Bloomberg reports that a former central banker with the Bank of China has made some dire statements about the GSEs:
BEIJING — A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China’s central bank.
“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” Yu said in e-mailed answers to questions yesterday. “If it is not the end of the world, it is the end of the current international financial system.”
“The seriousness of such failures could be beyond the stretch of people’s imagination,” said Yu.
Bloomberg adds ” He didn’t explain why he held that view.”, but it doesn’t seem too much of a stretch to figure this out, when the foreign banks hold several hundred billion dollars of GSE securities.
The unfolding credit crisis is really a box canyon. The large financial institutions are “too big to fail” and “too big to bail”. Letting them unwind would trigger a contagion that would bring down most of the large banks and investment houses, while bailing them out risks a collapse in the dollar and hyperinflation.
As Austrian economist O’Driscoll noted earlier this week in the Wall St. Journal, Washington Is Quietly Repudiating Its Debts.