The New Bogeymen of Financial Capitalism

In today’s global financial capitalism, much attention – and growing criticism – has been focused on the proliferation nowadays of hedge funds, private equity firms, proprietary trading desks, and other private-sector financial institutions. But the emergence of a smaller set of very large public-sector players – sovereign wealth funds (SWF’s) – with implications that are no less far-reaching.

The sub-prime crisis has diverted attention from rising fears about Sovereign Wealth Funds (SWF’s) as the new bogeyman of global finance. But the minute the sub-prime crisis subsides, anxieties about SWF’s will return. For the emergence of this vast and growing pool of state-controlled funds may have implications more far-reaching, and certainly more politically sensitive, than the hopefully temporary distress caused by the subprime crisis.

Indeed, if SWF’s continue to grow their investments are bound to permanently alter the relative weight of state and privately controlled assets in advanced economies. According to Morgan Stanley, SWF’s are expected to manage $12 trillion by 2015, up from about $2.5 trillion today. Both sums dwarf the sums controlled by hedge funds and private equity groups. Thus some of the biggest investors – both passive and strategic – in financial markets in the coming years will be government institutions. That the biggest of these institutions are in China, Vladimir Putin’s Russia and some unstable petro-states adds another worry to the mix.

The growth of SWF’s is a direct consequence of the accumulation of more than $5 trillion in foreign reserves by emerging-market economies in Asia and among oil and commodity exporting countries. These economies’ current-account surpluses, together with massive inflows of capital, have led their monetary authorities to try to prevent their national currencies from appreciating in order to maintain the competitiveness of their industries.

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