ARTICLE: "Foreigners Buy Stakes in the U.S. At a Record Pace: Weak Dollar is Lure," by Peter S. Goodman and Louise Story, New York Times, 20 January 2008, p. A1.OP-ED: "Sovereign Wimp Funds: If they're so rich, why aren't they smart?" by Holman W. Jenkins Jr., Wall Street Journal, 23 January 2008, p. A24.
EDITORIAL: "The invasion of the sovereign-wealth funds: The biggest worry about rich Arab and Asian states buying up Wall Street is the potential backlash," The Economist, 19 January 2008, p. 11.
BRIEFING: "Asset-backed insecurity: Wall Street, the flagship of capitalism, has been bailed out by state-backed investors from emerging economies. That has people worried—for good reasons and bad," The Economist, 19 January 2008, p. 78.
America seems cheap right now, with rescue bucks flowing in faster to work our current crisis than anything the IMF could ever arrange. Somebody's crisis is another guy's bargain, and there's a wonderful balancing in that if you don't get too nationalistic.
There's no question that sovereign wealth funds (SWFs) do this now to protect themselves down the road (no one wants a U.S. recession) and to take advantage. But the larger function is very real too: this is how a rich country gets bailed out of a financial crisis. Bitch about it all you want, but tell me the alternative that beats it.
I know, I know. We need to spend less and save more. Stipulated. But how do you want the pain of that lesson transmitted?
As for getting scared of these funds, the fear remains misplaced. The same money could be used for military buildups and all sorts of scary or stupid stuff. Instead, it's being re-invested in America. Again, paint me the better alternative.
Yes, SWFs need a voluntary code of conduct and yes, transparency must be improved. As for new rules, I'm with The Economist: apply the same ones we've always had for big funds: certain industries (banks and defense) come with limits of ownership.
As for their big size, SWFs remain about 2% of the world's $165 trillion world of securities, and they're collectively tiny compared to the combined weight of the three heavies (insurance companies, mutual funds and pension funds). Yes, they will grow, and become financial heavyweights in their own way, and someday maybe they'll find not just the American Alaskan fund alongside them, but U.S. Social Security too.
For now, the bulk of the SWFs emanate from oil-rich countries (2.1T out of 2.8), but that just means those countries are financially diversifying, which makes a lot of sense. What oil country should keep all its wealth in oil? That's like having your entire pension with Enron.
Clearly, this evolution bears watching, but suspicions about SWFs being run for national reasons over financial ones will make their impact self-limiting—as in, that's a recipe for financial failure.
The Economist hits the nail on the head when it says, the real danger of SWFs right now is that they may trigger stupid protectionism instead of acceptance as yet another balancing mechanism in our increasingly globalized economy—something it's doing right now quite nicely.
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Comments (4)
It will be interesting if any of these investments trigger Exon-Florio provisions (became law as part of the Defense Production Act of 1950, as amended, in 1988 and further amended last year or two.)
If my understanding is correct the US is still the largest supplier of arms by sales and gifts to other countries. Somehow it seems that offsets and other production co-sharing need to be evaluated based on the overall foreign investment strategy of key US partners, enemies, or potential both etc. Basically who is minding the store? DOD, State, Commerce, DOJ? Probably no one. How dependent is DOD on foreign arms sales?
Posted by William R. Cumming | February 15, 2008 9:26 AM
It will be interesting to see how the presidential candidates on both sides handle the issue. Will they pander to a public who believes that SWF's are nothing but a way for those "foreigners" to take us over or will they try to convince the public that overall this is a good development.
Posted by Jeff | February 15, 2008 11:28 AM
it's better then a government funded bail out and quite frankly guys like Buffet, et al were offered to invest in many of the companies that SWFs came into before the SWFs came in and they didn't invest as the yield they want (need) didn't seem to be there. The SWFs are taking petro dollars and putting them into seemingly safe investments outside their countries. luckily they are also investing heavily in their own countries as well. this is a win win.
Posted by moishe | February 15, 2008 1:54 PM
After the crash of the stock market in 2000,and lost of 71/2 trilions
dollars in stock's value,Greenspan had to bring down the bank interest rate from 6%to 1%,in order to save the economy,and divert those money toward the housing marrket. he save the economy at the expense of another buble worth of $101/2 right now.clearly,the
burst of this housing buble and its impacts has to be seen, but one
thing for sure, the chief of the federal bank is in a bad spot, if he bring down the interest rate the dollar value is going to free fall, if he
keeps it the same we going to get full recession.we had two pervious situation,one in oct.1987,and the other in 1991-92,where
stock market and bank's stock value fell mostly due to fear.and the
FED bank was able to inject money and save them,but(always listen after the BUT),this time the loses are real and just injecting money won't do it.right now dollar value to euro is 63% down,we have to see the fall of dollar.remember Great Brittion Empire went down when the pound fell.
Posted by farhad | February 15, 2008 5:27 PM