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US to China: Buy Mortgage-Backed Securities


Tags Global EconomyMoney and BanksCapital and Interest Theory


As the mortgage-backed securities market meltdown accelerates, Bloomberg reports U.S. Urges China to Buy Mortgage-Backed Securities. According to the article, China buys some but not a lot of these instruments.

The unfolding crisis in this sector is driven by a higher-than-expected default rates forcing a mark-to-market of securities whose value had previously been determined solely by mathematical models based on overly-optimistic assumptions (see: Investment Landfill; also Garbage In, Carnage Out ($), and The Poison in Your Pension). As banks and funds are being forced to liquidate the lowest tranches of these securities, they are finding that the market prices them in some cases a few cents on their dollar of their theoretical price.

Who better to absorb this pile of garbage than the Bank of China? In order to maintain its currency peg, it must "invest" hundreds of millions of dollars per year in US Securities. Worthless MBS would make a nice addition to its vast holdings of US Treasury Debt.

Robert Blumen is an independent enterprise software consultant based in San Francisco.

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