Related Post on Fed Balance Sheet

by Dollars and Sense

From Brad Setser:


One easy thing China could do to help stabilize global markets: buy Agencies!
Posted on Saturday, October 25th, 2008 by bsetser


There is constant talk -- too much, in my view -- about whether sovereign funds will come to the rescue of western financial institutions.


Qatar did put a large sum of money into Credit Suisse recently, but in general the Gulf funds are reeling from large losses on their existing portfolio even as they are facing increased domestic demands (see Mufson and Pan of the Washington Post and Steven Johnson of Reuters) . "Rescuing*" US banks but not your own countries' markets -- and our own countries financial institutions -- is hard. And some Gulf countries' ability to carry out their ambitious local development plans will hinge on the availability of financing from their sovereign funds is oil stays at its current levels.


China is still cash rich. But the CIC has yet to prove that it can manage a $100 billion balance sheet (its "frozen" investment in the Reserve Primary Fund is the latest case in point) let alone manage a US or European financial institution with a far larger balance sheet. Moreover, it would seem a bit bizarre -- at least to me --for the US taxpayer to guarantee the liabilities (and thus be on the hook for most future losses) of an institution that is effectively owned by China's government. As Uwe Reinhardt notes, US taxpayers are already on the hook for most of the downside -- and handing over both the upside and control to another country's government (typically a non-democratic government) hardly achieves the goal of keeping major financial institutions in private hands.

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Labels: currencies, Fannie Mae, Fredddie Mac, People's Bank of China, The Fed

 

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10/27/2008 11:43:00 AM