By George F. Will
Sunday, February 3, 2008
Although Americans are alarmed by the credit crisis convulsing the economy, they are sensibly placid about one consequence of the crisis. It is the substantial investment by sovereign wealth funds -- government-owned and -run investment funds -- in financial institutions needing infusions of cash.
Remember the patriotic ruckus in 1989 when private Japanese investors bought Rockefeller Center? Remember the frenzied opposition two years ago to the attempt by a company owned by the government of Dubai to become the operator of some U.S. ports? Last month there was no comparable anxiety when the sovereign wealth funds of Kuwait, Singapore and South Korea bought an estimated $40 billion of equity in Citigroup, Merrill Lynch, Morgan Stanley and the Swiss bank UBS.
Calmness, combined with vigilance, is sensible. Calmness, because the funds are a small fraction of the world's wealth and are performing necessary services. Vigilance, because they pose potential problems concerning transparency and possible political purposes.
Such funds are not new: Kuwait launched one in 1953. Matthew Higgins, an economist with the Federal Reserve Bank of New York, estimates that the total assets of sovereign wealth funds are now $2.5 trillion, much less than the $16 trillion, $18 trillion and $22 trillion managed by insurance companies, pension funds and mutual funds, respectively. The $2.5 trillion is larger than the combined assets of all hedge funds but is equal to just 1.2 percent of the $201.6 trillion combined market capitalization of global bond and equity markets and commercial banks. Higgins's high-end estimate is that the funds could be 4 percent of global financial markets by 2015.
Many countries exporting oil, toys or underwear to America are running trade surpluses. These countries need to do something with their dollars -- it is better that they invest them than buy weapons with them -- and want something with a higher return than U.S. Treasury bonds offer. By buying minority interests in U.S. financial institutions or other companies, sovereign wealth funds are gaining money-management expertise.
Various U.S. states and municipalities, too, are scrambling for higher returns through investments in equities because they have made $700 billion in unfunded pension promises to public employees. Stephen Schwarzman, chief executive of the Blackstone Group, a large private equity firm, says, "In our experience, there is virtually no difference between going to a sovereign fund [for investment capital] and going to a state pension fund in the U.S." Because U.S. policy endorses the free flow of capital around the world, inflows of foreign investments should be welcome -- if the motive of the nations operating sovereign wealth funds is profit-maximization rather than political power.
Chris Cox, chairman of the Securities and Exchange Commission, says the SEC's mission is to prevent fraud and unfair dealing, and sovereign wealth funds could complicate that mission if the governments operating them are both market players and referees. Or if the governments use their intelligence services' covert information-collecting to give their investors information advantages. Or if the funds' lack of transparency contributes to market volatility because of uncertainty about the funds' allocation of assets.
The blurring of the line between government and private economic activity is potentially troublesome. Still, the funds are not large relative to the world economy or even to the $14 trillion U.S. economy, which is larger than the next four largest economies combined -- Japan's, Germany's, China's and Britain's. Russia's economy is about the size of New York's and Arizona's combined; India's is about half the size of California's.
Today's Americans, their pain threshold lowered by the successful modulation of business cycles, regard recessions not as mere misfortunes but as violations of an entitlement to perpetual economic serenity. In the 50 years before 1945, contractions were frequent and ferocious enough to fray the social fabric. There were three contractions of 5 percent of gross domestic product, two of 10 percent and two of 15 percent. Since postwar demobilization, the most severe contraction -- that of 1982, when President Ronald Reagan and Fed Chairman Paul Volcker stifled inflation -- was 1.9 percent.
That recession ended in November 1982. If another recession did start last month, then in the 302 months from November 1982 through December 2007, the economy was in recession only 14 months -- 4.6 percent of the time. The economy was in recession 22.4 percent of the time between 1945 and 1982.
A recession-free economy is neither an entitlement nor, truth be told, desirable: The "wisdom of crowds" is real, but even markets make mistakes, and recessions, a.k.a. corrections, are, by definition, constructive. Even so, the modern economy's rhythms are much less alarming than any previous generation could have imagined.