U.S. needs a sovereign wealth fund

It does not have to be that way. If American taxpayers take all the risks by paying for these bailouts, success should give them a far larger share of the benefits than Paulson is securing from the institutions he helps. Fairness demands that Americans have a sovereign wealth fund (SWF), and we need it now. Before screaming that this would be rampant socialism, let’s try to envisage a more enlightened capitalism in this economy, and compare that to the sputtering response to the crisis of 2008.

National security, sound economic practice, and the future of the U.S. as a nation of confident shareholders demand our sovereign investment in the shares of the companies that government would save. Consider the national security imperative in simplified terms. China’s SWF, created in September 2007 to manage some US$200 billion of its foreign currency reserves, is far from the largest, but that much money would have been sufficient to buy almost double the outstanding common shares of GM, Ford, Citibank, Goldman Sachs, Morgan Stanley, and Merrill Lynch at the market price on November 25, when Fed Chairman Bernanke announced his US$800 billion plan to buy up debt.

This new US$800 billion rescue plan includes the first efforts to finance consumer debt. But the new loans, bond purchases and the temporary suspension of foreclosures by Fannie Mae and Freddie Mac come late and are still too little.

The history of the late 1980s Savings and Loan (S&L) Crisis should have guided the government’s response to the current mortgage debacle. When a bank forecloses and takes possession of a property, losses will easily exceed fifty percent under the best of circumstances. In the face of that reality, Citibank reportedly has already marked down its most toxic mortgage-backed paper to twenty one cents per dollar of those securities. When the S&Ls collapsed, the Resolution Trust Corporation sold packages of defaulted loans for less than fifteen cents on the dollar, and these sliced and diced mortgages will be much more difficult to unravel.

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