The thing that we were assured would never actually happen, happened: The U.S. government took mortgage giants Fannie Mae and Freddie Mac into conservatorship--a fancy way of saying that U.S. taxpayers are now on the hook for as much as $500 billion in bad debt.

Wall Street responded with relief and a rally of 2% in one day. How long-lived this rally will be remains to be seen. Wall Street has been nothing if not volatile this year: Up 2% one day, down 3% the next. Whatever happens next, expect to hear the phrase "Fannie and Freddie were just too big to be allowed to fail," lots of times in the coming weeks from all sorts of public figures as they pat themselves on the back and reassure a jittery public that this is absolutely the right move and it absolutely had to be done.

What you might not hear quite as often, if at all, is an explanation of precisely why it had to be done. Yes, part of it has to do with the size of Fannie and Freddie and the crisis in the financial markets, but pointing to that as the main issue actually begs the real question.

The real, $500 billion question, the one you probably won't hear batted around much is:

"Can the U.S. survive without Chinese money?"

No we can't, not for even a day.

The U.S. government is so dependent on constant infusions of Chinese money right now that if that single source of funds were to dry up, our government would experience such a severe shortfall it would shut down almost immediately. The financial pain we are currently experiencing would look like happy days, and the entire world would be thrown into a financial crisis so severe it would take decades, if not generations, to correct.

How can this be? We don't export all that much to China. Mostly we import cheap crap that fills our stores. China also provides the raw materials for the few manufactured items we do still produce here. Most of our steel now comes from China. Ditto fabric, computer chips, electronic circuits and car parts, and much more. But by far the most vital resource the U.S. receives from China is money.

The Chinese actually loan us most of the money we use to then buy their stuff. The recent tax rebate incentive package meant to stimulate the U.S. economy (by getting us all to run out and buy $600 worth of Chinese crap), was financed by, guess who? The Chinese!

China does not loan the U.S. money the way a bank loans money to an individual person. Instead, what China does is buy up U.S. debt in the form of mortgage-backed securities. China does this, not because China loves us so very much, but because, until recently, U.S. mortgage-backed securities were a great investment. The entire world widely assumed (until very recently) that U.S. homes only ever appreciate in value. Mortgage backed securities were a safe bet, and China made money buying them.

The fact that Chinese investment also allowed the U.S. financial system to function so that banks could extend credit to U.S. citizens and factories who then could buy up Chinese products by the ton, thus making a perfect economic circle, was frosting on the Chinese cake.

But when U.S. homes began to lose value at an alarming rate. so fast and so furiously that even 'good' loans held by Fannie and Freddie began to go 'upside down', the Chinese began to make nervous noises, and fear of a global slowdown began to spread.

The truth is, the U.S. had to bail out Fannie and Freddie not because Fannie and Freddie are too big to fail, but because the United States is too big to fail.

You might not hear it put exactly that way.

Yet.

http://hubpages.com/hub/What-Does-China-Have-To-Do-with-the-Fannie-Freddie-Bail-Out