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U.S. rescue relies on other nations(Milwaukee Journal Sentinel, The Via Acquire Media NewsEdge) Oct. 12--As fear turned to panic on Wall Street, the federal government rushed out a string of programs to prop up the nation's financial system -- at an eye-popping combined cost of more than $1 trillion. The bankers who will underwrite the rescue effort, however, are nowhere near Wall Street. They are in Japan and China, Great Britain and Saudi Arabia. "We have to borrow from overseas," said William Holahan, chairman of the economics department at the University of Wisconsin-Milwaukee. "The Chinese are more than willing to do that, which is the good news. The bad news is that we have to pay that back some day" -- with interest. Washington's two most powerful economic institutions, the U.S. Treasury and Federal Reserve Bank, have issued rapid-fire crisis loans and cash infusions over the past month to shore up mortgage giants Fannie Mae and Freddie Mac, to rescue insurance giant American International Group, and to take billions of dollars in bad mortgage securities off the balance sheets of the nation's banks, among other moves. How much the emergency measures ultimately will cost is impossible to predict. The biggest move to date -- the Treasury's $700 billion authorization to buy toxic mortgage-backed securities and other liabilities from private-sector banks -- could even turn a profit for the government if the distressed assets regain their value, at least in theory. But for now, the money has to come from somewhere, and since January 2001, 80 cents of every dollar of new Treasury borrowing has come from foreign investors, according to the nonprofit Concord Coalition -- often through purchases of U.S. Treasury bonds. The plan to buy distressed securities from banks comes with a provision to increase the national debt ceiling by $700 billion. That authorization does not cover most of the other programs, such as the Treasury's pledge to cover $200 billion of any losses that could emerge at Fannie Mae and Freddie Mac. Nor does it cover the $25 billion loan package to help Detroit's three biggest automakers, which lawmakers threw into the legislative melee. "Of course, it's all being borrowed," said U.S. Rep. Paul Ryan (R-Janesville), the ranking Republican on the House Budget Committee. So to fund all those massive programs, the trick is to reassure China, Saudi Arabia and other foreign lenders that the United States remains creditworthy, said Mike Knetter, dean of the Wisconsin school of business at UW-Madison. The United States cannot succeed unless it gets a handle on a far deeper debt problem, Knetter said. Debt permeates nearly every layer of American society, from consumers with record credit card debt this year, to the home loans given to people without the means to pay, to the federal government, which is about to report a record deficit for its most recent fiscal year. In fact, the debt clock near Times Square in New York, a tourist attraction since 1989, ran out of zeros last week when the national debt, which is the accumulation of each year's budget deficits or surpluses, topped $10 trillion. "Ironically, we're being asked to believe that creating more debt in the short term is the solution to our current indebtedness problem," Knetter said. "These problems emanated from over-consumption and lax lending standards." The nation needs to "de-leverage," or stop living beyond its means, Ryan said. But he added a caution: "It's dangerous to de-leverage in a contracting economy." Many Chinese already have an opinion of the United States, Ryan said Friday. "They think we're spenders, that we are the free-ride culture, that we can have the vast boat and the better house. Our government kind of acts like that," Ryan said. "We are too much of a debt society -- as a people, as a culture, as a government." The new borrowing is preprogrammed to further strain Washington's budget, Ryan and some economists say. Even without the credit crisis, the U.S. already faced a renewed budget crunch as baby boomers reach retirement in growing numbers, inflating the costs of the nation's three biggest domestic budget programs: Social Security, Medicare and Medicaid. Such heavy reliance on foreign loans bears risk. "If the wrong people get too much leverage over us, they can use economics as a weapon," Ryan said. Commenting on the impact of high debt on global bond and dollar traders, he also said: "It will hammer the dollar, reduce our credibility (abroad) and increase the cost of borrowing." New York City Mayor Michael Bloomberg, a billionaire bond trader turned politician, warned last month that a "next wave" of financial pain might come from overseas if foreign entities stop buying U.S. debt. "The U.S. will lose its status as the superpower of the world financial system," Germany's finance minister, Peer Steinbrueck, told a crisis meeting of the European Union last week. "The financial crisis is above all an American problem." World leaders urgently need to build an international financial order "that is not dependent on the United States," according to a commentary last month in a leading Chinese government newspaper, the People's Daily. That commentary, written by a professor at a major Shanghai university, followed the collapse of Lehman Brothers Holdings Inc., an event that Ryan said had caused a panic among Chinese investors. So far, America's bankers abroad have been cooperating. Japan, Washington's traditional ally in Asia, has amassed the largest share of foreign-owned debt with U.S. Treasuries worth $593 billion. But China is catching up with $519 billion, making it the second-biggest owner of America's debt as of July, according to the latest numbers from the U.S. Treasury. "The Chinese are anxious to loan us money so we can continue to buy their commercial goods," a policy that has lifted hundreds of millions of Chinese out of squalor and into factory jobs, Holahan said. Oil-rich states also became big buyers of U.S. debt. The Treasury tracks a 15-nation bloc of oil-exporting nations like Saudi Arabia, Iran, Kuwait and the United Arab Emirates, which collectively own $174 billion of America's debt, making that group the fourth-biggest lender to the United States, behind No. 3 Britain ($291 billion). Still, nobody at home or abroad can talk about final costs of the U.S. rescue plans. One of the first quandaries for the Treasury is how to affix a value to the exotic mortgage-backed securities and risky loans it will be buying. "The interests of the taxpayers are carefully protected under this program," Fed Chairman Ben Bernanke said Tuesday. "The Treasury will be a patient investor and will likely hold these assets for an appreciable period of time . . . In the long run, the taxpayer may come out either ahead or behind in this process." Some losses, however, appear unavoidable, according to a report issued by Ryan's staff at the House Budget Committee. If the Fed sustains losses from its $29 billion loan guarantee to arrange the sale of the Bear Stearns investment bank to JPMorgan Chase, "the Federal Government would incur those losses," the committee report said. Separately, it found: "The Treasury's actions to rescue Fannie and Freddie will have a cost to the taxpayer." Regardless of the ultimate costs, the stakes were too dire for the Fed and Treasury to withhold any options, Ryan said. "We were looking into the abyss of a massive crash," he said. The New York Times contributed to this article. To see more of the Milwaukee Journal Sentinel, or to subscribe to the newspaper, go to http://www.jsonline.com. Copyright (c) 2008, Milwaukee Journal Sentinel Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |