Heidi Crebo-Rediker: All Publications, Events and Press

Kerry Shakes Things Up at the SFRC | Foreign Policy

Cecille Isidro — Thu, 12 Feb 2009 19:12:00 -0500

Kerry's committee has also hired international financial expert Heidi Crebo-Rediker from the New America Foundation to head up a new SFRC focus on ...

The Brave New World of Global Finance

Cecille Isidro — Thu, 15 Jan 2009 10:30:00 -0500

When future historians look back at the major shift in power that came in the fall of 2008, they will focus not just on the election of Barack Obama. Less than two weeks after Obama's historic election, finance ministers and central bank governors from the G-20 nations convened in Washington at the height of a global panic to discuss the future of global finance.

Unfit to Survive

Stephanie Gunter — Wed, 17 Dec 2008 12:15:00 -0500

A New America Event
12/17/2008 - 12:15pm

Wall Street's and Washington's largest financial institutions are fighting for survival. The environment grows more hostile every day. Only those that evolve will prevail.

Leo Tilman, author of "Financial Darwinism", president of strategic advisory firm L.M. Tilman & Co. and former Chief Institutional Strategist at Bear Stearns, discusses the origins of the financial crisis and how to radically redesign the financial system to make it fit to survive.

Investment in America’s Infrastructure

Communications — Thu, 11 Dec 2008 12:58:00 -0500

Washington, DC -- President-elect Barack Obama has called for an ambitious program of public investment in infrastructure, including but not limited to short-term stimulus spending. Proposals for rebuilding America have received broad bipartisan support.

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Heidi Crebo-Rediker on CNBC.com | 'Economic Summit: Major Problems, Modest Hopes'

Cecille Isidro — Thu, 13 Nov 2008 15:27:00 -0500

“The risk is that the US will have a different agenda than many if not all the other countries participating because many of them have already publicly announced that they are hoping to leave the summit with specific reforms, as well as specific plans for how to implement to those reforms,” says Heidi Crebo-Rediker, a former investment banker in Europe, and now a scholar at the New America Foundation. LINK

Capital in the Capitol

Cecille Isidro — Fri, 17 Oct 2008 06:40:00 -0400

If anyone doubts the increasing importance of finance as a tool of foreign policy, one need look no further than Iceland, a NATO member, which this past week announced that it is in negotiations for a 4 billion euro bailout from Russia. Iceland's prime minister was blunt: "We have not received the kind of support that we were requesting from our friends, so in a situation like that one has to look for new friends."

While denied by the Icelandic government, there have been suggestions that one area of discussion is the possible use by Russia of a former--NATO military base on its soil. Others suggest that Iceland may be prone to more favorable consideration of future Russian claims to the resource-rich arctic. Regardless of how this turns out, the use of financial resources to achieve international goals is the latest example of a rising trend that we call the financialization of foreign policy. The United States government is woefully unprepared for this convergence.

Perhaps the current financial crisis could serve as a much needed wake-up call to Washington that it needs to better understand and integrate financial thinking into its overall policymaking apparatus. Current events have already jolted policymakers into acknowledging that the federal government can no longer operate business (or politics) as usual. Treasury's role as a $700 billion portfolio manager is only one aspect of what ought to be a wholesale rethink of our government's understanding of finance. At a minimum, there must be significantly greater cooperation between the Treasury and State Departments, and the national security apparatus. Foreign policy separate from financial policy is no longer an option.

An important lesson learned over the past several weeks is that U.S. strategic thinking about the foreign-policy considerations and consequences of finance and market issues has been inadequate. The current crisis presents an opportunity for the United States to reshape how our government responds to these new economic realities.

Upon taking office, the next president will confront a world far different from that of his predecessors. The new administration will face a more complex global landscape, where American financial pre-eminence is no longer taken for granted and where other nations use their own increased financial resources to further their national interests. The United States will certainly remain a major center of global finance, but has been weakened. The so-called "exorbitant privilege" of the United States to print the world's de facto reserve currency--and thus operate beyond the financial constraints that apply to other nations-- may have become a bit less exorbitant.

