Don’t fear the SWF reaper?
posted at 10:05 am on March 25, 2008 by Ed Morrissey
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Liz Peek offers that advice to those concerned about the effects of sovereign-wealth funds in the American economy. She castigates Treasury Secretary Henry Paulson and other federal agencies for passing new rules on the use of SWFs, arguing that our economic performance hardly qualifies us to dictate terms to those nations looking to diversify state funds in the US. Peek offers a multicultural future in Arab states as a potential goal, but neglects to mention the lack of profit motive and the potential for mischief by SWF managers:
Treasury Secretary Paulson, the International Monetary Fund, and the Organization of Economic Cooperation and Development are all busily establishing “rules of conduct” for sovereign wealth funds. They want to be sure that their owners, who have poured more than $60 billion into American and European financial services companies over the past 14 months, do not attempt to use their investments for political purposes.
Honestly, can’t you just imagine the managers of the Abu Dhabi Investment Authority or the Singapore Investment Corporation sitting around having a pretty good chuckle over this? The sovereign wealth funds have bailed out any number of leading financial institutions — banks and investment banks including Citigroup, Merrill Lynch, and UBS — to the great relief of American shareholders, and we are dictating the rules to them? Good grief.
The sovereign wealth funds will accede to the guidelines being promulgated here and abroad because they want to continue to diversify their economies away from oil, the source of most of these entities’ riches. These organizations clearly regard their oil reserves as a gift to be enjoyed not only by the current generation but also by generations to come. Their ambition is to diversify into other currencies, other industries, and other regions, in order to safeguard that future. The key word here is future.
The problem is exactly what Peek classifies as features. Bailouts of American trading and lending institutions by foreign investors would cause worries in any case, but these aren’t just foreign investors. The SWFs that bailed out Citigroup and UBS are essentially foreign governments, which now have a great deal of control over American economics. That’s what makes this different from the Japanophobia of the 1980s, when the nation got far more concerned over private investment than this state-run intervention from abroad we see today.
Americans could rely on rational, profit-motive behavior from private investors. Peek says we can rely on SWF managers to behave in the same way, but not necessarily so. Governments may seek profit in the marketplace, or they may seek other outcomes based on their own foreign policy. They can absorb losses in the market simply by increasing taxes, or in the case of petroleum-based economies, pumping more oil. If they decide that crashing the American market, or even just depressing it, is in their national interest, they have the means to make it happen.
Why would they do that? Perhaps they would see that as an advantage to keep the US from certain initiatives, especially costly ones, in the war on terror. Maybe they would want to see us at an economic disadvantage on trade. Certain nations may see an advantage in building a controlling interest in a vertical market such as health care or telecommunications — or credit and lending. Some would have the financial means for such ambitions. What’s key is that profit is not a primary or even secondary motivation, potentially leaving the markets open for irrational and destructive behavior.
Paulson and the federal regulators are correct to take a close look at SWFs and to restrict their access to the markets. Perhaps the caution will prove unnecessary, but it seems odd that nations who do not recognize private property rights should become major players in open markets without anyone questioning their motives.
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I’m not an economic geek, but all I can tell you is:
Sell your companies or give a large share to other nations, you lose your sovereignty.
It is as simple as that.
No matter how much trouble we’re in, no patriot should sell his country.
But we don’t live in a perfect world.
Europe sold and is selling many of its businesses to the Arabs and the Asians. They are losing their way of life gradually.
America doesn’t seem to learn from others’ mistakes.
I guess it’s human nature.
People are stupid.
Indy Conservative on March 25, 2008 at 10:14 AM
Heh, when I first read the headline, I thought this was going to be an blog about how beta-males should not fear single white females.
CarpeCanis on March 25, 2008 at 10:20 AM
Me too, I thought it was about Star Wars Forum and Darth Vader.
Indy Conservative on March 25, 2008 at 10:28 AM
I’m not that worried about foreigners owning American companies. Europe has problems of a socialist and immigrant nature. At least our immigrants don’t seek the destruction of western civilization and the establishment of the caliphate. Okay, maybe a few, but not enough.
Your Jewish Master on March 25, 2008 at 10:31 AM
The only way these SWFs make any sense is if you like the idea of globalization. Besides, why on earth would anyone want to mess up our economy?
blankminde on March 25, 2008 at 10:32 AM
Why not let someone buy a US company and tank it on purpose? They first have to hand all the cash over the mostly American investors, and then they can lose the money all they want. Let American entrepreneurs do what they do best: creating entirely new products, services and companies. No one has venture capital activity like the US. Let the foreigners come in and pay top dollar for the new company, while the Americans go and create another company to put the old one out of business.
