In essence we already agreed to the bail out some time ago. Have you ever spent $17,000 on a car and asked the dealer what the warranty for the car "really meant"? Well, the Chinese spent $340 billion on agency debt and probably asked the same question at least once or twice. They live in a world of secret agreements with leaders, not transparent democratic arrangements. So when it comes to the U.S government decision, we're not just starting from scratch here. How many phone calls do you think Hank Paulson has received from the Chinese central bank since August 2007?
"Are you *sure* that paper is safe enough for us to keep on buying?"
We'll never know exactly what kind of verbal dance Paulson concocted in response, but just look at the resulting flow of purchases and the relatively slight mark-up over Treasuries over that period of time. The Chinese (among others) thought we were standing behind the securities, at least in any world-state short of federal government quasi-bankruptcy. (In fact Paulson is in a total bind once that phone call comes in. He doesn't have much incentive to just say "tough luck" and precipitate a crisis when otherwise no crisis is on the horizon.)
So should we try this: "Oh, is that what you thought? Guaranteed? Did we use that word? Sorry, try reading our signals better next time. We love you. Great job with those Olympics. And when it comes to those Treasury Bills, we really do still mean it. And don't forget to support us on Iran and North Korea."
And we pretend that we are the world's sole super-power who can do anything we want. It is bizarre that China has more influence on our policies than the USSR ever did.
Money is more powerful than guns! No wonder that Putin too is going the same route of flexing his petroleum riches.
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