Page 2 of 2 Paulson placates China, Russia - for now
By Julian Delasantellis
necessary to keep China and other central banks in the game and continuing to
buy US agency debt. By selling China increasingly worthless debt in exchange
for the very tangible products of its factories, China is, in essence,
delivering a huge subsidy to the US government; the New York Times reports a
Chinese blogger stating that the policy is comparable to China paying for 200
new United States Navy aircraft carriers with which America could close off the
entire Chinese coast.
The extent to which China's and other Asian central banks have tied themselves
to US MBS debt is fairly well known; what is less well known is that Russia has
been tempted into the game as well. According to the US government's monthly
Treasury
International Capital report, the Russian central bank held about $100 billion
in MBS debt as of July.
Thus, the countries believed to be America's two main strategic competitors for
the next few decades, Russia and China, have basically received the Lester
treatment. They have been lured into investments that traded their wealth for
MBSs that have essentially vomited all over them.
One can argue about the asymmetrical nature of the differing threats of Russia
and China. China seems very content to bleed the West's bank accounts dry, as I
noted 12 months ago (see
Trinkets and treasure: China tames the US , Asia Times Online, August
31, 2007), they're doing far too well addicting the West with cheap consumer
disposables to even think of starting something militarily. They'll leave the
West alone as long as they're left alone.
It's seems to be another story with Russia. The West now seems to be faced with
a nation, led by ex-KGB man Vladimir Putin and his merry marionette Dmitry
Medvedev, brimming to the borscht with petro-wealth, determined to follow an
irredentist path that restores the old Soviet/Romanov empire by coercion and
force.
This was proved during last month's international crisis resulting from
Russia's invasion of Georgia. The West's feeble and tepid response to the
aggression proved just how powerless it is to counter the threat from a major
petro-state; with the possible exception of US Vice President Dick Cheney
playing with his bags of green plastic toy soldiers at the secret Secure
Location under a mountain somewhere, nobody had much of a stomach to counter
Russia with much of anything all that serious.
In essence, the only sanction Russia has had to face from its aggression has
been from the markets, namely, the decline in the value of the MBSs in its
central bank's portfolios, and both the 12% decline in Russia's main RTS stock
index and an 8.5% fall of the ruble since the invasion are probably as
attributable to the almost 50% decline in world oil prices since mid-summer
than to protest and outrage over poor, beleaguered Georgia.
With this background, the necessity of Paulson to move on Fannie and Freddie
became even more imperative. Had he allowed the two to fail, besides the dire
domestic consequences I described above, the international consequence would
have been to send the message that the game was up - that there was no further
reason to invest in US government-guaranteed obligations anymore, for the
United States had no intention of standing behind its obligations.
By keeping foreign investors still in the game, it's as if they're receiving a
promise from Lester not to upchuck on them anymore, a promise that neither
Lester, nor the United States as a whole, did, or would ever have any intention
of honoring.
The main reason that countries like Russia and China continue to invest in
questionable US dollar-denominated debt products is that, with their great
wealth so new and so recent, they know of very little else to do with their
riches. Like the proverbial Clampett family of the 1960's American TV show The
Beverly Hillbillies who, after discovering oil, were told that "
Californy is be So moved Beverly. Hills, is. Swimmin? pools, movie stars.?
Chinese, Russian other central bankers were told that ?the US dollar?s place
you ought to be,? so they loaded up the truck and bought MBSs.
Still, it can't be pleasant to be at the PBoC and receive the type of flaying
they received from the MoF over buying US mortgage-backed securities. Just as
the kids at my school eventually learned always to stay outside Lester's
roughly 1.5 meter effective launch range, the world's money will undoubtedly
eventually learn not to make itself vulnerable to America's profligacy with
uncontrolled debt and leverage, especially if that same policy continues with a
new president. What happened with the rescue of Fannie and Freddie only delayed
that day of reckoning.
I don't know what's become of Lester; he hasn't been at our reunions. Maybe
it's a coincidence, but I've never once seen a picture of Lester together with
former Countrywide Financial chief executive and subprime mortgage hurdy-gurdy
man Angelo R Mozilo.
The habits of adulthood are frequently obtained and mastered in adolescence.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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