Sovereign Wealth Funds in the Cross Hairs

These foreign government-controlled investment vehicles are a new target for economically anxious America.

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Last year's protectionist backlash against China on Capitol Hill—where there was a spate of bills attempting to force that country to let its currency appreciate vs. the dollar—has morphed into a "get tough" campaign on sovereign wealth funds. Earlier this week, Sen. Charles Schumer said that SWFs need to increase transparency—perhaps, at minimum, accepting an International Monetary Fund code of practices—or face congressional action. (Expect a flurry of bills from both the House and Senate.)

How strange. While you could make the argument that the strong yuan is hurting the American economy, SWF money has been a huge boost so far, propping up beleaguered U.S. financial institutions like Citigroup. But I guess it's the idea of accepting "foreign handouts" that rankles some people, especially when they come from nondemocratic governments. Plus, whenever the economy sours, the country has a tendency to turn inward.

But Judge Richard Posner, in his blog with Nobel laureate economist Gary Becker, makes a couple of good points about SWFs: 1) SWF investments create long-term wealth in this country by placing money in the hands of U.S. asset owners here that they can then invest for a higher return. 2) SWF investments in nondefense companies don't undermine our national security because they in effect create financial hostages. "It's as if to guarantee China's good behavior the president of China sent his family to live in the United States," Posner writes.