We’ve ridden globalization to
Clark1 on March 25, 2008 at 10:57 AM
Keeping political influence at bay from foreign states- that are trying to weaken or injure the U.S.- is the main concern.
Understanding their ideological target is fundamental.
The “Muslim nations” have the goal of global dominion under Islam.
Anything to stop that should be our aim.
profitsbeard on March 25, 2008 at 11:01 AM
Sigh… the Administration is clueless…
Lets see, we have a huge trade deficit, which means wealth is being exported to other countries.
As it takes a certain amount of wealth to run the economy, the Government lets in foreign investment…
Therefore, other countries are using our own Trade Deficit (especialy the one from high oil prices) to BUY American companies. Continue this long enough, and they will begin to have enough power to impact how companies operate.
And yet, our own government won’t let us drill into some of the largest oil reserves in the world (sands and shale, Anwar, Florida coast)… while allowing folks we should not trust more power in America (Saudis anyone?).
I understand the aims… to make it so THEY have a vested interest in America being healthy… problem is that we are expecting them to act with OUR cultural imperitives… somthing they have shown time and time again, that they will not do.
Romeo13 on March 25, 2008 at 11:06 AM
Not really, total SWF investment is very small and our markets could easily absorb their selling if they chose to do it all at once. But I imagine the Singaporeans and Saudis have different motivations so a coordinated attempt to crash our market is not likely. Besides, if they wanted to put pressure on our markets the best way would be to set up hedge funds and then to sell large amounts of S&P 500 futures. Much more liquid and effective with the leverage that futures contracts give you.
Our biggest fear should not be SWF but rather the rolling crisis in housing which continues to put deflationary pressure on our economy.
Bill C on March 25, 2008 at 11:20 AM
I can buy housing being a bigger potential danger to our economy. Makes sense. Interceding on behalf of irresponsibility makes no sense at all though. We focus on the problems we can affect so we’re worried about foreign investment with political motivation. If Americans want to be idiots with their money there’s nothing we should do about it. The dollar drops, the market eventually recovers, and we hopefully build on more solid ground. Idealism…
blankminde on March 25, 2008 at 11:37 AM
More chickens coming home to roost. Like developing communist 3rd world economies, we could put limits on foreign ownership in our “joint-venture” companies. Once we’ve accumulated their technical know-how, perhaps we can emulate their success and move forward towards capitalism, and even own our industries outright. If they get too uppity, we could always nationalize.
LMAO!
JiangxiDad on March 25, 2008 at 11:51 AM
Aren’t state employee pension and retirement systems such as CalPERS basically sovereign wealth funds for leftist causes?
CalPERS has about 250 billion in assets. It can take poor, public assistance Joe and turn him into rich, investment political party funding Joe overnight merely by adding him to the investor pool that controls money and earns commissions from those moves.
The SWFs for nation states don’t nearly alarm me as much as the ‘SWFs’ that exist in the United States.
gabriel sutherland on March 25, 2008 at 11:54 AM
Islam is an organization that has always fed off the work and blood of other cultures. SWF’s as an eventual replacement for oil revenue, feeds that Muslim need to make money with others labor.
It’s financial Jihad.
BL@KBIRD on March 25, 2008 at 12:10 PM
What does Islam have to do with SWFs in Singapore and China?
gabriel sutherland on March 25, 2008 at 12:18 PM
‘Islam is an organization that has always fed off the work and blood of other cultures’
Ha ha… and that makes them somehow unique when compared to our own or Europe’s historical business practices? All economies like to do bad things when they can get away with it and I dare you to name one culture that doesn’t or hasn’t.
I agree that there should be limits placed on investments made by state controlled entities. It’s pretty simple. Where I think it might be a little more complicated is where the entity is owned by the state but managed independently by professionals.
lexhamfox on March 25, 2008 at 12:42 PM
I’m not saying it is right or wrong but this is the thinking of the gov:
We can not continue to transfer 500 billion a year in wealth out of the country in the form of oil purchases. add into this mix the transfer of welath to import countries like China and we have on our hands a problem. In fact a big problem. When that wealth leaves our shores to pay for our gasoline and the junk we increasingly make in China, Asia etc our country faces a deflationary event to make others look harmless. therefore the government thinks that if we can have a large portion of that wealth transfered back into this country in the form of “investments” then the problem is solved without having to do anything about trade, oil dependence etc. This in a nut shell is the New World Order. add into the mix the free flow of labor. and within a generation the poverty problem of the world will be fixed. the poor of the world will increase their standard of living, the rich middleclass will decrease their standard of living and the superrich will rule them all. the masses will be fat, dumb and happy and the elite will have the power. Borders will be a thing of the past and wars will be regulated to history.
