Due to their ability to bail out the faltering bank industry, Ron Paul says no.
I disagree. [The few rare exceptions, right?]
While on principle no third party is justified in forcibly restricting the consensual trade of goods and services, SWFs are simply exacerbating the correction process. A recession is not necessarily a bad thing because it cleans up the poorly managed firms. And SWFs sweeping in to prevent their collapse is not laudable.
And not to get into efficiencies or profitability, but it should be noted that SWFs have been killed in the past 6 months because their portfolio diversification has been terrible. Not to mention that their funds bankrolled subprime schemes and propped up some of the very banks responsible for the liquidity issues today.
Politicians should not be allowed to curtail outside investors, but they shouldn’t be allowed to own, manage or control investment funds either. Privatize their assets.
Be sure to see Jim Rogers discussion on the recent Fed bailout as well.
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I amazed that Dr. Ron Paul has no fear of SWFs, even worse saying that “we should welcome the stability that such investment is bringing to our economy.”
Let’s see, Saddam Hussein brought stability to Iraq, Stalin to Russia, Castro to Cuba, and even North Korea has been “stabilized.” Question is, at what cost?
I agree with everything else Dr. Paul says concerning the real problem, the underlying fundamentals. This by no means though, negates the market distorting problems imposed by SWFs.
IMO, SWFs are just the next failed underlying fundamental that is no more welcoming to a free market than the machinations of Helicopter Ben.
That Dr. Paul can clearly see one government manipulation as evil, while welcoming the other, is beyond me. There is no amount of SWF money that can save our economy from the crack-up boom engineered in DC and Wall St.
I agree that assets held by governments in sovereign wealth funds would be better in their citizens’ hands, but I would like to refine one point.
The difference between intervention by the Fed and by SWFs is that investment by the latter is investment of real capital, not brand new currency. SWFs are not buoying financial markets by printing money and using it to prop up values. They are not “sweeping in to prevent [the] collapse” of firms of no value. They are making investment decisions and will pay the price if their decisions are incorrect.
It’s one thing to prolong the process of price adjustment by throwing bad money after good and making poor investment decisions. It’s another thing entirely to prolong the process by printing money out of thin air.
These are not “investment decisions” unless they expect a priori to profit from them. If they are buying up securities with tax money, with no expectation of profit, then this is really tax-funded consumption (i.e. handouts) not investment.
Personally, I’d feel better about it if they really were just printing up the money; not that deliberate inflation doesn’t have manifold negative side-effects, of course, but nothing really forces people to use their inflated currency beyond a certain measure of tradition. Taxation is a much more immediate threat, and its effects more difficult to evade.
The funds intend to make money and they are making long term investments. Why should we fear governments buying stocks with intent to make a profit? As I can tell this is the most benign activity a government could possibly engage in. Also, China bought BX at 31, not 35 (Paul Kedrosky’s research is obviously not very thorough. ). Blogs were saying the units would triple on the first trading day, the firms underlying performance was good by most metrics last year. Some of the best performing money managers by track record also bought Citi, BX, other firms. Why should we expect SWFs to be far superior? Many of the SWFs got discounts from private placements, bought hybrid securities…
Also, how do you know what these funds actually own?
Tim,
I think your article was correct and so is Dr. Paul’s. You address the SWFs from the economic well-being perspective of all people over the long-run. Dr. Paul addresses the fundamentals of American problems (to keep everyone focused on thhe U.S. Gov’t and its Fed Reserve) and he addresses the proper political course for the U.S. Gov’t — i.e., it should not interfere with foreigners buying/selling goods with Americans… if it wants to do something, it can abolish its Fed Reserve.
i cannot understand what americans think they’ve got to lose from swf’s. if it weren’t for swfs taking equity stakes in faltering banks etc, taxpayers would be receiving an even bigger bill for bail-outs (either directly or via bb’s heli-drop). as long as the us government stays out of the rescue mission, where’s the bad?
surely the libertarian approach is to practice laissez-faire on home turf. other countries may or may not follow virtuous actions, but empty rhetoric is surely ignored. this us busy-bodying in other nations’ internal affairs is widely resented. let their own citizens rebel, if they feel strongly enough about it!
not only is discrimination against swfs counterproductive, but it opens the door to further protectionist measures.
shareholders should be judged solely on the colour of their money. anything else reeks of social engineering.
newson, I agree with your final sentence. Similarly I agree with Ron Paul and others that suggest preventing SWFs from investing solely because they are foreign entities amounts to little more than protectionism.
