Oxford SWF Project

Ashby Monk

Sang Yong Park and Leslie Young have an interesting article in the WSJ today; if only for the fact that they are proposing some pretty substantial innovations to the global financial architecture.

First off, the authors adopt a Bernanke-type ‘savings glut’ approach for explaining how we came to be in the current global financial crisis (saving glut –> over-bought US Treasuries –> depressed yields –> increasing appetite for higher yielding, riskier assets –> subprime mortgage mess). However, rather than focusing on this well-rehearsed explanation for the crisis, the authors instead talk about investment decision-making within governments and its role in the crisis.

Indeed, they argue that non-commercial investing (what they term “unbusinesslike”) badly distorts the market and, ultimately, is what drove the current crisis:

“In the private sector, no responsible management of a corporation that enjoys a steady surplus would keep investing it in the bonds of a single highly leveraged borrower. Instead, such a corporation would secure some equity claim on the capital recipient’s assets.”

The authors’ solution? Foreign countries should swap their debt investments for U.S. equities via “mutual wealth funds.” MWFs would be intermediaries between SWFs and U.S. firms, thereby facilitating purely commercial investments on the part of these governmental financial institutions.

Maybe I’m missing something here, but don’t SWFs exist in the first place to diversify foreign governments’ sovereign wealth out of U.S. Treasuries? Why do we need to complicate things further with the creation of MWFs? According to the authors, SWFs will invest through MWFs so as to convince US citizens that they are not “pursuing a hostile agenda.” While investing through intermediaries would do that, there remains no reason to think (or evidence) that SWFs are in fact “hostile.” Moreover, there are easier ways to ensure SWFs are not hostile than adding another layer of complication to the global financial system. Imagine the difficulty of coordinating all the stakeholders so as to agree, design, and implement MWFs.

Rather than creating a new institution to do what SWFs are currently doing, I’d argue that we should simply keep pursuing the path started by the IWG of SWFs (and now being taken up by the International Forum) with the Santiago Principles. That, to me, seems a simpler (and more likely) solution to any remaining fears about SWF motives.