By John Brinsley and Rebecca Christie

Nov. 18 (Bloomberg) — China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries, as foreign investors sought the relative safety of government debt as stocks plunged 9.1 percent that month.

Total net purchases of long-term equities, notes and bonds increased a net $66.2 billion in September from $21 billion the previous month, the Treasury said today in Washington. Including short-term securities such as stock swaps, foreigners bought a net $143.4 billion, compared with net buying of $21.4 billion the month before.

China led all foreign official investors in September by posting a net increase in U.S. Treasuries for the sixth month in the past seven, bringing its total ownership close to $600 billion. Japan was a net seller of Treasuries for the fourth month in the past six.

“The details of the report paint a much more positive picture of cross-border investments than expected,” said Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. “China, along with others, is showing more demand than anticipated for U.S. assets.”

Economists predicted international investors would buy a net $27.2 billion of long-term securities in September, based on the median of seven estimates in a Bloomberg News survey.

China leapfrogged Japan, increasing its Treasury holdings by $43.6 billion to $585 billion, the report said. Japan, now the second-largest foreign owner of U.S. government debt, reduced its holdings by $12.8 billion to $573.2 billion.

China Demand

China’s ownership of U.S. government debt has doubled since July 2005, while Japan’s holdings are down from a peak of $699 billion in August 2004.

Foreign demand for Fannie Mae, Freddie Mac and other U.S. agency debt increased from a month earlier. Purchases of long- term agency debt totaled a net $6.2 billion, compared with net sales of $8.7 billion in August.

The Treasury’s figures include both agency debt and mortgage-backed securities and aren’t restricted to Fannie Mae and Freddie Mac bonds. Mortgage-backed securities of Ginnie Mae and corporate debt of the Federal Home Loan Bank System are also included in the report.

Stocks plunged and Treasuries rose in September as Treasury Secretary Henry Paulson negotiated for two weeks with Congress over a $700 billion plan to address the worst financial crisis in 70 years.
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The U.K., which through London acts as a transit point for international investors, especially those in the Middle East, bought $30.3 billion of Treasuries, bringing holdings to $338.4 billion.
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Now, one House Republican says that the government is trying to fix a problem that government created using the same ideas that actually created it. OK. He is not just any House Republican. He’s Ron Paul, congressman from Texas, former candidate for president, and a giant among supporters of limited government.

Congressman, good to see you.

REP. RON PAUL (R), TEXAS: Thank you. Nice to be with you.

PHILLIPS: Boy, a lot of drama going on, wouldn’t you say?

PAUL: Oh, yes, a lot of excitement. I wish it weren’t so serious and we could have a little bit of fun, but it is very serious. There’s no doubt about it.

PHILLIPS: Definitely. And my question to you is, this bailout plan, I mean, should the government even be stepping in? Is it lawmakers’ responsibility to bear the brunt of this?

PAUL: Oh, no, it isn’t. There’s a responsibility of government when there are problems like this. Sort of like after Enron, there was a responsibility, but the responsibility was assumed by the state of Texas. A lot of fraud went on, and the people who committed fraud ended up in jail. And the market dealt with the rest.

The company was essentially bankrupt. They had dealt with derivatives. And the company went bankrupt and the stock went to zero. So that’s a good way to handle it.

And Lehman Brothers was handled the same way, and there’s still some products left in Lehman Brothers. And it’s going to be bought up by stronger hands. That is the important thing, that the liquidation of that investment, bad debt, gets over with. The quicker, the better.

But when people make mistakes, it’s not the responsibility of the government to go in and buy these assets that have no value. But the mistakes were made because of so many contributing factors by the government, and particularly the Federal Reserve system.

PHILLIPS: Well, let’s talk about who really is at fault here. I mean, I had and a chance to interview an FBI investigator yesterday. His job basically is to investigate corruption on Wall Street. And he said look, there is no simply no oversight.

The SEC is not doing its job. Other commissions are not doing the jobs. Because when it comes to these high-powered companies, high-paid CEOs, and lots of money, that they are the ones giving big donations to the individuals that are supposed to be keeping an eye on them. And they just don’t want to touch it.

PAUL: Well, it shows that the system doesn’t work. So basically, the preemptive strike of a regulator essentially never works. It didn’t work to protect us against Enron, but the laws against corruption did work. I mean, they committed fraud and they were convicted.

So, I’m not a regulator. I’m a regulator due to the market, but not by bureaucrats who can be bought off.

PHILLIPS: So, Congressman, what do we do? If the answer isn’t regulators, how do you prevent this type of fraud and corruption, and an economic meltdown like the one we are seeing now where taxpayers are suffering tremendously?

PAUL: Well, they haven’t yet. They only suffer because the government has been too much involved in devaluing their currency, and now they want to devalue their currency more. So the most important thing is not to stick it on the taxpayer.

What we want to do is to get out of the way and let the liquidation of debt occur. We are unfortunately doing the bad things we did in the early 1930s. We wouldn’t allow the market to adjust.

Prior to that, we had recessions, but they were never long lasting. Now, since we’ve adopted this principle of regulation and trying to patch together inflated bubbles, it doesn’t work. It just prolongs the agony, and this is what we’re doing now. Instead of a quick correction, what we are going to do is have a situation that’s going to last not a year, but maybe a whole decade.

PHILLIPS: Real quickly, will we see a bailout plan signed off on before the next president takes office? What do you think?

PAUL: Yes, I’m pretty pessimistic, so I would say they’re going to pass it. Yes, they’re going to pass it. They’ve already spent $700 billion, and that’s a drop in the bucket. And they want another $700 billion.

They originally asked that it not be reviewed by any court. They’re very, very bold, and they’re socializing this nation and bankrupted this nation. They’re going to destroy the dollar before it’s all over if we don’t take this in hand.

PHILLIPS: Congressman Ron Paul.

Always interesting to talk to you, sir. Appreciate it.

PAUL: Thank you.