Great comments. Qustion:

“The Communist Party doesn’t have to worry about elections but it does have to worry about mobs with pitchforks. Same thing for the big Wall Street banks. One reason everyone did whatever they could to prevent the financial system from collapsing was that if the system did collapse, then the mobs start screaming for banker bonuses and massive and intrusive state regulation of the financial industry. As it is, things are rapidly going back to business as usual.”

Who organizes China’s Pitchfork People? The only mob that was reasonably successful (as far as I know, the history of earlier dynasties’ rise to power is surrounded with too much mythology) in the modern era was the CCP. And they had quite a bit of outside help, and no real gvt to fight against. My -crude and superficial impression is that the PRC mobs have been pretty tame, even under hardship.

Pitchfork risk has effects (you would have no problem to look at the game implications of Pitchforkers in autocratic (Czarist, Stalin Russia), bureaucratic (PRC) and even moderately democratic regimes) but they are not the same everywhere and there are many different kinds of issues that appeal to many different pitchforkers. Democracies allow these people to organize themselves and consider various options for action. Your world sems to know only gvt action and blind street violence. Democracy excells in the area in between.

People won’t care unless they think that you are taking money from their wallets. As long as the citizens have bread and circuses, they won’t care what people in power do. Cynical, but true. How many ordinary people are following the committee meetings on financial regulation? All of the lobbyists for the financial institutions are.

One big problem is that if I handed a balance sheet for a hedge fund to an average person on the street, they’d probably have no idea what to do with it. To figure out to do with it, they have to consult some sort of adviser, and anyone that knows a great deal about finance and where the bodies are buried, has a much stronger financial incentive to bury bodies than to point them out.

Also, the “watching the watchmen” problem comes up. It just floors me when the OECD and the BIS talk about democratic accountability.

What concerns me is not that the average person on the street doesn’t know what is going on. What is really scary to me is the degree to which regulators in major governments didn’t know what was going on.

In the case of China, it’s relatively easy, there is this agreement between the people and the government. You give us our money, and we don’t riot. If the banks collapses, we’ll beat you up if you are lucky, and if you are unlucky we shoot you.

I think when people talk about accountability people have an “election’s fetish.” It’s possible to have elections that are useless, and it’s possible to have accountability mechanisms that don’t have anything to do with elections.

It’s also ironic to me that people talk a lot about democracy when the major institutions that run the world economy aren’t particularly democratic. The Communist Party of China is far, far more accountable to the Chinese population, than the World Bank, IMF, WTO, Goldman-Sachs, Harvard, or the Federal Reserve.

bsetser: And a host of financial firms in OECD countries get significant fees for helping said funds invest …

And then they take some of those fees, form political action committees which hire lobbyists and give campaign donations to politicians so that they can run 30-second ads to convince people that they really have some choice.

It’s actually not a bad system. If you have a couple of thousand people that have an interest in financial transparency, it’s not that hard to create a PAC and hire lobbyists. The problem is finding people who make money off financial transparency.

The Communist Party doesn’t have to worry about elections but it does have to worry about mobs with pitchforks. Same thing for the big Wall Street banks. One reason everyone did whatever they could to prevent the financial system from collapsing was that if the system did collapse, then the mobs start screaming for banker bonuses and massive and intrusive state regulation of the financial industry. As it is, things are rapidly going back to business as usual.

“finally, your last point would roil the global financial system if adopted. I doubt many of the major funds would meet the test of “democractic scrutiny.” And a host of financial firms in OECD countries get significant fees for helping said funds invest …”

Never said it would be easy. Different winners and losers.

“Not quite sure how this “It is for the citizens of the investing country to hold their gvts accountable” is possible in a world where many funds are managed by unelected govs without clear ways for the citizens of said country to hold the gov. responsible. ”

Never said it would be easy. However, lots of countries are not so black and white. If (if..) there was more and better argued Western resistance to these schemes, many of which could easily conceal all kinds of boring practices, the citizens might get disgruntled.