Today, the United States is no longer capital rich. Rather, America is a significant international debtor with a sizeable portion of that debt held by central banks in China, Japan, Russia and the Gulf states. This wealth transfer from the United States to other nations is significant and appears likely to continue. The current banking crisis demonstrates that American financial institutions are becoming increasingly dependent on capital from foreign sources, such as central banks and sovereign wealth funds. One of the probable outcomes of the current crisis is the acceleration of the development of alternatives to American financial markets, capital and currency.

While the future course of how these issues will develop remains uncertain, the strategic considerations that they raise are likely to be permanent features of the global political, financial and national security landscape. Earlier this year, for the first time, the director of national intelligence's annual threat assessment included financial issues as one of the leading security threats facing this country. Director McConnell cited "concerns about the financial capabilities of Russia, China, and OPEC countries and the potential use of their market access to exert financial leverage to achieve political ends." That was well before the current financial upheaval.

Issues of this magnitude require more than operational tweaks--they compel a fundamental structural overhaul of the way our government integrates financial issues into its foreign-policy thinking.

The need to modify the organizational structure of the White House and executive branch to integrate financial policy considerations in the shaping of foreign policy has been undertaken at key turning points in the last half-century. In 1945, recognizing that the world had fundamentally changed after the Second World War, the Truman Administration retooled the federal government and created the National Security Council and other new structures to address the challenges of the Soviet Union, the spread of communism, decolonization and the new map of post-war Europe. This period saw the creation of the Bretton Woods system, the Marshall Plan and the establishment of the World Bank and International Monetary Fund.

Similarly, following the collapse of the Soviet Union and the onset of globalization, the Clinton Administration established the National Economic Council (NEC) as a counterpart to the National Security Council. The creation of the NEC was a positive step. But it has not proven able to confront the economic issues facing our country today.

The government must undertake a realistic appraisal of the global economy, noting the strengths and weaknesses of America's role in that economy and how other nations may seek to gain advantage through the financial tools increasingly at their disposal. In our relationships with international allies, competitors and potential adversaries, financial and economic components must be an integral part of our strategic and conceptual thinking.

To that end, we believe that the State Department and National Security Council need to be far more engaged in the world of international finance and economics--a competence which has, until now, been ancillary to its core capability. But, perhaps equally important is an enhanced strategic role for the Treasury Department.

At the State Department, the Office of Policy Planning (OPP) reserves a hallowed space where policymakers from across disciplines come together to "anticipate the emerging form of things to come, to reappraise policies which had acquired their own momentum and went on after the reasons for them had ceased, and to stimulate and, when necessary, to devise basic policies crucial to the conduct of our foreign affairs." Members of the OPP act as a liaison with those outside of the government.

The Treasury Department has no such space. Treasury's OPP, which currently functions as part of its office of communications, should be upgraded, refocused and should engage in a formal working relationship with the State Department's OPP to provide input on the long-term strategic implications of shifts in power in the world's financial system. The office should be structured to reach beyond Washington to serve as a liaison with market participants in the global financial system on matters relevant to U.S. foreign and domestic policy, including other states' use of capital to achieve political goals, the dollar's strategic role as a reserve currency and the America's role in the international financial system.

For the two departments to operate more cooperatively, it is important that each have the requisite level of cross-disciplinary expertise to pursue new avenues in international affairs. To that end, senior officials should have experience and training in both foreign policy and finance.

Twenty-five years ago, trade in goods and services accounted for roughly 90 percent of all cross border financial activity. Things have changed. Today, financial flows unrelated to trade now account for over 90 percent of cross-border activity--an astounding inversion. Investment flows not only dwarf trade flows--they continue to grow almost twice as fast. While trade remains a significant component of the world's financial system, international investment is much more substantial. For example, in 2006 foreign purchases of long-term securities from American residents totaled $52 trillion compared to $3.6 trillion in U.S. exports of goods and services.

