Remember Sovereign Wealth Funds?

An interview with Representative Jim Moran in the National Journal reminds me that we haven’t heard much about sovereign wealth funds recently.  These are the large pools of money (in foreign currency) that were created as a result of large cumulative current account surpluses in some parts of the world (e.g., oil exporters, China, Singapore).  They were quite controversial back in mid-2007, with concerns being raised – by Congress and others – regarding various aspects of their operation.

There are still some issues around the lack of transparency of these funds, although a great deal of progress on this dimension has been made (including in and around the IMF) and we learned to worry more about black boxes in other parts of the financial system.  But these funds might be coming back as a discussion item; for example: can they, should they, would you want them to, invest in US banks to help speed a turnaround?

Personally, I think the underlying current account surpluses are going to fall – this is one likely implication of the decline in world trade for next year that the World Bank is forecasting and the counterpart of what must be an increase in US savings (and thus a fall in our current account deficit).  The accumulated stocks, in the form of sovereign wealth funds, will remain but they are no longer on explosive growth paths and this should take most of the edge off the conversation.  But how open the US remains to various kinds of capital flows – and on what exact terms – will be a prominent issue on the Congressional agenda as we move into 2009.  We do, after all, want people to buy the debt we will issue to fund the fiscal stimulus.

2 responses to “Remember Sovereign Wealth Funds?

  1. I think the US would not be receptive to the SWF, bulk of which is in the Middle East, China, and Russia – all huge exporters. A while back, CNN ran a brief story about the real estate in Manhattan being owned by Middle Eastern giants.The passersby that CNN interviewed were very apprehensive. Now, when you are dealing with issues of national security (Dubai ports deal fiasco was a part of this)and then of wide ranging general consumer sentiment in today’s financial collapse, things are going to be brought up in media a lot (such as the TV drama of auto bailout – if it was a regular issue, it would be unknown but now the whole world knows about auto bailout). When, this happens, I feel people are going to really dislike the idea.

    The best tactic would be to gradually start the process of using SWF so that public get acclimated. The timing today is very wrong for broad SWF use.

  2. While we are examining SWF transparency, it might be healthy and worthwhile to also question the Fed’s transparency in handling the financial crisis. After all the Fed is literally acting as a Sovereign Wealth Fund that has taken on all kinds of “toxic securities” in exchange for treasuries. Yet when Bloomberg asked the Fed for information on the collateral on its balance sheet under the Freedom of Information Act, the Fed said that it would be a “dangerous step” to release any such information. With such a response, does the Fed have any more credibility than the venerable Bernie Madoff?