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Updated Saturday, March 6, 2010 12:23 am TWN, By William Pesek, Bloomberg

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Gov't spending may be big gamble

Abu Dhabi Investment Authority may face a US$4.8 billion paper loss when it's forced to convert its so-called Citigroup equity units to shares starting this month. In Singapore, Temasek Holdings Pte, a state-owned investment company that oversees US$120 billion, sold its shares in Bank of America Corp. — BofA bought Merrill Lynch, in which Temasek invested — for a US$4.6 billion loss in early 2009.

Such investments may pay off in the long run. For example, in the Government of Singapore Investment Corp.'s annual report, published in September, Chief Investment Officer Ng Kok Song said he still has “confidence” in the long-term prospects of the UBS investment. GIC declined to comment for a March 3 Bloomberg article.

Expect to see far greater conservatism on the part of governments investing overseas. It's not such a bad turn of affairs. This whole idea that massive state investment funds would save capitalism was always a bit surreal. It's a wonder the free-market crowd was ever peddling it.

Let's call it what it is: Thatcherism in reverse. During the 1980s, U.K. Prime Minister Margaret Thatcher championed a process of selling national assets, arguing that private managers create more wealth than public ones. Recently, we have seen a kind of re-nationalization of companies across borders. Is this how capitalism is really supposed to work?

If so, tensions will rise markedly. Would the U.S. sit idly if China went shopping for big stakes in Silicon Valley? What about Australia, New Zealand and Canada as foreign governments consider buying key resource companies? How might Japan or South Korea react to acquisitions of their banks?

These questions were touchy before the worst global crisis since the 1930s. Its fallout makes them even harder to tackle as nations turn inward to boost employment and shelter populations from global shocks.

This year has served up its fair share of disorientation. Look no further than market chatter about Greece turning to China for a bailout. After all, China's cache of reserves dwarfs what the International Monetary Fund has on hand to deploy.

If the doomsayers are correct that an even bigger crisis is looming, sovereign wealth funds may be expected to save the day. As the world shifts from economies that are too big to fail to those that are too big to save, it will be tempting to access all that state money sitting around. Greece is one thing. Think of the cost of bailing out a US$1.6 trillion economy like Spain or even larger ones.

Governments aren't meant to dominate markets in the long run. The global crisis brought them in to stabilize things, and greater regulation is needed to avoid another meltdown in the not-so-distant future.

When we talk about exit strategies, though, we should think about more than winding down stimulus efforts. We also should consider whether governments really should dominate the global finance game in the years ahead. Talk about gambling with capitalism's future.

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