Regulating sovereign wealth funds: does the US have any leverage?
Bob Davis’ Wall Street Journal article – which reports that the US Treasury is pushing Singapore and Abu Dhabi to increase their transparency and to signal that their funds will be managed commercially as part of the IMF’s effort to develop best practices – has prompted a flurry of online commentary.
Both Felix Salmon and Yves Smith doubt that the US has any real leverage over the sovereign funds.
Felix highlights the meaning of the term sovereign: sovereign funds are not accountable to any government other than the government of the country that is sponsoring them.
"Sovereign" means it’s not up to anybody else what you are or are not allowed to do.
Yves, echoing Zachary Karabell, argues that the debtor – and in today’s global financial system the US is the debtor – cannot set the rules of the game, but rather has to accept a global financial system defined by the creditors. He writes:
Consider the elements of fantasy at work in this discussion over these efforts to set guidelines on SWF investments:
1. We are pretending that a large stake in and of itself won’t lead to influence
2. We are pretending that we have negotiating leverage in this matter. We don’t. We need the dough desperately. Unless we get our saving rate up to make ourselves more independent (which will almost certainly lead to a recession or a very prolonged period of low growth), we are in no position to place restrictions on capital inflows (except now and again, for show)
3. We are pretending that any commitments made are meaningful. Let’s say the SWF decide that it’s politically expedient to play nice and agree to certain measures, like allowing for a certain amount of transparency and publishing their fund objectives, which will of course be to earn a certain level of financial return and will have nothing to do with getting access, say, to resources or technologies. First, there is no way to make the funds conform to their statements. Second, even if the funds are completely sincere when they make these representations, a change in leadership can lead them to repudiate their former policies, after they have acquired substantial positions.
So these negotiations are really theater for the benefit of the American public.
In my view, both understate the United States’ leverage.
Sovereignty cuts both ways.
The US cannot force Abu Dhabi to reveal the size of its fund. But if the US wanted to publish a publicly available estimate of Abu Dhabi’s fund, I suspect it could. It is a sovereign country, after all. And, for what it is worth, I would bet ADIA has significantly less than the commonly cited $900b figure, which I think originated with Morgan Stanley. The US could also publish an estimate of the GIC’s size.
The US cannot require sovereign funds to invest in certain ways. But it can regulate the type of US assets sovereign funds can buy. In fact, it already does. Certain parts of the US economy are off limits to any large foreign investments. Media companies for example. No sovereign fund could buy a controlling stake in say Boeing. CFIUS wouldn’t allow it. Those restrictions could be far more intrusive. The US could pass a law mandating that CFIUS review any purchase of more than 1% of a company’s equity by a sovereign fund, or requiring such a review by any fund that doesn’t meet certain standards of disclosure.
China doesn’t currently allow US hedge funds, private equity firms or banks unfettered access to its domestic market. That is its sovereign right.
Of course, just because the US could pass such a law doesn’t mean it should.
A law limiting the investments of non-transparent sovereign funds in the US market would force ADIA to sell a fairly large amount of stock, and ADIA and the GIC to divest from several large US financial institutions. It would have real consequences.
Felix would also note there are ways of skirting such regulation. Sovereign funds could put money in a London or Swiss hedge fund that the fund effectively controls. Or, more easily, a fund could buy an equity derivative providing them with the upside from any rise in the price of a given stock. Several funds already do this. These moves could though in turn invite a broader regulatory response as well, one that would make the US financial system very uncomfortable.
Or a non-regulatory response. The state of California, for example, is considering legislation that would require that its state pension funds divest from private equity funds that are partially owned by governments with less than pristine human rights records.
What of Yves Smith’s argument, namely, that in the global financial system, money is power – and the US no longer has the money.
I have some sympathy for his point of view.
A 9.9% stake gives an investor a bit of potential influence over a firm, even in the absence of a board seat. The process of selling equity to foreign governments to fund both the current account deficit and ongoing portfolio diversification by private US investors implies some loss of economic control. I also agree that nothing prevents a change in government from changing the way a sovereign manages its assets (PDVESA is a case in point).
But I also suspect that the United States has a fair amount of leverage, despite being a debtor.
The US is after all a unique debtor. Other countries haven’t been financing the US because the US offers a great return. The dollar hasn’t held its value relative to the euro, relative to oil, relative to wheat or relative to most metals over the past few years. It is unlikely to hold its value relative to most emerging market currencies. Yet the US still has attracted the financing it needs. The worse the dollar does, the more dollars foreign governments seem to want to buy.
There simply aren’t that many places in the world that can absorb the emerging world’s surplus savings.
Sovereign funds could try to dramatically increase their holdings of European assets (as could central banks). That would have one of two effects. It could push the euro and indeed all European assets up in price, with the euro’s rise irritating European governments already worried by its strength. Or it could lead Europeans who sell to emerging market sovereign funds to buy more US assets, limiting the impact of the shift in sovereign demand on market prices. More sovereign investment in Europe would lead to more private European investment in the US.
Sovereign funds could try to increase their investments in emerging markets even more than they already are. But those markets are small. Such inflows could have one of three effects: an emerging economy like Thailand could allow its exchange rate to appreciate and start to run current account deficits, it could intervene in the foreign exchange market to avoid such appreciation (and in the process finance the US) or it could slap on capital controls designed to deter ongoing inflows. Thailand thought it was attracting too much (private) investment about this time last year ..
Bottom line: emerging economies are building up their foreign assets because of a domestic policy decisions – whether to invest the fiscal surplus from the commodity boom abroad to limit the appreciation of their exchange rate. Unless they change those policies they are forced to invest abroad. Those surpluses are too large to be absorbed by other emerging economies (especially so long as emerging economies shy away from current account deficits) so they have to flow to the US and Europe. And if emerging economies stopped buying US assets and threw the US into a recession, that would reverberate back onto their own export sectors.
Emerging economies are stuck too.
The evidence?
China is in all probability buying far more US bonds now than it did back before the US Congressional pressure thwarted CNOOC’s bid for Unocal, simply because the amount of dollars China has to buy to keep its exchange rate from appreciating has gone up.
And the Gulf is likely buying far more dollar assets now than they did before the US blocked Dubai Ports World. Both because of higher oil prices and because of its ongoing dollar peg. Say a major Gulf fund – Qatar – opts to invest more in Europe and less in the US. And let’s assume its decision adds to pressure on the dollar. What then happens? Well, Qatar’s own exchange rate would depreciate along with the dollar – and the misalignment would likely attract large speculative inflows. Its central bank would have to buy more dollars to keep its exchange rate from rising. And those dollars would have to be invested in the US to avoid putting further pressure on the dollar.
The financial flows that finance the US deficit reflect policy decisions that require the buildup of offshore assets, whether to prevent exchange rate appreciation or to avoid the inflationary impact of suddenly spending the entire commodity windfall.
