Foreign Investment in U.S. Securities
Abstract
Foreign capital inflows are playing an important role in the U.S. economy by bridging the gap between domestic supplies of and demand for capital. In 2008, as the financial crisis and global economic downturn unfolded, foreign investors looked to U. S. Treasury securities as a "safe haven" investment, while they sharply reduced their net purchases of corporate stocks and bonds. In the first two quarters of 2009, foreign capital inflows dropped sharply, reflecting an increase in savings by households and businesses and a continued decrease in U. S. liabilities to foreigners reported by U. S. banks and securities firms. Foreign investors now hold more than 50% of the publicly held and traded U.S. Treasury securities. The large foreign accumulation of U.S. securities has spurred some observers to argue that this large foreign presence in U.S. financial markets increases the risk of a financial crisis, whether as a result of the uncoordinated actions of market participants or by a coordinated withdrawal from U. S. financial markets by foreign investors for economic or political reasons. Congress likely would find itself embroiled in any such financial crisis through its direct role in conducting fiscal policy and in its indirect role in the conduct of monetary policy through its supervisory responsibility over the Federal Reserve. Such a coordinated withdrawal seems highly unlikely, particularly since the vast majority of the investors are private entities that presumably would find it difficult to coordinate a withdrawal. The financial crisis and economic downturn, however, have sharply reduced the value of the assets foreign investors acquired, which may make them more hesitant in the future to invest in certain types of securities. As a result of the financial crisis of 2008, foreign investors curtailed their purchases of corporate securities, a phenomenon that was not unique to the United States.
Document Details
- Document Type
- Technical Report
- Publication Date
- Nov 18, 2009
- Accession Number
- ADA511440
Entities
People
- James K. Jackson
Organizations
- Library of Congress