Can someone please explain the financial crisis and the debt that US has in china to me?

or you can just give me a link to an article.



i'm a little behind in politics and economics. thanks.Can someone please explain the financial crisis and the debt that US has in china to me?First, how the financial crises developed:

A fifth of all mortgages were taken out by the weakest borrowers after the US Government started promoting home ownership of minorities and low income consumers in 1999.

On average, the mortgages were issued on 95% of the value of the underlying house.

Half of the mortgages did not require proof of the borrower鈥檚 income (Example: 鈥楴inja Loans鈥? No Income, No Job, No Assets)!

Such mortgage loans were bundled and sliced into tradable debt instruments.

The quality of these instruments was rated by credit rating agencies which were paid by the issuer of the instruments and had therefore an incentive to overrate the quality of these debts.

During all this time the US Federal Reserve Bank kept the interest rates low which made it easy even for weak borrowers to pay the interest on their mortgages.

When the interest rates finally started to raise, the whole system collapsed.

The borrowers could no longer afford to pay the interest on their mortgage, their houses were sold below the value of the mortgage on the property, pushing the real estate prices down.

Banks and financial institutions suffered massive losses on their mortgage portfolio and had to stop lending money to the economy. Thsi turned out to be so bad that the governemt had to intervene to recapitalize the banks.

As a result of the banks being unable to lend, there was less cash in the economy, consumers and companies could no longer spend as much, resulting in the current recession.



Second: the US debt held by China:

China is an export economy. That means they export more than they import, generally because their production costs are lower than in the US. In order to pay for the exports from China a buyer in the US has to sell US $ and buy the Chinese currency, Renmenbi (RMB) because he has to pay the price of the goods that he buys in China in local currency. This means that the demand for RMB is increasing and the price of the Chinese currency, i.e. the foreign exchange rate RMB per US$ would increase as well. The Chinese government does not let the Chinese currency float freely, they control the exchange rate. That means they have to intervene in the foreign exchange markets and buy US $ and sell RMB to maintain the value of their own currency at a predefined level. As a result, the Chinese government ends up with a huge amount of US$ currency reserve (approximately 1,953 billion US$) which they need to invest. They mostly buy US Treasury Bonds which makes China the largest holder of US Treasuries, holding about 768 billion US$, considering the total amount of the national debt of the US held by the public which is about 6.9 trillion US$.Can someone please explain the financial crisis and the debt that US has in china to me?At the very highest level, expansions and recessions are based on the expansion and contraction of debt. The roughly 25 year worldwide expansion that ended in 2007 was especially long, steep and involved an especially large amount of leverage. Therefore it is not surprising that the contraction of 2008-09 would be especially steep and long also.

Chinese institutions hold 10-15% of US public debt.Can someone please explain the financial crisis and the debt that US has in china to me?China is practicing mercantilism, similar to 18th century Britain and Kaiser's Germany, to rapidly monopolize industrial production. They know that them buying US debt allows US to continue its unhealthy lifestyle and weakens US. Steady return from debt's interest allows China to stock up on gold and buy natural resources abroad. The symbiotic relationship cannot be ended rapidly and it's in china's interest to prevent US default on its debt.