The emerging world’s unwillingness to adjust those policies gives the US leverage. Europe too. SWF inflows into the eurozone finance more private European investment abroad, not a current account deficit.
The fact that the funds managed by sovereign fund reflect broader policy decisions has another implication. Sovereign wealth funds are not – contrary to the often-make argument – a new source of liquidity for US and European markets. Not in aggregate.
As Ted Truman notes, if sovereign funds did not invest in US and European banks, they would be buying other US and European assets. Their decision to invest in the banks provided the banks a new source of risk capital, but it reduced the “liquidity” available for other markets. By the same token, to the extent that central banks – which manage far more sovereign money than sovereign wealth funds – have piled into Treasuries and Agencies, they have added to the liquidity of those markets but removed a potential source of support from other markets.
To put it differently, sovereign funds and central banks have never had more money to play with than they have now. And I suspect that a broad range of markets has never been less liquid than they are now.
So does the debate over transparency matter, or is it just window dressing?
I think it matters.
There is a reasonable chance sovereign funds will get big fast, and will soon account for the majority of foreign purchases of US equity. The emerging world has the biggest chunk of the world’s current account surplus. It likely added around $1.2 trillion to its reserves and maybe $200b to its sovereign funds. And not all of the money flowing into sovereign funds was invested aggressively – total sovereign equity purchases were probably less than $150b (counting some purchases from central banks) and total purchases of US equity were likely under $75b. Total portfolio equity inflows (per the TIC data) for 2007, official and private, were only $200b. A world where emerging market governments are adding $1.2 trillion to their sovereign wealth funds rather than $1.2 trillion to their reserves and buying say a trillion dollars worth of equities rather than a trillion dollars worth of bonds is very different than today’s world.
Moreover, the funds likely to grow the most rapidly are – setting Norway’s funds aside – funds from countries that aren’t very democratic. There is – as the following superb chart by the CFR’s Arpana Pandey shows – a strong correlation between a fund’s level of transparency and the political structure of the fund’s host country.
The level of transparency comes from the Truman index; the form of government from the Economist Intelligence Unit’s democracy index; the estimates of the fund’s size come from Standard Chartered.
The US and Europe are in effect asking the emerging markets now adding to their assets most rapidly to set up institutions to manage their sovereign funds that are more like the existing sovereign wealth funds (and for that matter state pension funds) of the major democracies and less like the sovereign wealth funds of non-democratic countries. In other words, some sovereign funds are being asked to conform to the norms of the societies they are investing in rather than the norms of the societies they stem from.
Not fair, you might argue. Why should the US try to push other countries to adopt its norms? It is their money after all. True. But the US is also being asked to accept a far higher level of government ownership of the US equity market than has been the case previously, and probably a higher level of government ownership than most Americans want. The US is also being asked to change.
The overarching judgment – which seems right to me – is that there is no political consensus that will accept the rapid growth of sovereign claims on the US and Europe if the big and rapidly growing funds remain clustered at the lower left hand corner of the transparency v democracy graph.
It is easier to change the level of transparency of a fund than to change a country’s political system.
That said, even if sovereign funds radically increase their transparency, the huge shift in sovereign demand toward equities that some banks are forecasting is likely to have an impact on the market’s overall dynamics. Mark Carney of the Bank of Canada has highlighted how sovereign demand for safe bonds changed the overall dynamics of the bond market. A comparable increase in sovereign demand for equity reasonably can be anticipated to have a large impact on the market. Anticipating just how that will play out, though, is hard.
The US is unaccustomed to playing by anyone else’s rules. The emphasis on the US’ lack of leverage may be an argument necessary to enable the US to perceive it’s loss of leverage rather than an attempt to argue for the absence of leverage.
Don’t be absurd. Of course the US government has absolute leverage over sovereign wealth funds in the US financial markets. On national security threat grounds, the US government blocked CNOOC buyout of California Unocal and more recently even blocked China Huawei partial buyout of 3Com. Not surprisingly the China CIC will deploy its funds into other markets more welcoming of foreign investment including a reported $10 billion in Japanese equity shares, investment in South African and Nigeria banks. Most of Chinese FDI will actually be invested in faster growing developing nations with natural resource reserves than mature Western markets.
$10b to japan wouldn’t be out of line with Japan’s share of the global equity market (given the $60b or so the CIC may now have to invest), and would still likely leave the combined portfolio of China’s two non-state bank investment funds (the CIC + SAFE)underweight japan. And I suspect Japan is more comfortable with CIC investments in an index or in a broad equity market portfolio than with CIC investments in key Japanese firms. Just a hunch.
“There simply aren’t that many places in the world that can absorb the emerging world’s surplus savings.”
Um, I can think of one…
The neat thing about Moldenstein is that it has no export industries. It also has no central bank, not much in the way of a financial system, no balance of trade, and in short no one who has any reason at all to complain about an overvalued currency. In fact (although some of our more patriotic Moldensteiners will jump up and down and wave their arms frantically, trying to tell you otherwise), its currency has no intrinsic value worth mentioning, because it is not useful for much except plating the faucets on your yacht. It has been overvalued for thousands of years and doesn’t seem to mind in the slightest.
Moreover, for a BWII CB, there is no contradiction at all between holding your pegs and investing in Moldenstein. Simply exchange your fiat for dollars as usual, then turn around and exchange those dollars for mold. Presto – no dollars. Already plated those faucets? Plate ‘em again. Heck, cast ‘em solid. No more ugly nicks and scratches!
Of course, if maintaining your dollar peg has already given you 20% money growth, you probably have a serious case of dilution dependency, aka “inflation.” In that case, why not make your currency convertible to mold at a seriously undervalued rate? That’ll give you plenty of ammunition to smooth out the difficult transition to monetary sobriety.
As you see, Moldenstein offers a broad variety of investing options to satisfy all the needs of the most discerning central banker’s needs. Best of all, our discretion is absolute – unlike our unfortunate rival down the street. You can even store your own mold on your own premises. Those pesky economists, journalists, German intelligence agents – just forget about them. In Moldenstein, privacy is absolute.
All we need is a slogan. “Now more than ever, mold.” “It’s morning in Moldenstein.” “Yes, we can – buy mold.” Okay, we’re still working on that one.
And I suspect Japan is more comfortable with CIC investments in an index or in a broad equity market portfolio than with CIC investments in key Japanese firms. Just a hunch.
Written by bsetser on 2008-02-26 21:59:37
Brad, a recent FT article noted the rise in poison pill measures adopted by japanese firms, perhaps that’s just in reaction to interest expressed by foreigners and SWFs?
One of the more unfortunate (depending on which side you stand) foreseeable potential (only if the lobbyists are unexpectedly weak) copnsequences of the current crisis is increased regulation of the markets. Protection is always a double-edged sword, besides the very existence of Cuba only proves that sanctions can’t kill off all weeds, likewise regulation. Heavyhandedness means as much a loss of vitality for the US economy as it does for the foreign investor. Does the US really want to be scrutinised as much for its human rights record vis-a-vis treatment of detainees, Guantanamo Bay, flights over Europe that don’t exist etc? Some things don’t stand up to scrutiny so don’t start with Pandora’s box.
