States normally invest foreign exchange reserves in low or no-risk investment vehicles like US Treasuries. But there is concern that some of these funds are now moving toward riskier equity holdings. This development worries governments in the US and Europe. Finance Ministers from the G7 recently asked some of the biggest funds to develop an explicit code of conduct for SWFs. Transparency is an issue here. So is national security. "Money is naturally going to gravitate toward dollar-based assets because of the strength of our economy," Treasury secretary, Henry Paulson Jr., recently said."I'd like nothing more than to get more of that money. But I understand that there's a natural fear that they're going to buy up America."
At the Carnegie Council last week, Daniel Altman downplayed those fears by noting that a similar sentiment surrounded Japanese real-estate purchases in the US during the 1980s. "My gut feeling is, that if you are going to offer securities for sale, you can't dictate who buys them," he said.
Bloomberg's Matthew Lynn is somewhat more direct in his defense of SWFs.
"Nobody minded when emerging economies recycled all those dollars, pounds and euros by putting cash on deposit in our banks, or buying bonds issued by our governments. So why should we mind when they start buying companies? They are just diversifying their holdings, like any prudent investor would. If we don't like them purchasing our equities, shouldn't we tell them to stop buying our bonds and currencies as well?"Should we be scared of Sovereign Wealth Funds? Or are they no riskier than other investment vehicles that we are more familiar with?
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