I oppose SWFs because their seed money comes from dishonest sources and their “free” money distorts the marketplace.
Libertarians condemn foreign aid financed by taxpayers, yet Citi which is being pressured by the marketplace to go belly up, is being bailed out by this dishonest money under a different name.
After 9/11 the airline industry was on the verge of collapse but were bailed out by the government. The airlines should have gone bankrupt, and the unseen consequences of this bailout are nearly impossible to outline… what other productive opportunities were foresaken? I can think of a few other things those billions of dollars could have gone towards.
SWFs are doing the same thing. Thus, asking the political class to rescue banks is no different than rescuing any other industry (even the local lemonade stands) that should fail (Jim Rogers makes a great point about that in his CNBC interview).
As far as “other citizens rebelling,” like any secession movement, that is never going to happen. That would be no different than a resident of some African country saying “well, if the Americans really didn’t want to send us money, they should rebel against the government.”
It’s not going to work and libertarians should not encourage government investment schemes even if it is financed from faceless on the other side of the world. (In an odd twist I bet you many Americans unknowingly actually helped fund many of the SWFs too).
All thing considered, SWFs are a minor disruptive player compared to policies enacted by central banks like the Fed or maintaining an ever-growing imperial military each year.
I generally agree with Ron Paul, but I will have to research this more before I make any stand. The current trend of the Federal Reserve to lower interest rates and bail out failing sectors really brings me fear, especially with the falling dollar and the subsequent rise in price of everything else.
The US dollars held by SWFs would be much better off in the hands of the foreign businesses and individuals that earned the money in the first place than in the hands of their governments. Government bureaucrats are not entrepreneurs and will undoubtedly make lousy investment decisions (like investing in failing financial institutions) that will lead to various distortions.
However, it must be remembered that taken as a whole SWFs by themselves are not inflationary; the dollars they possess are created here at home first, and not by the SWFs. And if SWFs didn’t exist, foreign governments would be parking those dollars in greater amounts in US Treasuries. So, either foreign governments spend the money themselves through SWFs, or, they buy Treasuries and allow the U.S. government to spend it. Either way is bad, of course.
to tim swanson:
i think ron paul is on much surer ground than you on this subject. foreign governments have long subsidized america’s standard of living, and foreign central banks are large owners of us treasuries. without this “gift” from foreigners, americans would be doing it much rougher (whatever the prevailing fed policy). sure, the motives of the foreign governments may be mercantilistic or contrary to their own populace’s best interests, but so what? zimbabwe is run by a despot, do you support a trade embargo to punish him?
i’d already premised my points on the basis of the us government not participating in rescue missions, so the airline industry example you’ve cited is irrelevant.
in agreeing with me that all shareholders are to be treated equally, your argumentation about why swfs are bad is superfluous. many stockholders beat their wives, many drink-drive, and quite a few drink-drive and wife-beat – are these individuals fit to be on a share-register, or should we strike them off?
libertarians (and anyone of good sense) object to taxpayer funds being dissipated in africa, but here the charity is inward-bound. american taxpayers should send thank-you notes to the culpable/stupid foreign governments.
in saying: “libertarians should not encourage government investment schemes even if it is financed from faceless on the other side of the world.” – you’ve shifted the debate.
i don’t encourage swfs, but they didn’t just spring out of nowhere to come to the rescue of citibank etc.
they are part of an existing reality, and are here to stay. the incitement to rebellion was pure irony, but seriously, non-interventionism implies letting sovereign nations sort out their own mess.
“don’t look a gift horse in the mouth!” is the ron paul message, and it’s right on.
Perhaps I’m daft but if we dont accept money from outside investors, how the hell does anyone think we’re going to manage through this mess?
Monetize it all – great answer especially as thats socialism for the RICH.
Let them all fail! – While this is my ultimate wet dream, it ain’t gonna happen any time soon.
When do you think that Middle East War will start? I say in time to save all this…
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