Given the enormity of this shift, hiring individuals with solely trade, as contrasted with broader financial, backgrounds is not ideal. For example, three out of four national security advisers for international economic affairs in the current administration were previously trade lawyers. In the next administration, relevant positions should be filled by individuals with not just trade experience, but with international investment or economics experience as well.

Specific recommendations for bureaucratic reform are only meaningful if there is a broader commitment and investment in the underlying framework behind it. U.S. financial dominance was a key aspect of the global balance of power until just a few years ago. The shift of global capital away from its dependence on the United States has already altered the position of the United States vis-à-vis allies and adversaries. The current financial crisis has only accelerated this trend. Some of these shifts may be zero-sum, but others are not. Unless the organizational structures and the placement of key officials and advisers are both reconfigured, these questions are not likely to be properly addressed and policy will suffer as result. From crisis, we must seek opportunity. Today's financial upheaval provides an opportunity for the next administration to use innovation and creativity to think anew about structures and systems that have been in place for more than sixty years.

In Search of SWF

Cecille Isidro — Thu, 09 Oct 2008 08:44:00 -0400

One of the major reasons why the current financial crisis is so threatening is the absence of what Tokyo-based investor Peter Tasker calls "strong hands"--long-term, patient, deep-pocketed investors that a teetering financial system needs to function in times of great uncertainty and stress. When Japan suffered its financial crisis in the 1990s, the strong hands that invested and kept the system afloat included private equity funds, insurance companies, and banks. But today, those financial actors are too leveraged, weak, or frightened to play a similar role. While most of the attention this week is focused on the Treasury's rescue plan, in fact, the U.S. government's ability to serve as the strong hands of the world is today constrained by both ideological resistance to government ownership of private sector assets, as well as the inconvenient truth that our government is the world's largest debtor.

But there is another source of funding able to take on the role of the strong hands needed to help bolster the financial system in this time of desperate need--sovereign wealth funds (SWFs). These investment funds were established by governments around the world, generally those whose central banks were so flush with cash that they needed to create new investment vehicles to deploy it all. Some, like those of Abu Dhabi, Singapore, and Norway, have been around for years. Others, like those of China and Russia, are relative newcomers. With SWFs currently believed to be managing over $3 trillion, what distinguishes them from central banks is that their mandate is to make just the kind of longer-term investments that today's financial crisis requires.

But the U.S. has done little to attract these investors--and in many cases, has pushed them away. With changing global dynamics encouraging SWFs to take their checkbooks elsewhere, the U.S. needs to act quickly and aggressively to attract its fair share of this much-needed capital.

***

For some time now, many U.S. politicians have resisted SWF investment, asserting that the nature of their foreign-government ownership makes them uniquely susceptible to political influence. It was only a few months ago that Congress held seemingly endless hearings with legislators and experts alike expressing outrage and suspicion about the political, as opposed to purely commercial, motivations of SWFs. Earlier this year, it was SWFs, not Wall Street CEOs, who were the bogeymen of the global financial system.

Several months ago, as the current crisis was in its earliest days, SWFs from Singapore, Abu Dhabi, Qatar, Kuwait, and China stepped up and provided capital injections to several banks including Citigroup, Morgan Stanley, and Merrill Lynch. (Neither Bear Stearns nor Lehman received any SWF support and have since paid the ultimate price.) These deals were done on scrupulously commercial terms; but rather than being met with applause, they aroused sharp concern among many U.S. policy-makers, troubled that foreign government entities were taking ownership positions in the backbone of the U.S. financial system "Will we sit back and let the [SWFs] of the world fire at will, claiming our assets and extirpating our businesses?" asked Ohio Congresswoman Marcy Kaptur earlier this year.

Now, many experts are arguing that SWFs may be among the only forces that can save the U.S. and global economy, to the extent that last week, Britain's secretary of state for business, Peter Mandelson, suggested that SWFs ought to be called savior wealth funds. But at the time when we need them most, SWFs are looking elsewhere.

SWFs that invested in American banks before the financial crisis have taken a huge hit; The Abu Dhabi Investment Authority currently shows a paper loss approaching $3 billion on its investment in Citigroup, and China's CIC has racked up a loss of over $1.25 billion in Morgan Stanley. This poor performance of SWFs met raised eyebrows back home, where leaders of otherwise un-democratic countries found themselves answering harsh questions from their own citizens.