I am a liberal but also a pragmatist when it comes to economic issues. Morality, democracy and lucre rarely make good companions.
Excellent post.
“Or, more easily, a fund could buy an equity derivative providing them with the upside from any rise in the price of a given stock.”
That’s not a problem to the U.S., because it doesn’t give any management control to the holder of the derivative; it gives it to the seller, who by delta hedging actually buys the stock and controls the voting rights. In fact, I imagine the U.S. would very much like the sovereign funds to buy derivatives for this reason, because it effectively gives management control to U.S. and European banks. (Mind you, given the intelligence that these banks have shown in managing themselves, this may not be a great idea.)
“The worse the dollar does, the more dollars foreign governments seem to want to buy.” You do mention this point a lot, as if it’s bizarre, but it makes perfect sense. Buy low, sell high. Sure you can follow the throw-in-the-towel philsophy of trading, where one sells something because it has lost value. But it’s not the path to today which is important in investing; it’s the path from today which is important. So, in determining to hold the dollar or not compared to the euro, it simply is not important that the dollar has lost value compared to the euro. What is important is whether the dollar will continue to lose value. And while following trends (the dollar has lost value, therefore it will continue to lose value) is a popular investment style, it obviously has its limits and eventually always reaches a point where it is a losing strategy.
re: “Sovereign” means it’s not up to anybody else what you are or are not allowed to do.
Prince Alois von Liechtenstein would agree
“…Prince Alois von Liechtenstein on Thursday said that the German government was undermining Liechtenstein’s sovereignty by paying an informer…” http://www.finfacts.com/irishfinancenews/article_1012681.shtml
and isn’t the u.s. still quite good at negotiating special arrangements?
http://www.iht.com/articles/ap/2008/02/24/business/EU-FIN-Switzerland-Germany-Tax-Evasion.php
http://www.networkworld.com/news/2006/092806-swift-criticized.html
This is my reverse psychology contribution:
Yes, the US and EU should bash SWFs onto the high heavens, maybe even throw their management behind bars after collecting them via “extraordinary rendition.” If there’s anything left that will cure global imbalances, it should be LDCs becoming more appalled at their poor treatment at the hands of America and Europe. Beggars can’t be choosers, but if the beggars start caning their patrons, well, maybe that will teach them not to do foolish things like invest in deficit running industrialized countries.
bsetser: The overarching judgment – which seems right to me – is that there is no political consensus that will accept the rapid growth of sovereign claims on the US and Europe if the big and rapidly growing funds remain clustered at the lower left hand corner of the transparency v democracy graph.
The trouble is that there is no political consensus that will ***oppose*** the rapid growth of sovereign claims on the US and Europe, and in the absence of any consensus either way, nothing will happen.
Also, I think it is a *VERY* bad idea to bring democracy into this discussion. The problem is that if you bring democracy into this discussion there is either the perception or reality that democracy will be used as a justification for economic nationalism or protectionism. The suspicion will be that “well you are democracy so that you can do whatever you want, and you aren’t so we are going to punish you.” This will tend to discredit democracy and human rights, and seeing how badly the cause of Chinese democracy has been served by linking trade to democracy and human rights, I think it is an extremely bad idea to start linking democracy and capital flows.
The other problem is one of perverse incentives. If the argument is that transparency is linked to a fundamental restructuring of the political system then you make transparency much more unpalitable. Personally, I think it is a good thing if the China Investment Corporation were transparent, but that is going to be very tough to sell if the prevailing argument is that making the CIC transparent means that the Communist Party is going to have to adopt multi-party elections, and I think it is a good idea not to link these issues.
Also, honestly, I don’t think that democracy has much to do with it. If China and Abu Dhubi were democratic states, I think that people in the US *still* would have largely the same economic nationalistic concerns. The one previous case in which you did have a democracy buying up large amounts of the United States (Japan) did cause a backlash.
Furthermore, I think that transparency is also something of a red herring. If you had major investments by foreign countries in the United States, you *still* have an issue if they were completely transparent.
The issue here is that I think that democracy and transparency are being used to justify policies which are at their core motivated by economic nationalism, so that people can create a rationale for those policies without appearing to be economically nationalistic. I think that this is a very bad thing to do.
First of all, I don’t think that there is anything fundamentally wrong with economic nationalism, and I don’t think that there is anything wrong with the US wanting to limit Chinese purchases of American capital simply because they don’t want too many foreigners owning US industries. The result of this is that if this is the rationale, then it ends up being reciprocal. US does what it has to do. China does what it has to do.
The trouble with invoking democracy and transparency is that the result is basically that the US gets to do whatever the hell it wants, and China is subject to restrictions. This might seem like a good deal for the United States, but the likely result is that you will end up with the situation in which China ends up opposing US-definitions of democracy and transparency.
I think that democracy and human rights are wonderful things, and I am shocked by the completely incompetent way that the US has ended up promoting democracy and human rights, and part of the reason why is that the US has this total inability to separate self-interest from altrustic ideas, and by using democracy and human rights to justify US foreign policy, the US discredits those ideas, and then as a consequence shoots itself in the foot.
Also my suspicion is that the relationship is not so much between transparency and democracy. If you split up the graph by region, then there seems to be no correlation within a region.
My suspicion is that everything correlates to per-capita income. High income nations tend to be more democracy and transparent than low income nations.
The reason I’m pretty passionate about this issue is that one of the formative political experiences of my life was to see how mishandling the issue over most favored nation trade status killed the overseas Chinese student democracy movement.
Basically by invoking human rights as a reason not to give China MFN and WTO membership, opponents of MFN and WTO put overseas Chinese student activists in a position where they were supporting policies that were highly unpopular not only within the Chinese public but also among overseas Chinese students in the United States, and this killed any organized pro-democracy movements in the United States.
Twofish, I agree with you on every sentence in your last four posts.
2fish — there is, alas, no correlation between per capita GDP and transparency. Singapore, Abu Dhabi, Qatar and Kuwait are all as rich (per national, not necessarily per resident) as Norway and all are less transparent.
a –
thanks for your comment.
you are right about equity derivatives addressing a lot of US concerns. that said, when Dubai took a stake in Daimler through an equity derivative, it still wanted a relationship with Daimler management.
as for buying $ when the $ is weak, i accept your logic that selling the $ now may not make sense. but i don’t think folks are buying $ b/c they want to. rather they buy more $ when the $ is under pressure against the euro b/c that correlates with general dollar weakness, and they are resisting pressure on their currencies to appreciate.
that and fixed currency shares in their portfolio, which imply buying more of a currency that is falling than a currency that is rising.
“The worse the dollar does, the more dollars foreign governments seem to want to buy”
Perhaps this is due to US jawboning.
