Asia Is About to Give U.S. a Kick in the Fannie

[Purveyor]

Commentary by William Pesek

Aug. 27 (Bloomberg) -- Intelligence reports. Unemployment statistics. National-security estimates. Political polls. World leaders sure have their hands full digesting reams of data.

The next U.S. president should add this to his must-read list: the Federal Reserve's H.4.1 table.

Economists have long weeded through the New York Fed's weekly release. With a dry, wonky name such as ``Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks,'' it's no wonder U.S. presidents aren't known to peruse its contents.

Yet it will tell the next leader -- be it Republican John McCain or Democrat Barack Obama -- how willing foreigners are to continue financing the U.S.'s way of life. Alas, there are good reasons for the U.S. to learn how to live without Asia's money.

The great stampede out of dollar assets that many analysts predicted hasn't happened. Demand for U.S. debt has been quite resilient amid a sliding dollar and a widening credit crisis. Even problems at Fannie Mae and Freddie Mac haven't yet precipitated a massive capital exodus.

The operative word is ``yet.'' The almost $10 billion drop in central-bank holdings of agency debt this month doesn't necessarily mean the flight is afoot. Yet Asia is anxiously awaiting news of how the U.S. handles troubles at government- sponsored mortgage-finance companies.

China, for example, holds $376 billion of long-term U.S. agency debt and, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong, most of it is in Fannie and Freddie assets. Fannie and Freddie aren't just too big to fail -- they're too geopolitical to fail.

Catastrophic Risk

``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu Yongding, a former adviser to China's central bank, said last week. ``If it is not the end of the world, it is the end of the current international financial system.''

Even if Fannie and Freddie are bailed out, recent events mark the end of the U.S.'s financing arrangement as we know it. It's a reality for which the U.S. should now plan.

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[truedelphi]

1. So are the Fed and the FDIC planning on holding bake sales to continue with

The ever widening bail outs??

Now, economic theory (dating back to the late nineteen twenties) holds that if you add money to the supply, then a recession or a Depression may be eased.

But that theory stems from the era when those who were bailed out then helped out their own locale.

These days, rich banking families here in the USA don't necessarily do anything of value for the middle class in the USA.

So perhaps what the coming years will bring will be alternate dimension realities.

If you are unfortunate to live in the reality of the middle income class, you will surely know what it means to be living through a Depression. And you may discover that some people don't live through a Depression.

If you are part of the upper 1%, then you may well know only good times. And you can take whatever wealth you are offered to set up yet another research lab in Singapore, or another textile factory in El Salvador.