Thursday, September 11, 2008

A Kind of Déjà vu --In a Reversed Course

Prior the 1998 Asia financial crisis, money flew in from the US and any other developed countries to then the rosy Asian capital market. Then when it turned out that the Asian economies did not live up to expectation, --and fueled by god-knows a sudden lost of confidence--, the investors frantically pulled out the money. Asia went to a devastating crisis.

Now ten years later, the US government bailed out and took over Freddie Mac and Fannie Mae. Of course they did it to prevent the collapse of their huge domestic housing market, as well as their financial market related to it. But so much for the problem they may face, it doesn't justify the radical step for a take-over. The government can just provide more channels to capital without effectively nationalizing the agencies. Arguably, there might be something bigger than that.

And that is the Chinese Central Bank --along with other Asian counterparts-- factor. As the Chinese has been investing 340 billion USD to the agencies' perceived as risk-free government backed securities, any slight doubt against the US government and its economy to live up to expectation would lead them to move the money out of the country. And that would be catastrophic, even to the US economy, since the very large chunk of capital inflow to US comes from the Chinese and petrodollar countries.

Washington clearly understands that the Uncle Sam can not afford to have those capital fled and suffer the way Asian countries did ten years ago, so they stepped in to restore the market confidence.

To make a stronger case on how much now Asian money is being important force in the US economy, let us look at the latest crisis in the Lehman Brothers. The free fall of Lehman's share price in the last two days was mainly due the fact that they can not close the deal with the Korean Development Bank to provide the much needed capital.

Of all countries, it's Korea, the country that went deep under ten years ago as the US investors, perhaps including Lehman, pulled the capital out of the country, that their refusal put Lehman, a very mighty financial firm of the world, on the brink of collapse --and perhaps the whole US financial market, too.

Now you see, this becomes very interesting. Stay tuned on this dangerously alarming period for the US economy and financial market and how the US government may, or may not, manage to get out of troubles.


  1. you're sounding very excited. A little too excited :)

  2. my best wishes to US market for always going up despite the troubles.

  3. "The government can just provide more channels to capital without effectively nationalizing the agencies"

    Not that easily, dude. At times like these, all efforts have been met with skepticism.
    Ever since the US govt started promising to save Fannie and Freddie (around mid-July of thi s year), the market is just not believing it. Shares of the two Government Sponsor Enterprises (GSEs) keep tumbling down. People are just plain skeptic that the deep-seated problems surrounding the two will be resolved easily, even with the government 'promise' to inject capital. Plus investors/market players generally believe that the way those the pair operates need to be reformed.
    Either you nationalize it, or privatize it. The latter could easily lead to a failure of both of them in a short time.