So, with the current markets uncertain and political pressure being applied from both sides, most SWFs appear to be sitting this one out. Financial circles abound with stories of American bankers and fund managers heading to the Persian Gulf seeking a lifeline and coming back empty-handed. Bader al Saad, the managing director of the Kuwait Investment Authority, recently made the point bluntly: "We are not responsible for saving foreign banks. This is the duty of the central banks in these countries. We have social and economic responsibilities towards our own country." KIA has already taken a $270 million loss on its Citigroup investment.

Those SWFs that are prepared to deploy their cash abroad today appear to be doing so not to save the system, but to try to profit from the shell-shocked, cash-starved investing universe paralyzed with asset prices in disarray. Bahrain's Investcorp, for example, recently launched a $1-billion investment vehicle backed almost entirely by SWF cash from the Gulf. The stated goal of this fund is not to recapitalize troubled banks, but rather to purchase at a deep discount the very same distressed loans and structured real estate credits (a.k.a. "toxic securities") that are a principal cause of the unfolding crisis.

Similarly, a senior advisor to the Russian president recently spoke of the "unique chance" that Russia has to exploit the international financial crisis by using money from its government reserves to help Russian companies purchase stakes in foreign firms whose share prices have fallen. It appears that SWFs may have taken us at our word when we insisted that they should invest for purely financial reasons.

And with the U.S. at the center of the current crisis, it's not entirely irrational for SWFs to expand their horizons and more aggressively deploy their funds domestically, regionally, and on a more diversified international basis. Many SWFs have also decided to re-direct investment to address pressing domestic issues. For example, a number of Gulf-based SWFs, recognizing the inability of their countries to produce enough food for their own citizens, have embarked on a food security investment strategy, pumping billions of dollars into agricultural projects in countries like Vietnam and Cambodia. "There are a lot of other compelling places to look for investments these days," noted Sameer al Ansari of Dubai International Capital, which earlier this year shifted its primary focus to Asia.

***

If the U.S. does not come to grips with the positive role that SWFs can play in this crisis, it risks losing one of the most important sources of capital available to stabilize the situation. With SWFs already looking elsewhere, there is little time for the ambivalence the U.S. has showed up until now. Countries such as Great Britain recognized the increasingly competitive global environment well before the current crisis and eagerly put out the SWF welcome mat; as U.S. politicians questioned the motives of China's SWF, the British sent their prime minister and Chancellor of the Exchequer to ask them to locate their international headquarters in London.

This coming week, the world's finance ministers, central bankers, and financiers will gather in Washington for the annual meetings of the IMF and World Bank. On the agenda will be a recently agreed set of guidelines intended to govern the investment activities of SWFs. These Generally Accepted Principles and Practices (GAPP) are the result of many months of negotiations among the largest SWFs and recipient countries. A central component of the GAPP, which the U.S. pushed hard for, is a commitment on the part of SWFs that they will eschew all political considerations in making their investment decisions and focus exclusively on financial ones--an ironic constraint, considering how much we would welcome politically motivated investments in our economy right now.

If the U.S. wants to maintain its critical role in the world's financial system, it is going to need a little help from its friends. We don't need to go hat in hand, but should make it clear to SWFs that, assuming they play by the rules, their investments are welcome in our country. Americans should be comforted that, as regards SWF investment, our country's national security interests are already the best protected and most well-regulated of any industrialized country. Last year's Foreign Investment and National Security Act created new, strict procedures specifically allowing for scrutiny of SWF investments. But while most SWFs may still believe that the centrality of the U.S. role in the global financial system is worth preserving, many fear the uncertainty and political risk that accompany equity investments in our financial sector, still cringing at the memory of the 2006 Dubai Ports incident.

