I don't know whether Sir Branson's bid for Northern Rock is better than the other offers on the table. We don't know the full details of what old Beardy is proposing, and we know even less about the other potential buyers. However, it's clear to me that the shareholders in NR are going to make it difficult for the Government to push any deal through, unless it is prepared to threaten the use of the "nuclear" option of driving the company out of business.
There are two groups of shareholders that the Government needs to worry about. One is the hedge funds, who have been acquiring NR shares since the company's troubles erupted, and have built up a pretty substantial stake. In the US these would be called "vulture funds". Some of them are already calling for a special meeting of the NR board, and demanding a new by-law to prevent the sale of more than 5% of the company's assets without shareholder approval. No bank in the world could operate with such a stipulation in place, but of course the point of it in this particular case would be to make it impossible for the company to liquidate itself in an orderly fashion in order to pay off its creditors, notably the UK taxpayer. The Government may try to portray the hedge funds as opportunistic leeches, which of course they are -- as the Bishop of Southwark might say, "it's what they do". Even so, they are leeches who can afford expensive lawyers, and they can make things very difficult for NR and for the Government.
The second group are the small shareholders, over 100,000 of them, many of whom became owners when NR demutualised. Here the problem is a bit different: if the pronouncements of their supposed spokesmen are typical, these people simply don't understand what being a shareholder means. They see themselves as "stakeholders", with a claim comparable to that of NR's creditors. This is simply not the case: the shareholders own NR and NR owes a lot of people -- in effect, everyone in the UK, as well as its own depositors -- a lot of money. Shareholders are of course protected by the principle of limited liability, but in some sense it is they who "owe" that money. What's more, they cheerfully sat by and collected their dividend cheques as their company greatly overextended itself by excessive borrowing in wholesale markets -- a classic example of overtrading.
One of these small shareholder spokespeople said on Radio 5 on Monday that it they resented having to make a decision "with a gun to our heads". Well I tell you what, sunshine, just give us back our money and I promise you'll never hear from us again. He also said that he wanted the chance to see the non-Branson offers so as to make sure that the best one was being chosen. Given that he seems not to understand even a basic concept like share ownership, I don't think that would be a good idea.
Tuesday 27 November 2007
Thursday 22 November 2007
Gordon Brown, meet Mr Dithers
It's almost beyond belief how much bad stuff has happened since Gordon Brown finally moved into 10 Downing Street. Attempted terror attacks....severe flooding....foot-and-mouth, bluetongue and avian flu....Northern Rock....the HMRC data fiasco....not to mention the fact that none of the home countries has qualified for Euro 2008.
Not all of these can be blamed on poor Gordon, of course, though that hasn't stopped the opposition parties from trying, and there is certainly a case to be made that the seeds of both Northern Rock and the HMRC debacle were sown while he was seething in the Chancellor's job. It's starting to look more likely than not that his tenure as PM will not be anything like as long as Tony Blair's.
There are some interesting parallels between Brown's career and that of Canada's last PM, Paul Martin. Like Brown, Martin spent many years in charge of his nation's public finances, and arguably each was responsible for the most lasting achievements of the Government in which they served (Blair's, in the case of Brown, and Jean Chretien's, in the case of Martin). Brown can claim to be the architect of Britain's longest-ever economic expansion, while Martin rescued Canada from an imminent fiscal meltdown. Yet neither actually got on well with his boss, with the result that in both cases, the handover of power came much later than expected, and not at the most favourable time for the new man.
When Martin became Canadian PM, the nation waited to see what he would do now that he finally had his hands on the tiller. The answer was: nothing. It seemed as if Martin had run out of either ideas or energy while serving under Chretien. He was so ineffectual that even the Economist noticed, and branded him as Mr Dithers. As soon as the next election came around, in early 2006, Martin was booted out by the same voters who had benefited so much from his tenure in the finance job.