If the dollar is coming down, they probably want an orderly transfer, maybe the foreign government money is providing demand, albeit decreasing, to counter the hot money leaving town.
“What is important is whether the dollar will continue to lose value. And while following trends (the dollar has lost value, therefore it will continue to lose value) is a popular investment style, it obviously has its limits and eventually always reaches a point where it is a losing strategy.”
—
In world history, every fiat currency has fallen to its intrinsic value which is simply the toilet paper it is printed on. Even Federal Reserve Chairman Bernanke admitted in his infamous “Dropping Helicopter Money” speech,
“The US government has a technology, called a printing press that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.” – Ben Bernanke
We can take Ben Bernanke at his own words that the Fed could care less about the rising US Inflation rate and US Dollar devaluation. In trying to bailout his leveraged Wall Street Hedge Fund clients, the Bernanke Fed has cranked up the growth of the estimated broad M-3 money supply to an explosive 15.4% annual rate, which is also crashing the US dollar and driving the commodities markets to record levels.
http://www.shadowstats.com/
” There simply aren’t that many places in the world that can absorb the emerging world’s surplus savings.
Sovereign funds could try to dramatically increase their holdings of European assets (as could central banks). That would have one of two effects. It could push the euro and indeed all European assets up in price…”
This seems to be a repeat of the commodities story.
The money pressure stemming from the global savings glut will have the same effect on European assets as it has on commodities, it will put a floor in the market.
Resource windfalls, 10% compulsory savings schemes, (are there any other sources of these investment funds?) are having unforeseen and disruptive effects on global markets.
Which, I guess, is just what you have been suggesting.
You are right to highlight the issue, Mr Greenspan needs to take another look.
If we’re going to require transparency of the SWF then we’ve got to require transparency of the hedge funds, etc? Or do we somehow think there is a distinction to be made bc a govt is behind a SWF? Furthermore, total transparency, while laudable, can disadvantage the investor. Warren Buffett surely doesnt want it.
re: “It’s morning in Moldenstein.”
well i do admit a fondness for barbarous relics esp accompanied by a joie de vivre deriving from a certain odeur de napalm one gets from the devil’s excrement
moldbug, you’ve got me sold on mold!
Adam — as of now, there are no requirements. and SWFs haven’t exactly been pushing for hedge funds that they have invested in to be more transparent. but the key distinction comes from government ownership/ control, which i think does make sovereign investment different from other investment.
norway — which is quite transparent but not fully so (it has undisclosed option positions i suspect) — has a lower return than some less transparent funds, tis true. but that reflects a conservative asset allocation dictated by Norway’s parliament. in some sense, those managing public money tend to be constrained when they come from a democracy, and those constraints reduce (but don’t eliminate) a lot of the public policy concerns in the recipient country associated with such investmetn.
Compulsory savings tends to put a floor in the equities market in Australia, but it doesn’t protect against these sorts of disasters waiting to happen, sometimes it seems to encourage them.
“Macquarie Communications would appear to be the most vulnerable
Macbank satellite with its skinny interest cover and testicular 350
per cent-odd gearing.
As one sage observer noted in the wake of the usual impenetrable
earnings release, capex towers over depreciation, and while the
company was insisting a $300 million loss (arising from a $600 million
loss on interest rate swaps) had nothing to do with cashflow, a loss
is a loss.”
http://business.smh.com.au/whos-next-for-financial-judgment-day/20080227-1v3x.html
bsetser: those managing public money tend to be constrained when they come from a democracy, and those constraints reduce (but don’t eliminate) a lot of the public policy concerns in the recipient country associated with such investmetn.
That’s the theory. I don’t think the reality matches this. Norway has a wonderfully run SWF. Japan has a very poorly run posting savings system. Orange County and the Florida state investment pool have both run into problems. In democratic states there is often the pressure to underpay fund managers or to boost risks in order to reduce taxes.
Democracies might have nicer marketing, but that’s basically all that is.
“Most significantly, the stagnation in wages and income for the vast majority of households — as top executives and industry superstars are walking off with the lion’s share of gains from economic growth — has created a backlash against trade and immigration and badly eroded political support for further globalization. Rather than Germany and Japan, it is China and India that are viewed as the imminent threats to U.S. prosperity and economic hegemony.”
UBS must have been in worse shape than most people knew: 12 billion is quite a bit.
*******************
UBS shareholders have approved a $12 billion capital infusion for Switzerland’s largest bank from foreign, government-owned funds.
The so-called sovereign wealth funds are based in Singapore and an unidentified Middle East country. The investment is aimed at shoring up UBS in the face of massive losses linked to the U.S. subprime mortgage crisis
bsetser: The US could also publish an estimate of the GIC’s size.
That would be a bad idea. I doubt that the US government has better sources of information about the GIC’s size than a lot of other people. I’m sure that there are people in the United States who knows exactly how much GIC has, but they are prohibited from saying by US law.
Any official publication would become a political hot potato that everyone screams about but no one takes seriously just like the State Department’s report on human rights.
my understanding of japan’s postal savings system is that it is mostly in JGBs — i.e. in a low risk portfolio. Tis true that some FL etc got into trouble. But they also got into trouble trying to get a bit more than t-bills on their short-term funds. that is different from a SWF buying equities abroad.
as for unilateral disclosure of fund’s size, tis true that it would generate a lot of resentment and it isn’t clear what it achieves. my point was simply that the US has options — high cost options to be sure — even though it is a debtor.
The Washington Consensus Lies Behind ‘Free Trade’
By Chalmers Johnson
http://www.rense.com/general80/trade.htm
The Washington Consensus elite preach free markets and free trade to the poor countries in order to capture larger shares of the latter’s markets and preempt the emergence of possible competitors.
The fact is that had the Japanese government followed the free-trade economists back in the early 1960s, there would have been no Lexus. Toyota today would be, at best, a junior partner to some Western car manufacturer or, worse, have been wiped out.
The IMF, World Bank, and WTO managed drastically to slow down economic growth in the Third World. Forced to adopt neoliberal policies and to open their economies to much more powerful foreign competitors on unequal terms, their growth rate fell to less than half of that recorded in the 1960s (1.7 percent instead of 4.5 percent).
Since the 1980s, Africa has actually experienced a fall in living standards – which should be a damning indictment of neoliberal orthodoxy because most African economies have been virtually run by the IMF and the World Bank over the past quarter-century. The disaster has been so complete that it has helped expose the hidden governance structures that allow the IMF and the World Bank to foist Bad Samaritan policies on helpless nations. The United States Treasury has a de facto veto in both organizations.
Basically, Twofish’s attitude is: “Sit down, shut up and know who your betters are.” While this is a particularly Asian way of thinking, it doesn’t fly here in the US, bub.
Guest,
The US military can bomb Iraq back into Stone Ages for the next century as John McCain advocates, but the era of uncontested US Global economic hegemony is over. A new multi-polar world order is taking its place for the better of humanity. If the China CIC invests its funds in Southeast Asia, Latin America or Africa, what’s the US government and IMF going to do about it? A voluntary code of conduct by Beijing? Give me a break. The Washington Consensus way of thinking doesn’t fly in the Beijing, bub.
