I already explained it. The effect was made when the money came here. By buying so many Treasuries, the yields went way down, and asset bubbles were created. There is a misunderstanding that the FCBs are just buying Treasuries. But in truth, their purchases of mortgages (Fannie Mae GSE kind of stuff and MBS) exceeds the Treasury purchases. The growth in the financial sector rose from 4% of GDP in 1980 to 71% by early 2002 (I don’t know what it is today). The Flow of Funds report shows all this. Federally related mortgage pools have grown from $114 bil in 1980 to $3 tril in 2002. In 2002, mortgage-related securities issurance totaled $1 trillion in just the first half of the year, an increase of over 50% from the same period in 2001.
So that money is hot, hot, hot, and it alone is responsible for our big stock market gains since early 1980, and the asset bubbles fueled since then. The bonds that were purchased are used by businesses and governments to provide services, and their purchase affects the interest rate of those bonds.
As of 2002, Treasuries were the 4th largest category of total credit market debt. The 3 bigger ones are financial sector, non-financial corporate business, and the household sector. The FCB dollars are going into about 26 categories of credit markets, working to make easy money for us to buy stuff, for corporations to buy each other out. Check Flow of Funds, Table L.1.
So the question remains what happens when the FCB divests its US assets. It will have the effect of credit contraction, and devaluing the dollar and US assets. Imagine the stock market really falling when those foreigners sell their US stocks.
So when we ask who is to blame for the housing bubble, don’t blame realtors or lenders. Blame the US consumer for spending more than producing, because the result is that a bunch of countries ended up with hundreds of billions of dollars that they needed to find a home for.