Martin didn't have the same bad luck as Brown; he simply didn't know what he wanted to do once he got the job he'd always wanted. Brown is supposedly a man of ideas, but the pre-budget statement last month suggested that not many of them are actually his. Worse, the response to the Northern Rock crisis was inept, and the HMRC problems are not exactly showing ministers in a good light either. Brown may not be dithering yet, but he's certainly starting to flounder.
Not all of these can be blamed on poor Gordon, of course, though that hasn't stopped the opposition parties from trying, and there is certainly a case to be made that the seeds of both Northern Rock and the HMRC debacle were sown while he was seething in the Chancellor's job. It's starting to look more likely than not that his tenure as PM will not be anything like as long as Tony Blair's.
There are some interesting parallels between Brown's career and that of Canada's last PM, Paul Martin. Like Brown, Martin spent many years in charge of his nation's public finances, and arguably each was responsible for the most lasting achievements of the Government in which they served (Blair's, in the case of Brown, and Jean Chretien's, in the case of Martin). Brown can claim to be the architect of Britain's longest-ever economic expansion, while Martin rescued Canada from an imminent fiscal meltdown. Yet neither actually got on well with his boss, with the result that in both cases, the handover of power came much later than expected, and not at the most favourable time for the new man.
When Martin became Canadian PM, the nation waited to see what he would do now that he finally had his hands on the tiller. The answer was: nothing. It seemed as if Martin had run out of either ideas or energy while serving under Chretien. He was so ineffectual that even the Economist noticed, and branded him as Mr Dithers. As soon as the next election came around, in early 2006, Martin was booted out by the same voters who had benefited so much from his tenure in the finance job.
Martin didn't have the same bad luck as Brown; he simply didn't know what he wanted to do once he got the job he'd always wanted. Brown is supposedly a man of ideas, but the pre-budget statement last month suggested that not many of them are actually his. Worse, the response to the Northern Rock crisis was inept, and the HMRC problems are not exactly showing ministers in a good light either. Brown may not be dithering yet, but he's certainly starting to flounder.
Tuesday 20 November 2007
When it comes to fish, the Newfies know best
Remember the story a week or two ago about food wastage in the UK? Apparently about a third of all the food bought in this country gets thrown out and winds up in the landfill. Aside from the evident immorality of this, it's a big contributor to greenhouse gases: the carbon dioxide produced each year by rotting food is equivalent to the emissions of five million cars (or one Jeremy Clarkson).
This week's food waste "scandal" takes us to the other end of the human food chain: to conform with EU limits on their landings of codfish, fishermen are throwing out as much as 60% of the fish they haul up onto their boats. They claim that the cod stocks in the North Sea have recovered sharply, so the quotas should be increased.
The fact that so much cod is now being netted as a by-product of attempts to catch permitted species such as Dover sole tends to prove their point. But even if they're exaggerating, even if cod stocks remain below ideal levels, it's hard to see who (apart from the seagulls) benefits from throwing dead fish back into the water, rather than bringing them ashore to sell. As long as the rules on net sizes are being properly enforced, there can be no harm in allowing this. In fact, as one fishermen's spokesman said today, the current practice is going to put more species in peril. The fishermen have to keep netting more and more fish, and throwing back more and more dead cod, in order to make a decent living from the permitted species.
The collapse of the cod stocks in European waters mirrors similar events on the Grand Banks of Newfoundland a couple of decades ago. The fishing industry of Newfoundland, once the province's primary source of employment, was eviscerated, with whole communities ceasing to exist. But even at the worst of the crisis, the fishermen were always allowed to land and sell whatever "by-catch" of cod happened to end up in their nets. Mind you, it was always amazing, when you ate out in St John's in those days, to realise just how big that by-catch could be! Still, a little bit of cheating is surely better than outright waste.
This week's food waste "scandal" takes us to the other end of the human food chain: to conform with EU limits on their landings of codfish, fishermen are throwing out as much as 60% of the fish they haul up onto their boats. They claim that the cod stocks in the North Sea have recovered sharply, so the quotas should be increased.
