The Fed Bails Out China

By Reuters Staff
March 19, 2009

From the reader mailbag:

So far, all of the commentary I’ve seen has focused on Bernanke trying to reflate the economy and lower long term interest rates. That’s obvious enough. But it seems like the real story here, or the backstory, is that China has essentially exercised a put option on its US Treasury bonds.
Bernanke made the move a week after China’s premier said he was "worried" about his US investments, and, as Brad Setser has graphed, the US was already having a harder time placing new debt issues. Besides, if China gets the money now it can fund its stimulus package more easily.

This is a good point, although I’m unclear on how exactly geopolitical considerations can make their way into FOMC meetings. I can’t recall seeing such things explicitly — and in fact when Argentina had its currency pegged to the dollar, the US would reiterate regularly that the Fed would not consider Argentine monetary considerations for one minute when setting monetary policy for what was effectively Argentina’s currency.

But obviously China is a lot more important than Argentina, and equally obviously Ben Bernanke spends a great deal of time talking to Tim Geithner — who was indeed himself a voting member of the FOMC until very recently.

My feeling is that these considerations made yesterday’s Fed move easier to take, but didn’t really drive it. Still, I’m sure the Chinese are smiling right now, and that has to be a good thing for Sino-American relations more generally.

Update: Brad Setser responds.

Reprinted from Portfolio.com

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