US to China: Buy Mortgage-Backed Securities
As the mortgage-backed securities market meltdown accelerates, Bloomberg reports U.S. Urges China to Buy Mortgage-Backed Securities. According to the article, China buys some but not a lot of these instruments.
The unfolding crisis in this sector is driven by a higher-than-expected default rates forcing a mark-to-market of securities whose value had previously been determined solely by mathematical models based on overly-optimistic assumptions (see: Investment Landfill; also Garbage In, Carnage Out ($), and The Poison in Your Pension). As banks and funds are being forced to liquidate the lowest tranches of these securities, they are finding that the market prices them in some cases a few cents on their dollar of their theoretical price.
Who better to absorb this pile of garbage than the Bank of China? In order to maintain its currency peg, it must "invest" hundreds of millions of dollars per year in US Securities. Worthless MBS would make a nice addition to its vast holdings of US Treasury Debt.
Comments (7)
michael r. brown
fascinating article. :)
btw, you have some malformed html above - http://blog.mises.org/blog/www.bloomberg.com/news/marketsmag/pensions.pdf - also, friendly-constructive (truly): i've noticed typos now and then - might want to tighten up on that.
Published: July 29, 2007 5:03 PM
Ohhh Henry
Last year China was trying to get foreigners to buy Chinese banks' non-performing loans. A swap of each country's toxic sludge investment portfolios could probably be arranged ...
Then when the balloon goes up both governments will have an excuse to declare each other "the enemy" and lie their citizens into a nice war so they can tighten the lid down hard on financial markets.
It's the perfect crime. What color is your hardened bunker?
Published: July 29, 2007 8:20 PM
banker
The BoC confiscated the wealth from Chinese citizens in order to do buy American assets? So what happens when the Bank of China ends up owning 25% of the real estate in the US? Or what happens when it buys defense companies or "strategic assets" through front companies like Blackstone? Or maybe I am just a little paranoid...
Published: July 30, 2007 1:56 AM
RogerM
Robert Blumen: "In order to maintain its currency peg, it must "invest" hundreds of millions of dollars per year in US Securities."
How does this square with Mises's argument that central banks determine the exchange rate by how much they expand credit/money in relation to the other country? If China wants to maintain a low exchange rate relative to the US Dollar, it just needs to expand its money supply.
Published: July 30, 2007 12:43 PM
Moonzie
As the author stated, it might required more US products export to China to have the Bank of China absorb this pile of garbage.
AmeriChinaB2B Inc. which runs the most visited US-China business to business(B2B) web platforms. launches a reverse direction Alibaba platform. AC-Ali,to help US businesses export to potential buyers in China.
AmeriChinaB2B is in the native country of US,it's closer to the American customers, understand their demand in the native country of U.S.A., meanwhile, to a certain extent, American customer can believe in AmeriChinaB2B even more,You might be willing to let AmeriChina to collect the goods or advance payment for you.
For more information, please check: http://www.acb2b.com
Published: July 30, 2007 1:28 PM
Robert Blumen
RogerM "How does this square with Mises's argument that central banks determine the exchange rate by how much they expand credit/money in relation to the other country? If China wants to maintain a low exchange rate relative to the US Dollar, it just needs to expand its money supply."
Mises was talking about a market-determined exchange rate. The USD/RMB rate is fixed, at a below-market level. As with any controlled price, in order to maintain it at this level, the BoC must be willing to buy whatever quantity is offered at the controlled price.
Published: July 30, 2007 10:38 PM
Gordon lane
Hey Guys....I have just heard that China has refused to buy anymore of our debt. Now, I'm just a retiree from Kansas,...but isn't this a bad thing???
Published: February 25, 2009 11:35 AM