The fact that so much cod is now being netted as a by-product of attempts to catch permitted species such as Dover sole tends to prove their point. But even if they're exaggerating, even if cod stocks remain below ideal levels, it's hard to see who (apart from the seagulls) benefits from throwing dead fish back into the water, rather than bringing them ashore to sell. As long as the rules on net sizes are being properly enforced, there can be no harm in allowing this. In fact, as one fishermen's spokesman said today, the current practice is going to put more species in peril. The fishermen have to keep netting more and more fish, and throwing back more and more dead cod, in order to make a decent living from the permitted species.
The collapse of the cod stocks in European waters mirrors similar events on the Grand Banks of Newfoundland a couple of decades ago. The fishing industry of Newfoundland, once the province's primary source of employment, was eviscerated, with whole communities ceasing to exist. But even at the worst of the crisis, the fishermen were always allowed to land and sell whatever "by-catch" of cod happened to end up in their nets. Mind you, it was always amazing, when you ate out in St John's in those days, to realise just how big that by-catch could be! Still, a little bit of cheating is surely better than outright waste.
Thursday 15 November 2007
More Kaletsky Kapers
Anatole Kaletsky is foaming at the mouth at the possibility that any rescue of Northern Rock will place a big burden on taxpayers. I think he's right to argue against such an outcome. However, I don't really blame the bidders for trying it on, and I suspect the Government will find it hard to refuse, given the inept handling of the crisis by the financial authorities, particularly the Bank of England.
But I have to wonder: can this be the same Anatole Kaletsky who was for many years one of the great apologists for cheap money? He regularly argued that the process of home equity withdrawal (the flipside of excessive mortgage lending) was a wholly-benign, growth-supporting feature of the US and UK economies. In fact, he used to castigate the ECB for refusing to cut interest rates, thereby denying European homeowners the chance to get in on the action. M. Trichet must be glad he didn't take the advice.
But I have to wonder: can this be the same Anatole Kaletsky who was for many years one of the great apologists for cheap money? He regularly argued that the process of home equity withdrawal (the flipside of excessive mortgage lending) was a wholly-benign, growth-supporting feature of the US and UK economies. In fact, he used to castigate the ECB for refusing to cut interest rates, thereby denying European homeowners the chance to get in on the action. M. Trichet must be glad he didn't take the advice.
Tuesday 13 November 2007
24-hour news people
Very early one Sunday morning a couple of years back, we were awakened by a huge explosion, obviously quite close by. As it was still dark, there was nothing to be seen outside, so we switched on Sky News. Sure enough, within about five minutes, one of those "breaking news" boxes appeared on the screen: "Large explosion heard in St Albans". Then Sky had what they must have thought was a stroke of luck: one of their reporters was living in the city (yes, St Albans is a city!), and called in with the first "on the spot" report.
The anchor in the studio asked if it was an explosion on the ground. No, the reporter said confidently, he had been in war zones and knew what those sounded like. He had heard a strange noise overhead just before the explosion and was pretty convinced it was an aircraft crash. He sounded so certain about this that you felt that at any moment, he would name the airline, if not the pilot. He was, of course, dead wrong: this was the Buncefield oil depot explosion, the largest blast in peacetime Europe. Within half an hour Sky was starting to get the story straight, and the "on the spot" reporter vanished from the airwaves.
I was reminded of this by BBC News-24's coverage of the factory blaze in East London on Monday. Even though terrorism was almost immediately ruled out, for almost two hours they gave it the sort of wall-to-wall coverage that we all remember from the September 2001 attacks. A helicopter was despatched to the scene, and quickly revealed that most of the "75 firefighters tackling the raging inferno" were in fact standing around in the car park, while about ten of their colleagues trained hoses on the building. (This is not meant as a criticism of the firefighters, who got the blaze under control very quickly, and happily with no injuries or loss of life).
