Oxford SWF Project

Ashby Monk

On the issue of whether governments should look to regulate SWFs, Joseph Stiglitz is making sense:

“Most of the debate is motivated by fears. It is not that the sovereign funds have taken actions which are objectionable, which are motivated by any thing other than profit maximization. It is only that they might do so, and we need to take preventive action. Of course, no one wants to stop the funds. If the funds had not bailed out Citibank and Merrill, America’s economic problems might have been even worse. Today’s buzzword is transparency. What is demanded is more transparency.”

“What kind of transparency would make a difference? Should we take comfort that they say they are pursuing just commercial objectives? How can we be sure that they do what they say? What information would a disclosure of balance sheets make? We normally don’t require such disclosures. Why here?

“Moreover, the pursuit of commercial objectives has never been a requirement for ownership in the past. Many a newspaper and TV has been bought not for commercial reasons but as a basis of advancing a political perspective.”

“What is clear is that the brouhaha over the sovereign funds is partly a fairly transparent form of new American protectionism and partly an attempt to shift attention from the failures of America: if America had saved more, and if its financial institutions had behaved better, it wouldn’t have had to turn to these sovereign funds…”

“In short, the debate about sovereign wealth funds highlights the limitations of our regulatory systems. If a sovereign wealth fund were to buy a pencil company, and, motivated by politics, decided to give away pencils as an act of friendship, no one would be concerned. If the firm is mismanaged and goes bankrupt, no one would be much concerned—anti-trust laws would have ensured that the firm is small, and if the economy is functioning well, those who lose their jobs would quickly find others. If a sovereign bought a bank and decided not to lend to a particularly country (whether it thought it a bad risk or a rogue state), it would have little economic consequence (though we might socially disapprove of this discrimination and might pass anti-discrimination laws), as long as there was a competitive banking system. Even if it shut down a plant and moved it overseas to create jobs in its own country, there would be little concern: new jobs would quickly be created here at home. But if our competition laws or other regulatory systems are not working well, then a firm owned by a sovereign fund—or a private firm—might take actions that are adverse to the public interest. Ownership does convey information; it may tell us about the likelihood of such actions being undertaken. In some circumstances, it may provide an additional rationale for regulatory scrutiny. But in only limited circumstances—such as those described earlier—where regulatory oversight is so impaired that appropriate actions cannot be taken in a timely way and where the consequences of the adverse actions cannot be easily repaired—is there a compelling case for ownership restrictions. But when ownership restrictions are thought warranted, they should be non-discriminatory. Sovereign funds might be restricted, but if so, hedge fund ownership should be as well, unless there is full transparency of the true owners of the hedge fund.”

Compelling logic.