De facto foreign policy

The New York Times today reports that Asian stock markets rose two to four percent after the U.S. Treasury's announcement that it was transferring control of Fannie Mae and Freddie Mac to conservatorship. While a defensible domestic intervention to prop up Freddie Mac and Fannie Mae in a down economy and a severely wounded mortgage system, the U.S. government's decision to take over the mortgage giants is, in fact, de facto foreign policy. It is de facto foreign policy because this seemingly domestic policy has the unintended effect of subsidizing foreign central banks' investments in dollar-denominated bonds. Inadvertent foreign aid certainly is not good foreign policy (regardless of the domestic soundness of the recent government move)!

Due to the lack of financial discipline by the Bush administration, which is fighting two wars and cutting taxes at the same time, the funds must come from somewhere. Enter Asian central banks like People's Bank of China. These banks are much too integrated with the U.S. financial debt structure for their good and for our good.

The Asian central banks know that this is not a particular good time to ride the tides with the U.S. economy, yet they are addicted to cheap money and competitive markets for their exports. What about the U.S.? We rely on Asian and other foreign funds to fuel the ever growing national deficit and consumer indebtedness. The size and distribution of Freddie Mac debt holdings is case in point. The same article reports that "while central banks around the world have historically accounted for a quarter of purchases of Freddie Mac debt, their share rose to 37 percent for debt issued since 2006... The bulk of those purchases appear to have been by Asian central banks, which have been buying dollar-denominated securities at a record pace to slow their currencies' rise against the dollar and thus preserve the competitiveness of their exports." NPR's Morning Edition suggests that the U.S. is in a bind because who else would "recycle Americans' dollars" to feed our appetite for more "things we can't afford."

Even in our interconnected world, it is worrisome when American domestic policies become foreign policies by default rather than by thoughtful design.