The recent U.S. government takeover of Fannie Mae and Freddie Mac was greatly influenced by concerns expressed by foreign governments and central banks that have heavily invested in American capital markets. The continuing instability in the mortgage industry led many to fear that there might be a major selloff by foreign investors that could threaten a dramatic fall in the value of the dollar.

According to The Wall Street Journal, four of China’s largest banks had sold off or allowed to mature in the last several weeks $4.6 billion of Freddie and Fannie debt that they held, out of a total holding of $17.3 billion (down from $20 billion at the end of 2007).

With low domestic savings rates and huge federal budget deficits to fund, the U.S. economy has become increasingly dependent up foreign capital to cover government spending and to support private sector capital formation.

The table below shows the trend in foreign holdings of U. S. securities between 2002 and 2007, the period for which the last complete data is available from the Department of the Treasury and the Federal Reserve.

Out of the more than $9.7 trillion of U.S. securities held by foreign investors in June 2007, $9.1 trillion was in the form of long-term securities. Total security holdings by foreign investors grew by more than 125 percent over this six-year period. And the foreign holding of long-term U.S. Treasury securities increased by more than 116 percent in the period.

(Even over the financially troubled times of the last year, the Treasury Department reported in August that between June 2007 and June 2008, foreign holdings of short and long term U.S. government securities  actually increased by more than 8 percent.)

Foreign investment in U. S. agency debt (which includes Fannie Mae and Freddie Mac) expanded by 165 percent between 2002 and 2007. Foreign holdings of American corporate debt expanded by 142 percent during these six years.

As of June 2007, foreigners owned almost 57 percent of all marketable U.S. Treasury securities, and more than 21 percent of all U.S. agency debt. Foreign-owned corporate debt issued by U.S. companies equaled 24 percent of all such debt outstanding.

In comparison, all American holdings of foreign-issued long-term securities came to $6.3 trillion as of June 2007, or $2.8 trillion less than foreigners were holding of U.S.-issued long-term securities.

Out of the $9.7 trillion of foreign-held U.S. securities of all types, $1.2 trillion was held by Japan, $922 billion by China, $921 billion by the U.K., $740 billion by bank depositors in the Cayman Islands, $703 billion by depositors in Luxembourg, $475 billion by Canada, and $396 billion by Belgium. Middle East oil-exporting countries held $308 billion.

Out of long-term U.S. Treasury securities held by foreigners, Japan had $553 billion and China had $467 billion. Middle East oil exporters held $79 billion.

Europeans held 43 percent of all foreign-owned long-term U.S. securities, followed by Asians holding 24 percent of the total, as of June 2007.

Whatever the consequences may be from the federal government’s formal takeover of Fannie Mae and Freddie Mac, America’s dependency on foreign investment has clearly been a major factor behind this policy decision.

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