The BBC got a reporter in close to the scene, then started to up the ante. Because the fire was located on a corner of the 2012 Olympic site, the sports reporter was central to the coverage. He called someone at the Olympic Delivery Authority, effectively asking whether this catastrophe would derail their plans to have the Games facilities ready on time. The ODA seemed pretty relaxed about it all, not least because the burning building was due for demolition anyway. The BBC also reported "travel disruptions" in the area. A reporter called Eurostar, who advised that their services were unaffected -- possibly because the nearby High Speed 1 line was not yet in use that day, so all of their trains were on the other side of the river. More promisingly, it emerged that services on the nearby North London Line were suspended -- and as the helicopter camera moved in for a close-up of the stricken line, a passenger train trundled by.
The BBC also reported that the fire had started in a bus depot, which turned out not to be true. Still, there were three bus depots on the same road, so the helicopter focused in on one of them while a reporter contacted the manager of a bus company. His first comment: "That garage in your shot is not ours". So the reporter asked him for his eye-witness account of the explosion. Well, actually, he was in an office on the other side of London, but he was sure it must have been worrying for people close by. It all made you think that Drop the Dead Donkey and Alan Partridge didn't skewer the media hard enough.
By late afternoon the BBC was scarcely mentioning the fire on its news bulletins, so I still have no idea why they initially gave it so much airtime. It's not as if there was nothing else going on at the time: someone took a pop at German Chancellor Merkel, Benazir Bhutto announced she was no longer talking to President Musharraf, and David Cameron announced a new policy initiative on....no wait, maybe that explains it.
The anchor in the studio asked if it was an explosion on the ground. No, the reporter said confidently, he had been in war zones and knew what those sounded like. He had heard a strange noise overhead just before the explosion and was pretty convinced it was an aircraft crash. He sounded so certain about this that you felt that at any moment, he would name the airline, if not the pilot. He was, of course, dead wrong: this was the Buncefield oil depot explosion, the largest blast in peacetime Europe. Within half an hour Sky was starting to get the story straight, and the "on the spot" reporter vanished from the airwaves.
I was reminded of this by BBC News-24's coverage of the factory blaze in East London on Monday. Even though terrorism was almost immediately ruled out, for almost two hours they gave it the sort of wall-to-wall coverage that we all remember from the September 2001 attacks. A helicopter was despatched to the scene, and quickly revealed that most of the "75 firefighters tackling the raging inferno" were in fact standing around in the car park, while about ten of their colleagues trained hoses on the building. (This is not meant as a criticism of the firefighters, who got the blaze under control very quickly, and happily with no injuries or loss of life).
The BBC got a reporter in close to the scene, then started to up the ante. Because the fire was located on a corner of the 2012 Olympic site, the sports reporter was central to the coverage. He called someone at the Olympic Delivery Authority, effectively asking whether this catastrophe would derail their plans to have the Games facilities ready on time. The ODA seemed pretty relaxed about it all, not least because the burning building was due for demolition anyway. The BBC also reported "travel disruptions" in the area. A reporter called Eurostar, who advised that their services were unaffected -- possibly because the nearby High Speed 1 line was not yet in use that day, so all of their trains were on the other side of the river. More promisingly, it emerged that services on the nearby North London Line were suspended -- and as the helicopter camera moved in for a close-up of the stricken line, a passenger train trundled by.
The BBC also reported that the fire had started in a bus depot, which turned out not to be true. Still, there were three bus depots on the same road, so the helicopter focused in on one of them while a reporter contacted the manager of a bus company. His first comment: "That garage in your shot is not ours". So the reporter asked him for his eye-witness account of the explosion. Well, actually, he was in an office on the other side of London, but he was sure it must have been worrying for people close by. It all made you think that Drop the Dead Donkey and Alan Partridge didn't skewer the media hard enough.