It is difficult for ex-colonials to admit that they have lost control over their colonies in Africa and Asia. It is indeed more difficult for a hegemon like the US to realise that the global financial balance has shifted southward and newer rules have to be worked out.
IMF is not an attack dog any longer to keep global financial markets safe for the US. IMF lacks credibility. It did not give any advance warning about the subprime turmoil. BIS has a better record. What did the IMF achieve when it started, in grand style, its negotiations over ‘global financial imbalances’? It said it has established a ‘process.’ Now the U.S., in its anxiety to reform the IMF, is pushing it to sit with owners of SWFs and set guidelines. IMF wil be clapping with one hand. US has concerns over SWFs and none about hedge funds!
Secrecy? What knowledge the Fed or US Treasury have of CDOs and other valueless bundles? Accountability? To whom? The US and EU countries should set their financial houses in order before they begin to dictate terms to others. For long, too long, they have lived in a state of denial and it may prove costly to maintain the pretence. It pays to be humble when you are in a weaker position. This realisation does not come easily.
Guest on 2008-02-27 12:18:48 :”"Sit down, shut up and know who your betters are.” While this is a particularly Asian way of thinking, it doesn’t fly here in the US, bub.”
On the contrary, while not often stated so bluntly, this is pretty much the exact response of the US elite to anyone who questions the rising levels of economic inequality in the US.
K subramanian — doesn’t the logic of your position suggest that it will be up to the new powers, and their wealth funds, to insist on more transparency from hedge funds?
I understand where you are coming from — and i have thought seriously about how changes in the global economy have reduced the united states relative position. But the US can still set the rules for actors operating in its markest — just as china sets the rules for actors operating in its own markets. SWFs could respond by reducing their investment in the US, but then they would need to find different places to invest, and that isn’t easy. i stand by my argument that the policies that have led to funds of the current size limit their investment options.
that isn’t a statement about us power. it is a recognition that the us has been powerless to prompt currency adjustment. in turn, those resisting currency adjustment likely have limited their investment options.
that at least is my analysis.
the IMF’s multilateral consultation didn’t fall down b/c the us wouldn’t adjust its fiscal policy. the us actually did that (tho it is now reversing the improvement quickly). it fell b/c the new financial powers weren’t willing to allow more currency adjustment. Saudi as well as china.
i have much more sympathy for the argument that the US has failed to regulate the institutions that it claims to regulate effectively — the problems to date have come from regulated banks more than unregulated hedge funds (i wouldn’t want to push this too far tho, other shoes may drop), and it is clear that the incentive structure that led to CDOS stuffed with subprime getting triple A ratings and finding willing buyers wasn’t optimal. I generally think the US has not done enough to address the shortcomings in its model the current crisis has revealed.
in part that is because the crisis isn’t over; the fed is still fighting fires not rethinking its regulatory framework. in part tho it is because the big SWFs put capital into the big regulated banks most responsible for the creation of the CDO makret and the troubles in the shadow banking system without first insisting on fundamental reforms, or as far as I can tell, on even full disclosure of the banks potential risks.
that is something that the US government can hardly be blamed for.
EM creditor countries do have leverage. Leverage over the US banking system. Leverage over the PE industry, which now is turning to sovereign funds for debt financing as well as for the capital the PE firms manage (if the SWF provides the equity and the debt, you kind of wonder why they need a PE firm at all … they could just buy the company outright with lower fees if nothing else). Leverage over H funds, especially those operating in London. So far they haven’t used their leverage to press for the kind of reforms that your analysis suggests are needed.
this comment from a ft.com article says it all:
“”Effectively you will just intermediate Wall Street and the City of London out of the picture,” said Mr Hands. “It is already happening.” He said the Abu Dhabi Investment Authority (ADIA), the world’s biggest SWF, “will effectively replace Wall Street”.”
The arabs replacing the jewish bankers…the irony of it all!
The next chapter unfolding in the demise of US Dollar hegemony. You can forget about any US Treasury or IMF influence in the Russian SWF. – Dave C.
Russia to squeeze US Dollar out from energy exports
http://www.iht.com/articles/2008/02/25/business/place.php
MOSCOW: Russia, the world’s second-largest oil-exporting nation after Saudi Arabia, has been quietly preparing to switch trading in Russian Ural Blend oil, the country’s primary export, from the dollar to the ruble.
The effort to squeeze the dollar out of Russian oil sales marks another project with swagger and ambition by the Kremlin, which has already wielded its energy wealth to assert influence in Eastern Europe and in former Soviet states.
“They are serious,” said Yaroslav Lissovolik, the chief economist at Deutsche Bank in Moscow. “This is something they are giving priority to.”
Oil trading is now nearly always denominated in dollars, the de facto common currency of the petroleum business. When Kuwait sells oil under a futures contract to India, for example, the price is set in dollars.
if vennie starts pricing its oil in rubles, i’ll worry …
guest — careful. you pushed into somewhat dangerous territory.
the FT article tho is interesting — in the story, only intermedaries left are the PE firms, which take SWF money in as equity and then borrow from the SWF to buy a company …
which basically, means the PE firms gets fees for buying a company. any returns on the debt come out of the returns on equity.
the really big change would be if ADIA borrowed to fund its lending to PE firms, acting as an intermediary. and if it does that, why shouldn’t — other than politics — it borrow to buy companies directly, and save itself the fees?
Reportedly China’s Premier Wen Jiabao yesterday lectured US Secretary of State Condoleezza Rice on the global economic importance of “monetary stability” for the US Dollar.
If China unhatched a secret plan to destroy the monetary value of the US currency, it would almost certainly be grounds for a military conflict with nuclear weapons. Now we have a Federal Reserve and a US Treasury Department that openly promotes the debasement and the destruction of the US monetary currency. Gold is almost at $1000 per ounce…the irony of it all!
bsetser: doesn’t the logic of your position suggest that it will be up to the new powers, and their wealth funds, to insist on more transparency from hedge funds?
I’m still not sure why people are in favor of transparency in general. Personally, I think it would be a good idea if CIC were transparent since pension funds in China have a history of being poorly managed and transparency would help. However, this doesn’t apply to listed companies.
Also, I don’t think US pressure on China for “transparency” is useful because I really think that it is quite insincere. I really don’t think that if CIC opens its books that it will have an easier time with US equity purchases since the resistance to those equity purchases comes from elsewhere. No matter how well CIC behaves, there will be those that argue that since it is run by evil communists that it should be trusted because it could reverse policy tomorrow, and it could.
Personally, I think it is far better to regulate purchases through things like the Williams Act, anti-trust laws, and CFIUS reviews.
bsetser: the really big change would be if ADIA borrowed to fund its lending to PE firms, acting as an intermediary. and if it does that, why shouldn’t — other than politics — it borrow to buy companies directly, and save itself the fees?