To me this is fantasy that fails to understand the human condition and human history. but to the elite it is sensible.
unseen on March 25, 2008 at 12:57 PM
Time to rebalance my portfolio.
Kini on March 25, 2008 at 1:00 PM
We can not continue to transfer 500 billion a year in wealth out of the country in the form of oil purchases
unseen on March 25, 2008 at 12:57 PM
I hear the point, and the concern. For perspective, please remember that the U.S. GDP in 2007 was 13-14 trillion, so the 500 billion you cite is, what, 4% of GDP? It’s a lot of money, just not a significant percentage of our total economy.
Also remember that food & fuel prices are certainly increasing, but if you look at historical trends, they remain a smaller percentage of household budgets than historical averages.
cs89 on March 25, 2008 at 1:38 PM
cs89 on March 25, 2008 at 1:38 PM
that 500billion is on top of the imports we have coming from China, Asia etc.
With a 700billion trade imblance we will transfer in 10 yeras time 7 trillion in wealth from this country to the rest of the world. While this is good I think when it comes to poverty etc. It is bad if that wealth is being turned against us by our enemies. Just because we as a country pray to the almighty dollar does not mean all countries will have the same prayers. If they have a higher reason for their money than just to make more of it than we are in big trouble within a generation.
As a side note what would that 7 trillion build in this country? That’s 2.5 years of the federal budget. Could we not use that wealth in this country?
unseen on March 25, 2008 at 1:48 PM
Our trade deficit would be a minor issue if we increased energy production in the United States. However, to do so would disengage the United States from many corners of the world. We’d still maintain interests in global energy production as it relates to our allies, but for our National Security if we’re producing enough energy for the country domestically, we could really press for more meaningful reform in a lot of hotbed geographic areas in the world.
Look at the Israelis. They risked everything to steal nuclear energy secrets because they knew it was vital to their future. They had to have nuclear energy based on what other options are available to them.
gabriel sutherland on March 25, 2008 at 2:39 PM
unseen on March 25, 2008 at 1:48 PM
Again, I hear your point. This is a lot of money. I don’t know all the figures, but let’s use your 700 billion trade imbalance. Even if you assume 1 trillion going overseas, that leaves well over 10 trillion in GDD that doesn’t. Whil the 7 trillion you cite may transfer out over 10 years, the other 100+ trillion in GDP doesn’t.
It’s a lot of money, it can be a problem. However, we still have a robust economy which is the economic powerhouse of the world. A country with, say, 3 trillion invested can cause us significant problems. Our country, with a 10-15 trillion GDP can overcome these problems when properly motivated.
cs89 on March 25, 2008 at 2:42 PM
cs89 on March 25, 2008 at 2:42 PM
Understood. that is the problem though. the “leaders” of the USA and Western civilization see the same numbers and come to the same conclusion. It is small compared to our output. However to these countries it is large and will enable them to do things that before where just a small dream in thier minds. for instance the transfer of wealth from the USA to China while small for us has enabled China to build up its military to a point that it is a very real threat to that aera of the world. The wealth transfer to the middle east as enabled some players like Bin Ladin to wage a global terror and islamification campaign. Again the amounts to us are small but to the poor the amounts are great. I think we are underestiamating our enemies because of the difference in prespective that we have. In the USA 50million while large does not buy you much. whereas 50million in say Africa can buy you alot of friends.
We as a nation should have our own SWF and start buying key industries in places like Russia, china etc. oh wait….we aren’t allowed to do that. Wonder why?
unseen on March 25, 2008 at 4:28 PM
OMG! The economic crap being spewed in the comments here is making me furious!!!
I’m only going to comment on one thing so I don’t have to start breaking things in my apartment.
A trade deficit is NOT “transferring wealth”. When we buy something from China, they get money, we don’t. But money is not the only form of wealth! The goods that we bought are also wealth. In fact, we consider the goods received to be MORE VALUABLE than the money we paid for them. If they weren’t, why the hell would we have bought them in the first place?
</fury>
viking999 on March 25, 2008 at 8:09 PM
viking999 on March 25, 2008 at 8:09 PM
Just because people are stupid enough to part with their wealth for cheap, posioned crap does not make that cheap crap more vaulable than money. Yes a trade deficit is a transfer of wealth. If it was not it would not be a deficit. If we were trading the same amount of goods we would have a trade balance. imports would=exports. It does not so we have a net transfer of wealth from this country to other countries.
unseen on March 25, 2008 at 8:35 PM
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