Short term I think it’s a deal for fed. But long term (it seems nobody is caring about long term these days), why should China continue to buy the Fannie/Freddie debt, for some premium over the US treasuries with substantial mortgage market risk (liquidity). I agree the US treasuries and Fannie/Freddie debt are co-related. It seems the greenback will continue to be a large part of China foreign exchange holdings.
But think a minute, if the United States can not sort out this mortage thing, why should China/Japan mess with it? I think the implication of this mortage crisis will be much greater than many peoeple (convention wisdom) think. The house will NOT always go up. The housing sector and homeownership are good thing, but sometimes too much of a good thing could be a bad thing. I think the people in China state investment Cos. should seriously think about their strategy.
These days the market acted like the world is coming to an end. I have not read the history of 1929 crash, but I felt this one is the most severe in my investing life. I guess the importance of US economy to the world may be bigger compared to 1930 because of globalization, the dominance of dollar.
Just my speculation on today’s market action. Some banks lost big on the Fannie and Freddie’s preferred shares, they need to liquidate some common stocks to raise some cash? Or another commodity hedge fund blew up?
While I think the US housing sector is coming to an end, China and other countries will move forward: more cars, more houses and more consumer spending 🙂