turned out poorly. In a bid to finance its ongoing industrialization, China has bought some $1 trillion worth of Treasury bonds and debt from U.S. agencies. A lot of that investment has come in so-called mortgage-backed securities issued by Fannie Mae and Freddie Mac.

With Fannie and Freddie (more on them later) in serious trouble, China's central bank has also felt the pinch. At home, Fannie and Freddie's problems look like blocks of foreclosed homes in new developments. For the global economy, they look a lot scarier than that.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Treasury Secretary Henry Paulson told the nation. "This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation."

It's a frightening prospect, for sure, if not a very clear one. You can follow the coverage on this blog and at npr.org/economy. After the jump, we'll provide a quick primer -- 10 links to stories that need reading now.

Continue reading "The Fannie And Freddie Bailout, In 10 Easy Links" »

Laura Conaway

2:01 PM ET | 09- 7-2008 | permalink | comments (9) | e-mail post

Open Thread: Got A Question About Fannie/Freddie?

Wait, this has something to do with China?

David McNew/Getty Images

 

The U.S. government is stepping in to take over Fannie Mae and Freddie Mac. The beleaguered mortgage companies hold, oh, about half the nation's $12 trillion mortgage market. With the federal takeover comes the ouster of the companies' top executives and the entrance of untold amounts of financing from American taxpayers. Officials say they're acting to protect the global economy, since so many outside players -- most notably China-- have bought into Fannie and Freddie.

That's the news. Now come the questions. Why do policymakers want to do this now? How much will it cost the government? How did the situation get so dire? And, everyone's favorite, what does all of this mean to you?

We'll wrestle with these questions and more, free of charge. Just drop us a line in the comments, please.

Laura Conaway

11:26 AM ET | 09- 7-2008 | permalink | comments (21) | e-mail post

'Adjustments In The Crosses' -- 09.04.08

The wicked helpful Currency Strategy newsletter from Brown Brothers Harriman landed this morning with a bit I cannot understand:

In the UK, where the BoE left rates unchanged as expected, sterling is being bolstered by upbeat comments from the London Time's Kaletsky. Adjustments in the crosses are also contributing to today's moves. The Japanese yen is steady, pulled by activity in the crosses. The Australian and Canadian dollars are firmer. Weak Australian trade data had little impact.

Anyone get that part about "adjustments in the crosses?" I know it means something -- maybe this? Later today, I'll call the wicked helpful Marc Chandler and ask him. Stay tuned.

UPDATE: Just called Chandler. He was out, but I got his colleague Win Thin, and he said . . .

Continue reading "'Adjustments In The Crosses' -- 09.04.08" »

Laura Conaway

10:37 AM ET | 09- 4-2008 | permalink | comments (0) | e-mail post

Why Did The China Miracle Take So Long (Like, 4 Centuries Long)

The new China meets the old one.

Liu Jin/AFP/Getty Images

 

A new economics paper is getting attention and looks quite interesting.

China was a major world power and technologically advanced nation until the late 1200s. Then, its technological edge disappeared until, well, 1979.

The answer, according to this author: trade. When China was open to trade, its technology advanced. When China wasn't open to new inventions and new ideas, it retreated.

Adam Davidson

9:07 AM ET | 09- 1-2008 | permalink | comments (0) | e-mail post