As the world's financial system experiences sharp capital constraints, those with long-term, patient capital are in increasingly short supply. There's a saying in financial circles that, in times of crisis, "cash is king." So at times like these, when cash is sovereign, we might be well-served to resist protectionist rhetoric and encourage, not shun, sovereigns with cash.

Confronting Economic Meltdown

Communications — Mon, 22 Sep 2008 20:30:00 -0400

A New America Event
09/23/2008 - 8:30am

The New America Foundation's Smart Globalization Initiative and Next Social Contract Initiative cordially invite you and your colleagues to an important national policy forum.

The following are highlights of the event, while video of the full discussion can be viewed at right.
Steve Clemons “Given the economic meltdown today…we ought to consider the interests of various partners in the global economy.” “What are the responsible roles and intermingling interests in the world economy?” Frank Micciche “There are rights and responsibilities that each sector of… more

Covered Bonds Can Rebuild America

Cecille Isidro — Mon, 28 Jul 2008 09:58:00 -0400

Monday's embrace of covered bonds by U.S. Treasury Secretary Henry Paulson and senior representatives of the Fed, the Federal Deposit Insurance Corp. and the country's largest banks to help thaw the U.S. mortgage market is a laudable step, appealing to market proponents and skeptics alike. Introducing covered bonds to the U.S. is a great idea. In fact, covered bonds can help more than just the mortgage market.

At its most basic, a covered bond is a bond issued by a bank and backed by a dedicated group of loans kept on the issuing bank's balance sheet. While the introduction of covered bonds in the U.S. is not a magic bullet, covered bonds may be more than just a way to restart the mortgage market. They may also help unlock sorely lacking investment for U.S. infrastructure.

Covered bonds are, for the U.S. at least, a long time coming. They've existed in Europe for centuries and are a mainstay of the global capital markets landscape. While few in the U.S. have heard of them, the market for covered bonds in Europe is well established, large and an important tool for banks to fund themselves. By pooling together lots of smaller loans into a larger bond, which is then sold to investors, a covered bond is large and liquid enough to generate interest from large investment funds.

Crucially, unlike the way banks securitized and sold mortgages in the U.S., the underlying loans for a covered bond stay on the bank's balance sheet. This leaves less risk that the bank will ignore prudent lending standards. The loans that "cover" the bond are also highly regulated. They are monitored by independent third parties and must be of high quality. Any deteriorating loans in the cover pool must be replaced with stronger ones. If something goes wrong, covered bond holders have both the bank and the underlying collateral to protect their investment.

But Paulson's effort to introduce covered bonds backed by mortgages leaves a very real opportunity on the table. An entire market for covered bonds backed by public sector debt thrives in Europe alongside its sister mortgage-backed equivalent. In Europe, public sector covered bonds are a centerpiece of infrastructure finance and an important investment vehicle for global investment funds and central banks.

These bonds typically pool loans given to regional and local government authorities or public-private partnerships, and are guaranteed by the public authorities. They finance projects like roads, bridges, high-speed rail, hospitals, schools and utilities. By pooling these loans and issuing large covered bonds, banks in Europe are able to attract the large pools of global capital that shy away from U.S. municipal markets, the traditional source for financing much state and local infrastructure.

Municipal bond markets in the U.S. have functioned well for years, channeling private capital into financing public infrastructure. But municipal bonds are unable to take advantage of the world's largest pools of capital that are available for infrastructure financing elsewhere. The universe of investors willing to invest in U.S. municipal bonds is limited because of the relatively small size of most individual municipal finance debt issues and the subsequent illiquidity of the bonds. It is hard to get a large global investor interested in a bond issue of less than a billion or so.

Also municipal bonds in the U.S. exclude investors who are unable to take advantage of the tax-based incentives. This includes every non-U.S. pool of capital and many U.S. pension funds.

While federal, state and local governments struggle to fund basic infrastructure, there is abundant private capital available for infrastructure investment using the right market mechanisms. Covered bonds provide that mechanism in other parts of the world. Investors in Europe's public sector covered bonds come from a universe of roughly $30 trillion held by central banks, sovereign funds and global pension funds. There is certainly enough capital to bridge what has now become a trillion-dollar infrastructure financing gap in the U.S.

