Sovereign Wealth Funds and Their Sub-prime Cash Infusions

I’ve been meaning to comment on this for some time and, while delaying, the topic has fallen out of the news quite a bit. Recent Coverage.

Across the winter of 2007-2008 we’ve been hearing about the sudden rise of sovereign wealth funds and their cash advances to victims of this “sub-prime” fiasco.

If you were to listen to CNN or Fox News, perhaps, you might hear some discussion (and fear) of the foreign influence on our economy. If you were to listen to CNBC rather, you might well have heard some very positive opinions. One interview I saw included two panelists who both agreed…entirely.

There are a number of safeguards concerning foreign control of American corporations. The fear that our economy is going to be stolen from us is an exaggeration. However, the positive opinions on this topic seemed to be summarized as: “well, these firms need the cash, so…it’s a good thing.”

Well, my self-centered media friends, that’s not what I’d call a good thing. These firms should be ready to suffer the consequences. Their executives have been given the ax and their boards are shaken. Though many pension funds and individual Americans were counting on these firms, this is the situation we have before us. We need better corporate governance and risk-incentive controls; that would be a “good thing.” Unfortunately, we can only punish these supremely wealthy but now retired executives so much. Yeah…

If there’s a reason that this is a good thing it’s because we are growing closer and more diversified ties with parts of the world that have very non-diversified economies and unpredictable societies. To give an overly simple analogy: we cooperate well with Britain and Japan, for example, because we have many mutual interests and we value the stability of the international economy. This, perhaps, is why we haven’t come toe-to-toe with China and found ourselves in a more adversarial relationship, despite our political and competitive differences.

If the UAE, Singapore, and Kuwait pour state-controlled funds into our American corporations they have a legitimate interest in our economic welfare. We can leverage this relationship and tie it to support for any number of our national interests, not least of which are security and anti-terrorism efforts. This, I submit, might be the “good thing” to come out of this international financing debacle. A world with more to gain from stability and capital flow than from a distributive vision of competition is less inclined toward conflict. Game theory saves the day and the Sudetenland is safe.

Of course, we’ve lost any sense of our own stability in this ridiculous process. Our currency is falling like a rock; much of it is over-seas due to our increasingly costly oil spending; sensibly, the sovereign wealth funds, with their rapidly depreciating stockpiles of American dollars, have decided to buy our financial firms while they’re on sale. Meanwhile, our homes are losing value as if they’re on fire. So as we’ve done many times before, here we are taking one for the team.

Well, at least they’re speaking French in Alsace-Lorraine.