By Ashby Monk
I have been in Oxford and London all week conducting / collecting interviews for our project on SWFs. It’s hard to put into words the sentiments among some of our interviewees; so I won’t. I’ll let one of the interviewees do it: "Here is a quote for you. A global depression is going to happen. You can print that." Not everybody we met with during the week was this pessimistic. Nevertheless, all wanted to reflect broadly on an incredible year in financial markets; and the role of SWFs therein.
Who did we meet? I can’t say exactly because confidentiality agreements restrict our ability to disclose names. That said, some will eventually appear in print. What I am allowed to say, however, is that we met with senior bankers, bureaucrats, journalists, and SWF stakeholders in and around the City of London.
An interesting theme developed during these discussions: SWFs are seen to be a symptom of, and a (small) solution to, the current economic and financial crisis. Here is the way the discussion usually unfolded. Yes, SWFs are a small comfort to the current financial system during this crisis. They are owners of capital in a system that is seriously decapitalized. However, SWFs, by their very nature, are also a symptom of the global economic malaise characterized by imbalances. For a variety of reasons, countries have accumulated massive current account surpluses. These surpluses are not seen to be sustainable, but SWFs are nonetheless a useful tool for managing these imbalances. In short, we cannot understand or even hope to solve any problems we have with SWFs without first understanding and indeed solving the larger problems that have underpinned the rapid growth of these funds: imbalances.
The natural question that followed: who is to blame for the global imbalances and how can they be unwound? Once again, two of our more opinionated interviewees offered interesting insights. First, “we need to break the oil dependence and stop the over-consumption in the West”. And, second, “Arabs need to start buying large chunks of China.” While the two points are perhaps oversimplifications of the problems we face, they do nonetheless capture the nature of the larger considerations at play.
So, while SWFs do present a series of new concerns to Western policymakers (national security, nationalization of markets, state capitalism, etc.), they are also symptoms of much larger global economic problems. As such, any new national SWF policies should take into consideration these larger issues. Otherwise, these policies will only be treating symptoms. In this case, our patient, the global economy, will only get sicker.
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