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Don’t Fear, Just Watch Sovereign Wealth

George Will at the Washington Post writes about how to handle the new challenge (and occasional hysteria) of sovereign wealth funds:

“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. (…) 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.”