Could the Sovereign Wealth Funds Cleanup Wall St.?

Its been a surprisingly quit weekend on the news front. I thought this was an interesting take on how we could possibly help fix the financial crisis.

Here is a commentary that ripped the Fed(and rightly so!) and also discusses an interesting idea on how to reign in the pigmen without government regulation. Its a short piece so here is the article in full.

Here is the link to the piece from the Telegraph:

"Federal Reserve's political masters will damage America
By Liam Halligan
Last Updated: 1:08am BST 22/06/2008

At the start of last week, I thought that the US Federal Reserve was starting to get to grips with the gravity of the current situation. I allowed myself to believe that the world's most important central bank had decided to bite the bullet and address the serious inflationary dangers we face. But I was wrong.

Since the sub-prime debacle began, the Fed has cut rates by 325 basis points - all the way down to 2 per cent. With US inflation running at more than 4 per cent, real borrowing costs are deep into negative territory, which can only provoke more inflation.

Taking the bull by the horns - finally! - Fed chairman Ben Bernanke has lately been cranking up the rhetoric. First, he indicated there would be no more rate cuts. Then he hinted the next move would be up.

By last weekend, the medicine was starting to work. Bond yields showed that Bernanke's word carried weight, with the markets pricing in several rate increases before the end of the year.
This autumn's presidential election means rates may not go down much. But even if they don't, the recent market-driven tightening is useful, as it helps rein in price pressures.
But it was too much - alas - for those who really run US monetary policy. Not content with stamping out any increase in rates, the Fed's political masters are now killing even the idea of a rise in rates. Madness.
Read more by Liam Halligan
Steady nerves for the credit crisis
Last week, I heard Lord “Eddie” George expound on the current financial turmoil. One thing he said really hit home. “The inconvenient truth,” he said, “is that the buck stops with management and shareholders. If we forget that, we’ll return to onerous direct controls, which would be in no one’s interest”.

Lord George is a fan of sovereign wealth funds. He thinks these government-run investment vehicles serve a useful purpose: channelling petro-dollars and other export revenues from East to West, so helping to correct global imbalances.

This enthusiasm should be combined with his correct observation that the answer to last summer’s meltdown lies within our big financial institutions.

Wall Street and the City are riddled with banks owned by lots of shareholders with very small stakes – often other investment banks. This lack of meaningful outside-control explains why the ego-pumped moneymen supposed to be running these outfits have, in fact, been running riot. This has put our financial system in danger. But by taking large stakes in our banks, the SWFs could usher in a new age of self-regulated discipline. And I hope “Steady Eddie” agrees.

• Liam Halligan is Chief Economist at Prosperity Capital Management"


My Take:

Many are starting to not believe the Fed's recent hawkish comments on raising rates. I think the economy is so bad they are starting to worry about the repercussions of doing so.

I still think it must be done because inflation will guarantee an economic flush.

Time will tell, but I thought the second part of this article might be a great solution in terms of stopping the pigmen from running Wall St. like the wild wild west. They done nothing but run wild since the mid nineties. These cowboys have put us on the verge of an economic collapse as a result.

So what are the answers? More regulation is the most obvious one. Now I am torn on this issue because I believe free market capitalism is the best way to prosper economically. However, more regulation is definitely necessary when obvious conflicts of interests are seen.

A good example of this is the ratings agencies being paid by Wall St. versus the buyer of these rated securities.

However, the idea floating in this article about having the SWF's buying large stakes in these banks sounds intriguing to me. Wall St. is now owned by small investors who have no say in what the banks do, as well as the pigmen themselves.

As a result, they don't have anyone to answer to as they start these ponzi games ie(tech,housing) that always end up blowing up. If the SWF's were to buy a large stake in these companies, the pigmen would have shareholders that they would actually have to listen to.

It would be a way of self regulation without getting the government involved. As a capitalist, its something that I think is worth exploring.