MADELEINE BRAND, host:
From NPR News, this is Day to Day. The four largest banks in China are scaling back their investments linked to mortgage giants here in the U.S., Fannie Mae and Freddie Mac. The banks say they've been pulling back since June. Marketplace's Nancy Marshall-Genzer is here now. And, Nancy, how much control do these investments give the Chinese over the U.S. economy?
NANCY MARSHALL-GENZER: Madeleine, it really depends who you talk to. One economist I spoke with today said, hey, the U.S. economy is huge, and China has absolutely no influence. But Gary Hufbauer of the Peterson Institute for International Economics thinks China does try to exert some indirect influence over U.S. trade policy.
U.S. Treasury Secretary Henry Paulson has instituted regular meetings with China, and China certainly lets us know what it thinks about our trade and fiscal policies at those meetings. Now, Hufbauer says Beijing can also exert pressure on U.S. companies that want to do business with China.
Mr. GARY HUFBAUER (Trade Expert, Peterson Institute for International Economics): It could suggest to those executives of that firm that they might do well to lobby back in Congress or in the administration on whatever issue concerns them.
MARSHALL-GENZER: You know, it must also be said, though, that U.S. companies lobby China to get the Chinese to do what they want. So it's not exactly a one-way street.
BRAND: And, Nancy, if we are so indebted to other countries, especially China, what does that say about the strength of the American economy?
MARSHALL-GENZER: Yes, how prosperous can we actually be, right? Hufbauer says we're actually adding to our net foreign debt at a rate of 500 billion dollars a year. He says that's still small relative to our gross domestic product, which is in the trillions. But if our debt keeps growing at that rate, it'll be a real threat to our prosperity in 10 years or so. I also spoke today to University of Pittsburgh economics professor Thomas Rosicky, and he's been studying the Chinese economy for more than 40 years, so he knows what he's talking about. He says we're way too dependent on overseas investors.
Dr. THOMAS ROSICKY (Economics, University of Pittsburgh): What happens if overseas lenders hesitate to increase their holdings of U.S. government bonds? This could have the effect of driving up interest rates.
MARSHALL-GENZER: And, Madeleine, that's because we have to pay higher interest to get overseas investors interested in our bonds again. And that, in turn, means interest rates would go up on loans for businesses wanting to expand and consumers looking to buy things like a new home or a new car.
BRAND: Well, speaking of, let's talk about Fannie and Freddie, and what this pull-back of Chinese investment means.
MARSHALL-GENZER: Yes, it's a little soon to tell. It's hard to read the psychology behind foreign lenders' decisions, but Professor Rosicky says we are going to have to get serious about cutting our deficit, that is for sure. He says it can be a smooth process that we decide to do it. We can control it. Or, if we just keep spending until overseas investors think we're too big of a risk and pull out, it could be quite a rocky process.
BRAND: Thank you, Nancy. That's Nancy Marshall-Genzer of public radio's daily business show, Marketplace.
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