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One of the outcomes of this deficit is that other countries hold substantial reserves of US dollars. These countries their governments and their banks have therefore had a need for dollar denominated securities in which to invest. As treasury securities became increasingly scarce throughout the past decade, these foreign investors moved to the next best thing. In this case, that appeared to be AAA-rated mortgage-backed securities. As a result, foreign investors became exposed to risk in the domestic US housing market. When that market collapsed the securities were far from having genuine AAA strength a wide number of foreign institutions lost money

Under normal circumstances, with minimal international capital flows, US banks would have borne the full impact of the MBS market. Foreign institutions would have had little ability to purchase these securities. Indeed, they have been forced to sell their excess dollars, reducing their nations currency exchange advantages, bringing global capital flows back towards equilibrium......

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