In financial circles, discussion about the economy often is between people who believe that the federal reserve bank has power to control interest rates and inflation.

Arguments revolve around how fast the Fed should raise rates so as to hold down inflation without choking off business recovery.

For many, it is comforting to assume that the Fed actually determines interest rates and inflation and that the only question is how it should use this power. This reassures the nation that the government is in control.

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The principal flows in asset-backed securities in Q2 2004 were to finance real estate ($255.7 billion, net, in home mortgages and $64.6 billion, net, in commercial mortgages).

The principal source of this funding was the issuance of corporate bonds, mainly to foreign investors and life insurance pension funds. In other words, the trade deficit and long-term pension savings were the principal sources of this type of financing for the U.S. real estate market.

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The primary sellers of corporate bonds during the quarter were issuers of asset-backed securities, placing a record (net) $315.2 billion.

The principal buyers were foreign investors ($213.2 billion, net) and life insurance companies ($160.1 billion net). Also major sellers in this market were domestic households ($181.4 billion, net).

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