Geopolitically, the world still lives in the shadow of 11 September 2001. Economically, the world still lives in the shadow of 15 September 2008, the day Lehman Brothers collapsed and ushered in a deep financial crisis. The fundamental problem: big banks and other financial firms that pretended to take on huge risks without, in fact, being able to shoulder those risks. Under the guise of taking such risks, these financial firms reaped the reward during the good times. But when the risks came home to roost in the US, only taxpayers − the US government acting on their behalf − had the wherewithal to absorb those risks.
The world still lives in the shadow of 15 September 2008, the day Lehman Brothers collapsed
In future, shouldn’t US taxpayers get some of the reward from taking on the macroeconomic risks that are too big and too pervasive for banks and financial firms to shoulder? Such risk-bearing is richly rewarded. Indeed, a shockingly high fraction of the wealth of the super-rich comes from finance, as George Mason University professor Tyler Cowen points out in his American Interest article “The Inequality that Matters”.
But more importantly, having US taxpayers rewarded for actually taking on macroeconomic risk − risk that US taxpayers end up bearing in large measure anyway − would crowd out the charade of big banks and financial firms pretending to take on that risk. And it is that pretense that brought the world to the dreadful, long-lasting economic quagmire it is in now.
In my Quartz column in January I explained “Why the US needs its own sovereign wealth fund” primarily as a way to give the federal reserve more running room in monetary policy. At its inception, a US sovereign wealth fund would be established by issuing $1trn worth of low-interest safe Treasury bonds and investing those funds in high-expected-return risky assets. That takes those risky assets out of the hands of private investors and puts safe assets in their hands instead.
Having fewer risky assets on their balance sheets overall would make those private investors readier to back private firms in taking on the additional risks involved in buying equipment, building factories, or starting up new businesses. And having more safe assets in the hands of private investors would provide good collateral for the financial arrangements those projects would need. So the establishment of the
The establishment of the sovereign wealth fund encourages investment
sovereign wealth fund encourages investment and stimulates the economy.
The fed has plenty of tools for keeping the economy from being stimulated too much. So the mere existence of the sovereign wealth fund gives the fed a wider range of stimulus levels to choose from. Moreover, any given level of stimulus would require a less aggressive course of quantitative easing (QE) on the part of the fed than it would otherwise need to pursue.
But a US sovereign wealth fund can do more if given the independence it needs to focus on making money for the US taxpayer and financial stability, rather than extraneous political objectives. These two goals are consistent, since the same contrarian strategy serves both. Both buying assets cheap, relative to their fundamentals, and selling assets that are expensive, relative to their fundamentals, pushes asset prices toward their fundamentals. And by buying low and selling high, profits are generated that can be used to help pay off the national debt.
It takes almost inhuman fortitude to withstand the winds of investment fashion. But given appropriate compensation policies, a $1trn US sovereign wealth fund would be able to hire the next generation’s Warren Buffett to take care of US taxpayers’ money. They deserve no less.
Miles Kimball, economics professor at the University of Michigan. He blogs about economics, politics and religion.