Yes, and so??? Is there a belief here that US institutional structures are naturally better and that the world should automatically copy American institutions? If not, what exactly is the problem?

bsetser: that point also applies to the state pension funds. they do seek returns. but they also are quite transparent — ted truman’s paper highlights just how transparent they are. and they generally have an independent outside board that selects the head of the fund and the head of the fund selects the fund managers.

True, and personally I think that in managing CIC, that China should copy American institutions, but *why* I think that may be interesting. If it turned out that having Hu Jintao pick and choose what companies to invest in would maximize Chinese national interest, then I’d be in favor of having Hu Jintao pick and choose what companies to invest in. The trouble with a system without checks and balances is that you get massive amounts of self-dealing and if you put too much decision making power in one person, then inevitably Hu Jintao will make decisions that are in Hu Jintao’s interest rather than China’s national interest. Also Hu Jintao is quite busy. Thinking about what companies to invest in means that he doesn’t have time to think about earthquake disaster recovery.

To prevent this, you split up responsibilities. If Hu Jintao wants to write a big check to Angola to secure supplies of oil, then he discusses this with the State Council, orders CIC to write a check to the Chinese government, and then the Chinese government puts that money into the Angola development fund. That way lots of people see where the money is going, and we see that the money actually is going to Angola and not to Hu’s cousin. Also, you end up with lots of people who have time to think about Angola.

bsetser: a) to manage external investments, and every country has the right to regulate money coming in to its own country … sovereignty works in both ways

I don’t know of too many Chinese who object to that idea. I do know of a lot of Americans who would since this completely destroys the Reagan-Thatcher model of how the world should work. Also, I think that in practice, you’ll find its really hard to keep people from talking money when it is offered to them. There are a number of states that are travelling to China in order to attract Chinese investment in the US. One reason I think that all of this attention on SWF is misplaced is that I personally think that the vast majority of Chinese investment into the US will eventually take place outside of the SWF’s.

bsetser: to manage surpluses that stem from policies that the us has opposed

Again there is this problem of describing what it means for the “US” to oppose something. It certainly hasn’t opposed PRC/Gulf states currency policy enough or reserve accumulation to do any real about it, since it opposes steps that deal with the accumulation more than it opposes the accumulation itself.

2fish — you are right to note that sometimes the line between private money and public power is a bit blurred in the us. US government support for Us “private oil cos” abroad is an obvious example, and one that has long made me a bit uncomfortable.

that said, the US has long relied on private companies to do things that state companies might do elsewhere — private defense contractors are one example. I think the us even privatized uranium mining/ enrichment … so there is a big difference between us institutional structures and the institutional structures of many rising powers.

that point also applies to the state pension funds. they do seek returns. but they also are quite transparent — ted truman’s paper highlights just how transparent they are. and they generally have an independent outside board that selects the head of the fund and the head of the fund selects the fund managers. the state governor doesn’t pick and choose which “foreign” company will get investment from the pension fund. politics sometimes does enter in, but the institutions still look to me very different from the institutions that have been set up to manage spare fx reserves/ the oil windfall.

why should the us care, you might ask. every country has the right to set up its own institutions. true enough. but here i think the crucial point is that these institutions have been set up:

a) to manage external investments, and every country has the right to regulate money coming in to its own country … sovereignty works in both ways

b) to manage surpluses that stem from policies that the us has opposed …

2008 is the time frame, but renewable (I presume for a year at a time). The eventual swap would be due a month after it was used, but extendable. That is pretty open ended.

It will be very interesting to see if, and how soon this will be utilized. This agreement might actually work as a bit of a deterance against a short raid on the ISK. Maybe that’s too optimistic a hope…

I still think Iceland would be better of pegging to the Euro, while preparing to join the EU. This going solo is too shaky a ride for us.

I would think you’re right to assume the managers of the Norwegian Sovereign Wealth Fund have had some kind of political message delivered about not trying to tip the scales against the Icelandic currency. I also think it is completely unrealistic to imagine any SWF not being used to political means, one way or the other. After all, money is power. Politicians don’t mind a bit of power…

How much power will oil exporting nations have to wield in the next few years?

That’s actually one of the questions that I’m asking here. Whether and how business and political interests should be kept apart is something that needs to be debated.

As a practical matter, I don’t think business and political interests *can* be cleanly separated, since I happen to think that markets require a lot of government regulation and support to function. The question is how business and politics should interact, and I think we need to figure this out before trying to come up with SWF rules.

Also. the US situation in which an SWF is controlled by a subnational unit which is not subject to national control is a pretty common one, and it’s going to pose a major problem for issuing standards on SWF’s. Suppose the IMF issues standards for SWF’s, and the Treasury Department thinks that they are wonderful. What happens if the State of California or Orange County doesn’t like them?

This is going to be a very tricky problem in that if you have Treasury represent California at an IMF best practices meeting, then this radically changes the internal structure of the US government. If you have California directly interacting with the IMF in drawing up best practices, this is also going to radically alter the internal structure of the US government.

1) The US *federal* government doesn’t use its public money abroad to make money, but US *state* governments most certainly do. From a US point of view the difference between the Federal and State governments might be extremely important (as is the Chinese distinction between the Central and local governments), but from the outside, it appears much less so.

2) The US government doesn’t do X. So?

The line between private and public $ didn’t seem too obvious when Paulson found himself the subject of an investigation into whether he turned a blind eye to thealphabet soup business as part of a favour to former employers. The official reaction to the Venezuelan situation -how much of that was “inspired” by the energy businesslobbyists? Standard Petroleum didn’t exactly distance itself from the military forces it employed to “protect” its business interests in China in the early 1900s. Look, theoretically business and political interests should be kept apart but more often than not, they aren’t.

So SWFs are aiming for alpha? Unfortunately the economies of scale might just work against them- alpha tends to work well only when speed and disvcretion is applied alongside amazing insight; hedge funds have found that as more and more capital mloves in the same direction, returns (and therefore alpha) get squeezed. Good luck to moving those billions.

2fish — you are right that many countries, especially countries in Asia, often viewed private US banks and hedge funds as agents of the US writ large, not just as private actors. The US of course argued that the US government didn’t influence the actions of private bank and hedge funds, and thus there was no coordinated plot.

That said, there is a difference between private and public money. The US govenrment uses its public money abroad almost exclusively to promote political goals, not to try to make money. lending to the government of mexico to help it avoid default was meant to support US foreign and international economic policy, not to make money. Export credits support another policy goal. Development lending yet another. What the US doesn’t do, generally speaking, at the government level, is make big equity investments abroad. It also generally doesn’t bet against another countries currency or government — it may refuse to support a country in times of trouble, but it doesn’t take a simultaneous short position. The US is either long or flat.

the UK has in the past taken large “political” equity stakes. The UK government owned a big chunk of the Suez Canal until 56 I think. That didn’t work out to well — Egypt considered this a colonial legacy.

As a result, I do think that the expansion of sovereign equity investments — and the more active management of sovereign funds — does raise a new set of issues. There is always a continuum of sorts, as you note. But the scale of sovereign investment abroad suggests something really has changed.

cheers