By late afternoon the BBC was scarcely mentioning the fire on its news bulletins, so I still have no idea why they initially gave it so much airtime. It's not as if there was nothing else going on at the time: someone took a pop at German Chancellor Merkel, Benazir Bhutto announced she was no longer talking to President Musharraf, and David Cameron announced a new policy initiative on....no wait, maybe that explains it.
Tuesday 6 November 2007
After the goldrush
Among all the anecdotal evidence that the UK property boom is over, here's the most convincing sign: the awful Rosie Millard has dropped her long-running column on buy-to-let in the Sunday Times. As the market heads over the edge, she (or the paper)may have begun to worry about lawsuits from people she has induced to become amateur landlords. (By the way, fans of Rosie need not despair. She has already started a new weekly column called Lust, Greed and Envy. These are, of course, three of the Seven Deadly Sins, but Rosie seems quite keen on them).
It will be some time before we can judge the long-term impact of the past decade's buy-to-let frenzy. However, it's not too soon to suggest that it may have done a lot to frustrate the Government's long-term housing goals.
Firstly, it was reported recently that the proportion of households that own their homes has started to decline recently, after rising steadily since the Thatcher sell-off of council houses. There are many factors at work here, but the buy-to-let mob have surely contributed in at least two ways. Obviously enough, the added competition for available properties accounts for a large part of the run-up in prices. Moreover, the contest for financing between middle-class professionals such as Ms Millard and her ilk on the one hand, and young couples just starting out on the other, is pretty one-sided: any bank will always prefer to lend to someone with a higher income or more security, especially as the investor gets a tax deduction on the mortgage. I can't think of any other reason why the banks would have allowed the ratio of prices to average earnings to soar to unprecedented heights, as it has in recent years. That ratio is no longer meaningful if a lot of the borrowers are wealthy investors with several homes.
Secondly, the buy-to-letters seem to have distorted the new housing market. The keenness of ill-informed but greedy amateurs to buy off plan, whether to let or simply to flip, has induced developers to build enormous numbers of new apartments. Trouble is, nobody wants to live in these jerry-built shoeboxes. In cities such as Leeds, as many as 70% of new-built apartments may be empty. By coincidence, that's the same proportion of the total apartment stock that buy-to-let investors now apparently control. Prices in this sector are falling fast, which serves the investors right; but that won't change the fact that a large part of the homebuilding effort of the past decade has been misdirected.
I think the malign effect of buy-to-let in the apartment sector may go further than this. We are thinking of downsizing from our big commuter-belt house to an apartment, so we have started to look at what's available. We went to look at a new-build development in Brighton. Leaving aside the pokiness of the flats themselves, there were plenty of signs of the malign buy-to-let influence: in my experience, people spending several hundred thousand pounds on a place to live don't use flattened cardboard boxes as window coverings. Why would we, or any other empty nesters, choose to move into a building largely owned by absentee landlords interested only in turning a quick profit? We may well wind up staying put, thereby keeping our decent-sized family property off the market.
The current market turmoil will shake out a lot of buy-to-letters, which is a good thing. The Government can ensure that the sector doesn't bounce back too quickly by removing the council tax concession that currently applies to empty properties. That change would also create an incentive to do something about the 840,000 homes that are currently sitting empty in the UK. Renovating those, or knocking them down and replacing them with something more modern, would be a much better use of developers' time than slapping up another block of flats in Leeds.
It will be some time before we can judge the long-term impact of the past decade's buy-to-let frenzy. However, it's not too soon to suggest that it may have done a lot to frustrate the Government's long-term housing goals.
Firstly, it was reported recently that the proportion of households that own their homes has started to decline recently, after rising steadily since the Thatcher sell-off of council houses. There are many factors at work here, but the buy-to-let mob have surely contributed in at least two ways. Obviously enough, the added competition for available properties accounts for a large part of the run-up in prices. Moreover, the contest for financing between middle-class professionals such as Ms Millard and her ilk on the one hand, and young couples just starting out on the other, is pretty one-sided: any bank will always prefer to lend to someone with a higher income or more security, especially as the investor gets a tax deduction on the mortgage. I can't think of any other reason why the banks would have allowed the ratio of prices to average earnings to soar to unprecedented heights, as it has in recent years. That ratio is no longer meaningful if a lot of the borrowers are wealthy investors with several homes.