Because after you buy a company there are the headaches of running the company. You have to attend board meetings, read and write reports, think about strategic direction, go through resumes for upper management hires, etc. etc. etc. And it’s not one company, its twenty, and those are the companies that you have already. If you are a PE firm you are always going to be looking out for new ideas and new deals, and you are going to be flooded by requests and phone calls from people interested in getting money. Going through hundreds of business plans to find a few ones worth investing in is time consuming. It’s also expensive because if you want to know whether or not a company that is proposing a new soap for pets factory has a business plan that makes sense or not, you are going to have to get an expert on making soap for pets, and he isn’t going to be working for free.
This means going to conferences, meeting people, getting stuck at the airport, etc. etc. There’s also the matter of figuring out who to meet.
You can either hire people to do that for you, or you can outsource that function to people that presumably know what they are doing. There’s also the secrecy element of things. If you hire a PE firm then only the top executives know or really care where the money comes from. If you have your own PE firm then you are going to end up with about a hundred people who are familiar with the inner workings of what you are doing and why you are doing it.
As far as Wall Street goes, there is no sign that any of the SWF’s want to bypass NYC and London and go direct. Even if they do, then the people that they hire are going to be people with experience in NYC and London, and the SWF’s are going to set up shop in those places.
2fish — my guess is that a lot of SWFs will over time want to encourage the development of a local fund management industry, particularly one that provides lucrative jobs for their former employees. China has held its exchange rate down to generate chinese jobs in the export sector. I would be surprised if it also doesn’t face pressure to create financial sector jobs inside china.
you are right that a higher level of transparency won’t eliminate concerns about the CIC. I have always used the word “Reduce”. but i do think there is a material difference between a fund that transparently invests in indexes — or even outsources to firms that try to beat the index by a little bit — and a fund that invests in individual companies. I also think there is a difference between a fund that works within a investment mandate set by an independent board or by a parliament, and one that works within a mandate set by one or two people.
Russia’s fund has the potential to arouse enormous concerns. Russia though so far has been transparent and shied away from equities. That has helped.
Of course, not all Russian firms have acted like Russia’s fund. and the mandate and style of Russia’s fund might change over the summer. but for now, it isn’t generating concerns.
Guest: Basically, Twofish’s attitude is: “Sit down, shut up and know who your betters are.” While this is a particularly Asian way of thinking, it doesn’t fly here in the US, bub.
Actually no.
My attitude is that the US government needs to do what it thinks is best for the United States. The Chinese government needs to do what it thinks is best for China. And then everyone sits done and discusses things so that people don’t hurt each other too much. What makes this interesting is that different parts of the US and China, and even different parts of the US and Chinese governments have different ideas on what is “best.”
What doesn’t make any sense is for the US government to expect the Chinese government to do something that would benefit the United States just so that the US doesn’t have to make some hard choices.
Maybe it’s because of the people I spend my time around, but when someone claims to do something for my benefit, and I can’t figure out what’s in it for them, I get really worried, in large part because I don’t know how they are going to behave if the situation changes…..
For example, if the US government is in favor of transparency, and it claims that it is doing so in order that Chinese pensions are well run, that’s nice, now why should the US government really care that Chinese pensions are well run? Would the US really still be in favor of well-run Chinese pensions if it causes widespread unemployment in the US?
The debate over whether the U.S. needs foreign lending seems misguided. The U.S. is now spending 5% to 6% more than it produces annually. It has excess aggregate demand. The build-up in reserves of china and other Asian nations are in some measure responsible – they have kept their currencies deliberately undervalued to spur local growth, which has come at the expense of U.S. production. Trade with these nations is not based only on comparative advantage, but on an absolute advantage that their exchange rate policies have created for them in many industries. This was all fine as long as U.S. demand was large enough to support full employment at home as well as fuel their growth. But it had to end sometime. The U.S. simply can’t continue to live beyond its means, especially with its looming fiscal responsibilities. The U.S. didn’t ask China to manipulate its currency to build up these reserves to subsidize its exports. In fact, China has resisted repeated U.S. efforts to curb this behavior. By the balance-of-payments identity, such official intervention, if not offset by private capital flows, forces a U.S. current account deficit. It is ingenuous to then argue that the U.S. ‘needs’ the funds to support its deficit.
bsetser: 2fish — my guess is that a lot of SWFs will over time want to encourage the development of a local fund management industry, particularly one that provides lucrative jobs for their former employees.
Sure but
1) it’s not going to happen overnight. Which would you rather have making a fair and unbiased decision on a multi-billion contract issue, a judge in Shanghai or one in NYC?
2) it’s not an either-or. As you develop local fund management industries, they are going to need services that involve getting a lot of people from around the world in one room, and that room is likely to be located in NYC or London.
bsetser: i do think there is a material difference between a fund that transparently invests in indexes — or even outsources to firms that try to beat the index by a little bit — and a fund that invests in individual companies.
You can make these distinctions but Lou Dobbs and the people on CFIUS who blocked the Huawei deal are unlikely to. I really don’t think that you’ll end up with a situation in which people say “well CIC publishes its books, I guess it’s OK to let China invest in US defense industries.”
bsetser: I also think there is a difference between a fund that works within a investment mandate set by an independent board or by a parliament, and one that works within a mandate set by one or two people.
Major decisions in China are not made by one or two people. There is an elaborate structure in place to prevent another Mao Zedong from appearing, and any major Chinese decision is going to be a compromise between competing agencies.
One reason I don’t think that people are being completely sincere about their reasons for not liking SWF’s is that the rationale keeps changing. One second, they aren’t insulated enough from popular political pressures. The next, they are too insulated from those pressures.
What I think is at the heart of all of this is that people in the United States fear loss of control to people who might have very different views on the way the world should work.
bsetser: Russia’s fund has the potential to arouse enormous concerns. Russia though so far has been transparent and shied away from equities. That has helped
But the main reason I think is that no one in the US seriously thinks of Russia (or for that matter Japan or Norway) as a rising power or a potential future threat to the United States.
bsetser: Of course, not all Russian firms have acted like Russia’s fund. and the mandate and style of Russia’s fund might change over the summer. but for now, it isn’t generating concerns.
Give it five years. When you start having stories about the booming Russian economy, how the US is dependent on Russian goods, and people in the military talking about boosting military spending to meet the Russian challenge, then people will worry.