I also have struggled with the right typology for thinking about sov. wealth funds, as the term encompassed a host of different things. And — since I am interested in the BoP, I really am interested in external investments. to me, there are what might be called monetary reserves (foreign) and fiscal reserves (foreign).

Monetary reserves arise from intervention in the fx market. Fiscal reserves arise from gov. fiscal surpluses (held abroad).

Both can be invested eiter in safe securities (classic reserve assets) or riskier f. assets (portfolio equity, debt with credit risk, PE, etc).

In a lot of countries, fiscal reserves are held as a deposit at the cnetral bank and invested along side monetary reserves.

Classic SWFs tended to be financed out of fiscal reserves. the fiscal reserves were judged to be large enough that a new agency was needed to invest the funds in a more aggressive way. Effectively, this means setting up an agency other than the central banks’ reserve managers to manage the funds.

but some countries have set up de facto SWFs out of monetary reserves. Singapore is an obvious case (though the GIC gets money from sources other than the MAS). Korea too. China’s CIC was set up in a way that effectively bought fx from the cnetral bank so it would have fewer reserves. And i think you can thus think of SAFE’s investment portfolio as a “SWF” (meaning aggressively invested portfolio) managed by a central bank.

things get more complicated when a third category of fund is included — call it a PE style fund that takes large, illiquid stakes in companies. Some SWFs that originated as fiscal reserves have done so …

But some of what are called SWFs that originated as holding companies for the state’s domestic investment have also made extenral investments. and somse SWFs that originally were set up as vehciles to channel fiscal reserves abroad have also been used to make domestic investments. Lines get blurred …

finally, your last point would roil the global financial system if adopted. I doubt many of the major funds would meet the test of “democractic scrutiny.” And a host of financial firms in OECD countries get significant fees for helping said funds invest …

A useful update. Still, the label “SWF” (invented by investment bankers) has little significance outside the sales desk.

I think that unless an exception is warranted all state/CB investments in OECD cash and liquid marketable securities should be simply called: state reserve investments (I), a subset of which would be international liquidity (or reserves) characterized by their : right: liquidity. The illiquid stuff and exotics (i.e. private equity etc) should be treated and regarded differently.

Excluded from this should be(II):
a- state pension and “future funds”(provided there is a plan for ultimate distribution and/or identifiable beneficiaries
b- family/tribal treasuries
c- state conglomerates.
d- pools of state investments made by e g OECD countries during the past few years to support the financial system. I suggest that funding for these investments is also not treated like normal gvt debt, unless the investments are worth less than the debt

Looking at the above, ADIA, Temasek, the Norwegian fund, CIC all belong in category II, but why call them sovereign wealth “Funds” Some like Temasek are corporations, not “funds”, some are incorporated , others not, etc.

But for understanding international monetary phenomena
(especially in an era of rising protectionism and currency maniplulation (or rather, the world trade share of manipulators is still growing), what we need is a clear picture of reserves that can be used as such, and the in and outflows, with their sources, associated with those reserves. A state investment in a foreign (and by now maybe worthless) widget maker is not reserves, but an allocation of national public sector money to a foreign purpose. It is for the citizens of the investing countrry to hold their gvts accountable, but it should not have monetary consequences.

Of course, if host countries would be flooded with foreign, and possibly hostile cash and the local elite feels threatened, we have a different set of issues, but that goes far beyond SWFs.

Many countries do not accept the good government paradigm that gvt should be minimalist and market-friendly. Gvt savings and investments beyond what is needed for that core capacity are at odds with that paradigm. Pension funds are fine, if managed at arms legth from the gvt. A “future fund” for the population as a whole and under democratic scrutiny is by definition also legitimate. Bureaucratic gvts or ruling families who allocate state funds to purposes that may be illegitimate (violating WTO rules for instance) or corrupt, and in ways that cannot be democratically scrutinized, should not be assisted by OECD financial firms, or their foreign branches and subsidiaries…