Secondly, the buy-to-letters seem to have distorted the new housing market. The keenness of ill-informed but greedy amateurs to buy off plan, whether to let or simply to flip, has induced developers to build enormous numbers of new apartments. Trouble is, nobody wants to live in these jerry-built shoeboxes. In cities such as Leeds, as many as 70% of new-built apartments may be empty. By coincidence, that's the same proportion of the total apartment stock that buy-to-let investors now apparently control. Prices in this sector are falling fast, which serves the investors right; but that won't change the fact that a large part of the homebuilding effort of the past decade has been misdirected.
I think the malign effect of buy-to-let in the apartment sector may go further than this. We are thinking of downsizing from our big commuter-belt house to an apartment, so we have started to look at what's available. We went to look at a new-build development in Brighton. Leaving aside the pokiness of the flats themselves, there were plenty of signs of the malign buy-to-let influence: in my experience, people spending several hundred thousand pounds on a place to live don't use flattened cardboard boxes as window coverings. Why would we, or any other empty nesters, choose to move into a building largely owned by absentee landlords interested only in turning a quick profit? We may well wind up staying put, thereby keeping our decent-sized family property off the market.
The current market turmoil will shake out a lot of buy-to-letters, which is a good thing. The Government can ensure that the sector doesn't bounce back too quickly by removing the council tax concession that currently applies to empty properties. That change would also create an incentive to do something about the 840,000 homes that are currently sitting empty in the UK. Renovating those, or knocking them down and replacing them with something more modern, would be a much better use of developers' time than slapping up another block of flats in Leeds.
Thursday 1 November 2007
America waives the rules
The US constantly proclaims the superiority of free markets, but does it really believe in them? A couple of recent examples suggest not.
Let's start with the "open skies" agreement between the US and Europe, recently concluded after many years of difficult negotiations, and due to take effect in early 2008. Europe consented to allow US carriers free access to European airports, with Heathrow the big prize: prior to this deal, only four airlines were allowed to operate transatlantic flights from the airport. Is return for this, the US conceded....well, not much, actually. Restrictions on foreign ownership of US airlines remain intact, and European carriers have not been given much in the way of "cabotage" rights, which would allow them to carry passengers within the US.
So it wasn't much of a deal for Europe anyway, though anything that helps to curb the ripoff pricing of business class flights from Heathrow can't be entirely bad. But now it emerges that the FAA is going to cut back on the number of flights allowed at JFK in New York during peak times. This will put paid to BA's plans to fly there from mainland Europe, and may even force it to cut back its existing schedule of US-UK flights. In the meantime, US airlines can make space for themselves at JFK by shifting flights to other NY-area airports, and are busily lining up slots at Heathrow.
The FAA has in effect turned an agreement that had already few benefits for the UK into one that could prove seriously negative for British carriers. You can imagine the outcry from Washington if the UK had done something similar, but so far I haven't heard a peep out of Whitehall.
There's a second example: the US, with some support from EU countries, is starting to get very worried about "sovereign investment funds". These are pools of cash held by non-US governments that are now being used on an increasing scale to buy assets in rich countries. Some of these funds are owned by "friendly" countries (such as Singapore or Canada), but many more are owned by countries the US is a bit more leery of, including China and several of the OPEC nations.
The US was happy to allow these funds to buy US assets as long as they stuck mainly to bonds -- in fact, without buying from China and Japan, the US Treasury's borrowing programme would have been in big trouble years ago. But now the funds are starting to invest more broadly, buying real estate and taking over whole companies. This makes sense from their standpoint -- you don't want to have all your eggs in one basket, especially one as ropey as the US debt market -- but it's got the Americans crying foul.