“…relations have deteriorated to such a degree that a full-scale visa war looks imminent. If the West decides to escalate the visa conflict, the Russian elite will suffer the most. Their children, bank accounts, property and favorite vacation spots are all located in the West…” http://www.moscowtimes.ru/stories/2008/02/28/007.html
K. Subramanian,
I think you hit the nail on the head regarding the lack of credibility of the IMF to play a role in crafting “rules” for SWF’s. Not only have many of the SWF’s countries tasted the bitter pill of accepting IMF prescribed policies in return for “assistance”, with said policies not producting the desired results. More importantly, the IMF history of being a foreign policy instrument of the US has done even greater damage to the IMF’s credibility. This issue is selectively ignored in the west in all of their discussions of “IMF Reforms”. They must either believe that others in the world do not think or see how the IMF has been used a foreign policy tool. Or that by “inviting” others to have a greater say in the IMF, they will be co-opted into the idea that they also can use the IMF as a foreign policy instrument. I don’t think the leaders of the SWF nations are that stupid to accept any new authority of the IMF or a set of rules governing SWF’s that are not to the mutual benefit of all parties concerned. If the US and west are willing to do that, perhaps a real dialogue can begin. But such a dialogue requires being intellectually honest about how the IMF has been used as a foreign policy tool of selected nations. That is about power, not just about good or bad policies.
“In fact, China has resisted repeated U.S. efforts to curb this behavior.”
It was never a conscious decision by the China PBoC to build a $1 trillion stack of dollars. The $1 trillion in US Treasury bonds contributes nill to China’s GDP, but instead finances US military spending in Iraq. What the horde of cash represents is excessive liquidity from an out-of-control US monetary policy.
At great cost to labor intensive employment, the Chinese yuan has already appreciated almost 10% in the past year versus the US Dollar and will continue to steadily appreciate for the forseeable future. In currency markets standards, the double digit revaluation is considered very large. But has China’s revaluation resulted in any employment gains for the US Economy? US multinational corporations have already stated their intentions to outsource to even lower labor cost countries. The China yuan valuation issue is nothing more than a canard to scapegoat the Chinese for structural problems under US Neo-liberalism globalization.
“Basically, Twofish’s attitude is: Sit down, shut up and know who your betters are.” While this is a particularly Asian way of thinking, it doesn’t fly here in the US, bub. ‘”
Twofish resides in the US, Twofish is an American. If you think non-white Americans have less of a right to be critical of the US government than white Americans, please say so.
SWFs could respond by reducing their investment in the US, but then they would need to find different places to invest, and that isn’t easy.—Brad Setser
What makes you think it would be so difficult? The world is full of investment opportunities, and the best ones are probably outside the US.
guest –
a) Europe has said it worries about more inflows and a stronger euro. it has been widely reported that european leaders have asked china not to diversify into the euro.
b) india slapped restrictions on p-notes b/c they are worried about excessive inflows.
c) thailand tried controls in response to excessive inflows early last year
basically, small markets have trouble absorbing big flows, and right now the gulf and china are large relative to most markets outside the us and europe. moreover, everyone in the emerging world apart from some eastern european countries is intervening to keep their currency from going up, so more inflows just passes the dollar hot potato on to another central bank so to speak.
if you want to disagree, feel free — but present me with concrete data comparing the postulated increase to existing flows. for a lot of emerging economies a $5b or $10b inflow is big bucks. $20b would be really big. Not perhaps for Russia, india or brazil, but all already are intervening — they don’t need more inflows.
‘What makes you think it would be so difficult? The world is full of investment opportunities, and the best ones are probably outside the US.’
Written by Guest on 2008-02-27 21:45:55
I agree that spreading investment more widely is good idea.
There are a few problems that reduce the opportunities.
For example.
Many countries, most countries, have some barriers to investment, they like to hold onto lucrative or strategic businesses.
They are hard to “break in to”
Investment by the west is mostly preceded by stringent due diligence and many countries don’t have the transparency, regulatory environment etc. that allows investment opportunities to get the go ahead.
They can get bogged down by corruption, many authorities have trouble finding their pens when it comes to signing off on things.
The finance industry got burned when it invested in places like Mozambique in the seventies, so they would be risk averse.
The Inflationary result of gross mismanagement by the Federal Reserve. It’s too easy for Bernanke to continually press the print button. – DC
Jim Rogers Says Sugar, Other Agricultural Commodities to `Explode’
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqa5ay.X5RTY
Feb. 28 (Bloomberg) — Jim Rogers, who predicted the start of the commodities rally in 1999, comments on the outlook for sugar, cotton and other commodities.
“All of you should get all the sugar you can. The price of sugar is going to explode.”
On prospects for the Japanese yen:
“I own the yen and it’s another thing I’m buying these days. I’m convinced the carry-trade is going to reverse and when it does the yen is going to go through the roof.”
“…One view is that ADIA’s penchant for secrecy stems from its experience during the scandal at the Bank of Credit and Commerce International in the early 1990s, during which ADIA is said to have lost hundreds of millions of dollars. The al-Nahyan family became embroiled in regulatory investigations, although no charges were ever brought against them. But people who worked at ADIA from its earliest days in the late 1970s and 1980s say that the fund’s reticence dates to its formation. Some see this as a reflection of Abu Dhabi’s small size, insular culture and geographical vulnerability, a sense that the less that is known about the specifics of ADIA’s hoard, the better.”ADIA does not answer to a wide public at home,” said David L. Mack, a former United States ambassador to the United Arab Emirates. “They are a small country in an area with some nasty countries like Iran that can make trouble for them. They don’t like to advertise.” http://www.nytimes.com/2008/02/28/business/worldbusiness/28fund.html?pagewanted=2&ref=business
Thanks Brad, for that thoughtful correction. Owners of SWFs should press for transparency on the part of hedge funds if negotiations if negotiations, if any,have to proceed in an even handed manner. It seems to me that, on date, there are no signs of negotiation but only jousting against owners of SWFs.
It not only hedge funds that suffer from secrecy and opacity. Major banks like UBS, Credit Suisse, Citi, et al are disclosing burnt assets according to their own choice and schedule. Why doesn’t the Fed or IMF ask for total disclosure of all their assets and how much of it is detritus thrown up by the financial turmoil? For more than a decade, the IMF tried to prise open banks in all developing countries and laid down countless disclosure standards. Don’t these apply to big brothers in advanced countries? It is difficult to get lost if we pursue all these threads and how they were handled in the past.
Yes, I share the view that the US, China or India can limit investment avenues in their territories. It may also seem that presently US offers greater opportunities than other countries. This is a static (post Second World War) view and overlooks the newer opportunites which can arise in Africa and Asia. Ten years ago, who could have imagined the rise of Indian and Chinese giants in the global market? The pity is that the later day American version of capitalism is financial and has distorted the ‘real’ economy in the process. The current crisis may again decouple the two and, hopefully, one may see more growth in hardcore areas and not speculative bubbles.
On the US losing its leverage, one has to go deeper. The G7 was formed to contain the growing power of the US in the post war years. France led the battle. G7 began to have common purpose for some years. Now, G7 itself is riven with differences. In the current global context, G7 has become irrelevant. A time was when a whisper from G7 would tame other countries. They used to hold closed door meetings in European Palaces and chaperons will announce the decisions in single lines. No longer. It is the same kind of loss of US power or leverage that we witness. It is a welcome development for the world.
One last point Brad. I value your comment that the negotiations over “imbalances’ failed because, even as US corrected dits deficit (?), China or EM did not appreciate their currency. There can be, and indeed have been, serious divergence over which comes first. It ended in a stalemate. China has since appreciated Yuan by 15 percent and many emerging economies, including India, have done so in tandem. As the old cliche goes, it take two to tango. A tango fails if one partner turns aggresive – it will be a circus.
K Subramanian — I appreciate your equally thoughtful reply.
The G-7 has lost influence.
And there should be a set of reforms that requires much more disclosure (and in ways that are useful) of off balance sheet exposure. it turns out all the problems were off balance sheet, and the banks had huge contingent liabilities and insufficient capital to support their off balance sheet activities, activities that didn’t stay off balance sheet in times of stress.
re: China’s 15% appreciation — too much of that came recently, and over the same time period china depreciated v europe. india’s move was comparable (tho with higher historic rates of inflation, the real move is larger), but the timing was different. most of it came in the spring of last year. since then india has been targetting a rupee level even more than china targets the rmb level, in part (I suspect) b/c of concern about rupee appreciation v the rmb.
K: Major banks like UBS, Credit Suisse, Citi, et al are disclosing burnt assets according to their own choice and schedule. Why doesn’t the Fed or IMF ask for total disclosure of all their assets and how much of it is detritus thrown up by the financial turmoil?
In the case of the banks, the Fed are the people that push for disclosure. None of the banks have too much choice as to when to disclose and how.
One problem is one of valuation. I will pay you between $1 and $100 based on what percent of fortune 500 companies default in the next ten years. What is the value of that contract?
The other problem is the sheer number of assets. Think of every account that a bank has. It’s not a matter of going in and saying, show me your worthless assets, you have to go through each account and try to figure out what every asset is worth.
Thanks Twofish. That is the quality of innovation these financial warriors have brought about. It is now the problem of valuation – consider, for more than five years, on a conservative estimate, they were raking profits on these transactions!It was the Anglo-Saxon model for the world. Countries like India which did not fall for the model or the derivatives have better financial stability.
Alan Greenspan admired them as “innovation” on par with the innovations in the IT sector. There was indifference bordering on neglect on the part of regulators. Now, the birds have come home to roost. More and more snakes are coming out of the pits (read monoline linked securities running to trillions of dollars). What has been Fed’s or Treasury’s response? Pump more liquidity, reduce interest to the bottom and feed the beast. When Asian countries faced a crisis, they were sheared to the bone and were asked to settle the loans. Their budgets were cut and welfare program stopped.
As a diversionary tactics, they are engaged in a war on SWFs. It will keep Senators happy. Unbeknown to Fed /Treasury, their distressed bankers are aligning with SWFs!
Subramanian — the Fed/ Treasury know quite well that the bankers are aligning with the SWFs. They are encouraging it (to my chagrin). The senators, not so much — tho some are a bit surprised that Wall street is now so keen on state ownership.
anonymous — i presume you were being ironic, or at least hope so. but i didn’t take any chances … so i deleted your comment.
Brad,
In my view, the fundamental problem with off-balance sheet business was that it was not clear how detached it actually was. The investors in these vehicles considered that there was a high probability of the parent bank backing them, and the capital regulation assumed the opposite. What should have happened is that the responsible regulator should have declared one way or the other. The trouble is, however, that such regulators are regarded as dogmatic and obstructive, and tend to get squeezed out. I wonder if the greatest need for transparency lies in public service, because then the record would show who decided what, and on what basis, and make it harder to fudge such issues.
K: they were raking profits on these transactions! It was the Anglo-Saxon model for the world.
Derivatives really don’t have that much to do with the Anglo-Saxon model of corporate ownership. They’ve been around since the early-1980’s and personally I think that overall they’ve added a lot of stability to the financial system.
K: Countries like India which did not fall for the model or the derivatives have better financial stability.
Hard to say. Mexico hasn’t had particularly good stability.
K: There was indifference bordering on neglect on the part of regulators.
I don’t think this was true. The problem really is not so much in the derivatives market but rather on the collapse of the real estate markets that these derivatives were written on. Personally, I think that without derivatives, the situation would have been a lot worse than it has been.
RebelEconomist: The investors in these vehicles considered that there was a high probability of the parent bank backing them, and the capital regulation assumed the opposite. What should have happened is that the responsible regulator should have declared one way or the other.
The trouble is figuring out how to represent those obligations in the balance sheet. For example, I agree to pay you $1 million if Martians land. How should I mark this on my balance sheet?
RebelEconomist: The trouble is, however, that such regulators are regarded as dogmatic and obstructive, and tend to get squeezed out.
Regulators aren’t regarded as dogmatic and obstructive in the banking industry and aren’t squeezed out.
Also, I hate the term “Anglo-Saxon” model. A much better term is “Thatcher-Reagan” model. One big problem I have with the “Thatcher-Reagan” model of economics, is that it really doesn’t describe how large corporations and banks in the United States actually do work.
Banking is one of the most heavily regulated industries in the world, and this is a good thing since without effective governmental regulation, banks very, very quickly destroy themselves.
Regulation is hard because there are all sorts of tricky balances. For example, if you have someone with no banking experience then they just aren’t going be effective, because they will have no idea what questions to ask, what tricks people play, and where to look to find the bodies. On the other hand, if you have someone who is very experienced in banking, they will tend to see the world in the same way that the people they regulate do, and that might not be a good thing.
There’s also the problem that government regulators often don’t get paid enough. If private industry will pay $600,000/year for a securities lawyer while the government will pay $180,000/year, who are people going to go to? If you want effective regulation, it’s going to cost you.
RebelEconomist- Actually, it’s not so much of confusion regarding the “detachment or attachment” of off balance sheet vehicles, it’s just a game of sleight of hand played by willing participants. Let’s just say this, when you set up an off balance sheet vehicle, usually, an outflow of investment occurs, ditto for senior personnel. Even if the 2 are insignificant, eg employing a new team externally, usually the “repatriation” of profits occurs on a regular basis. Whatever the form these “repatriations” take, they are not free from the rule that where assets exist, there’s corresponding liability, whatever the legal status of the vehicle.
Twofish- The trouble is figuring out how to represent those obligations in the balance sheet. For example, I agree to pay you $1 million if Martians land. How should I mark this on my balance sheet?
Well, if you’re a gaming concern, you would mark it as a contingent liability (recognising if and when it becomes more certain, eg when you hear reports Martians are broadcsating their arrival or you see Independence day scenes around you )and whatever betting fees/premiums you receive (what the counterparty pays you, since no one makes a one way transaction) would be revenue. If you’re not in the business , pretty sure you’ll be questioned by your boss or the relevant authorities soon.
Sorry people, not much humour since it’s pretty weird to be pondering such things on a sunday morning, any ludicrous parts must be attributed to the fact that I’m barely awake at 8/9 am