What's Uncle Sam's problem? Well, the official line is that these funds may not invest on purely economic (expected return) grounds. Because they are not "transparent", they could make investment decisions based on extraneous (i.e political) factors, and that could destabilise markets.
I see several flaws in this argument. Although the sovereign funds are getting pretty big, they are dwarfed by the huge US-based investment pools, predominantly state pension funds such as CalPERS. Although subject to regulation, these funds are hardly beacons of transparency. Nor are the hedge funds and private equity funds that have become huge players in US financial markets over the past decade. The fact is that public equity markets have become less significant players in the US economy in recent years. The emergence of sovereign funds is far from being the biggest contributor to this trend away from transparency.
Foreign ownership of US assets is only going to increase. The soaring oil price will keep bloating the sovereign pools and the collapsing US dollar will make US assets cheap for foreign buyers. Years of overconsumption are finally taking their toll. It's an uncomfortable time for US policymakers, and it looks as if the country's commitment to free markets will be one of the first victims.
Let's start with the "open skies" agreement between the US and Europe, recently concluded after many years of difficult negotiations, and due to take effect in early 2008. Europe consented to allow US carriers free access to European airports, with Heathrow the big prize: prior to this deal, only four airlines were allowed to operate transatlantic flights from the airport. Is return for this, the US conceded....well, not much, actually. Restrictions on foreign ownership of US airlines remain intact, and European carriers have not been given much in the way of "cabotage" rights, which would allow them to carry passengers within the US.
So it wasn't much of a deal for Europe anyway, though anything that helps to curb the ripoff pricing of business class flights from Heathrow can't be entirely bad. But now it emerges that the FAA is going to cut back on the number of flights allowed at JFK in New York during peak times. This will put paid to BA's plans to fly there from mainland Europe, and may even force it to cut back its existing schedule of US-UK flights. In the meantime, US airlines can make space for themselves at JFK by shifting flights to other NY-area airports, and are busily lining up slots at Heathrow.
The FAA has in effect turned an agreement that had already few benefits for the UK into one that could prove seriously negative for British carriers. You can imagine the outcry from Washington if the UK had done something similar, but so far I haven't heard a peep out of Whitehall.
There's a second example: the US, with some support from EU countries, is starting to get very worried about "sovereign investment funds". These are pools of cash held by non-US governments that are now being used on an increasing scale to buy assets in rich countries. Some of these funds are owned by "friendly" countries (such as Singapore or Canada), but many more are owned by countries the US is a bit more leery of, including China and several of the OPEC nations.
The US was happy to allow these funds to buy US assets as long as they stuck mainly to bonds -- in fact, without buying from China and Japan, the US Treasury's borrowing programme would have been in big trouble years ago. But now the funds are starting to invest more broadly, buying real estate and taking over whole companies. This makes sense from their standpoint -- you don't want to have all your eggs in one basket, especially one as ropey as the US debt market -- but it's got the Americans crying foul.
What's Uncle Sam's problem? Well, the official line is that these funds may not invest on purely economic (expected return) grounds. Because they are not "transparent", they could make investment decisions based on extraneous (i.e political) factors, and that could destabilise markets.
I see several flaws in this argument. Although the sovereign funds are getting pretty big, they are dwarfed by the huge US-based investment pools, predominantly state pension funds such as CalPERS. Although subject to regulation, these funds are hardly beacons of transparency. Nor are the hedge funds and private equity funds that have become huge players in US financial markets over the past decade. The fact is that public equity markets have become less significant players in the US economy in recent years. The emergence of sovereign funds is far from being the biggest contributor to this trend away from transparency.
Foreign ownership of US assets is only going to increase. The soaring oil price will keep bloating the sovereign pools and the collapsing US dollar will make US assets cheap for foreign buyers. Years of overconsumption are finally taking their toll. It's an uncomfortable time for US policymakers, and it looks as if the country's commitment to free markets will be one of the first victims.
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