Elsewhere in the world, many commercial banks and specialty public-sector banks use public sector covered bonds as a cheap source of funding. In particular, as a result of the enormous availability of funds for infrastructure projects through securities like covered bonds in Europe, European banks have developed great comfort with infrastructure as a core part of their general banking activities.

Their experience with infrastructure makes them often the lenders of choice for U.S. infrastructure projects, in contrast to their American counterparts. Notably, the loans for public-private partnership infrastructure projects like the Chicago Skyway, the Indiana Toll Road, the San Diego Toll Road and the Pocahontas Parkway in Virginia all came from European, not U.S., banks.

As we search for ways to improve America's outdated--and in some cases, failing--infrastructure, we must look to creative mechanisms to address the very real question of how to pay for it in the most cost-effective manner. What is missing in the U.S. is a mechanism for channeling enormous global pools of capital into our long-term infrastructure development.

The U.S. government, as it seeks to unlock the mortgage market deadlock, should not miss the opportunity to include the public sector in its newly proposed covered bond framework. Creating U.S. covered bond legislation that incorporates public sector debt as well as mortgages is one tool in the financial toolbox we can use to both help jump-start the mortgage market and open channels for attracting infrastructure investment through the global capital markets.

Don't Pick On Sovereign Wealth

Cecille Isidro — Thu, 17 Jul 2008 09:16:00 -0400

Under pressure from the U.S., Europe and the IMF, representatives of 25 sovereign wealth funds managing about $3 trillion in assets met last week in Singapore to discuss how to allay fears about their investments. These large pools of government-controlled wealth are investing in everything from Barclays and Citigroup to New York's Chrysler Building. As they transcend traditional boundaries between foreign policy, financial markets and national security, it is natural that Western capitals are worried.

However, shining the spotlight too brightly on sovereign wealth funds (SWFs) may divert attention from the more fundamental foreign-policy issue that these funds have come to represent -- the rise of "state capitalism." The broader use of finance as a foreign-policy tool is an increasingly important 21st-century phenomenon. SWFs, though, don't necessarily pose the biggest risks in this category.

If a country wanted to use financial tools to advance its foreign policy, it would more likely do so through the use (or threat of use) of its generally much greater central bank reserves to affect currency markets. While SWFs are believed to control about $3 trillion worth of assets, the IMF estimates that government-owned central bank reserves exceed $7 trillion.

Central banks' decisions often have significant and overt political motivations. Many Gulf states, for example, appear to have made a political decision to continue to support the U.S. dollar by linking it to their own currencies, despite the negative inflationary impact that such support causes them at home. They apparently do so in return for, among other things, the military protection afforded by the U.S. Likewise, if China really wanted to use its financial power to influence U.S. policy, it would be far more likely to use its $1.8 trillion of central bank reserves than its $5 billion SWF stake in Morgan Stanley.

Another more probable financial tool that governments may exploit for political gains is the state-owned enterprise -- i.e., an operating company in which a government is the major shareholder. Its corporate mission statement is likely to include acquiring, managing and operating businesses for the benefit of its government shareholders. That's why the mere rumor that Russia's Gazprom wants to buy a foreign company tends to cause anxiety in Europe, where governments are worried about their dependency on Russian energy.

The financial structure through which widely differing governments hold and invest their wealth says little about the risks their investments may pose. In the case of sovereign wealth funds, beyond government ownership, there is no other single common defining characteristic to link them to one another. This is why the international community has struggled to put in place criteria by which to judge them, as well as appropriate rules and responses to govern their investments. There is little in common between the risks to the U.S. posed by SWFs of strong democratic allies like Canada and Norway and those whose political systems and motivations are more worrying, like those of China and Russia.

The attempt to create one-size-fits-all rules for sovereign funds is what has led to the creation of the IMF-sponsored SWF International Working Group that met last week in Singapore. While the agreement on "generally accepted principles and practices" will not be finalized until this autumn, it is widely expected to place significant emphasis on voluntary transparency and disclosure. Given the recent emergence of new SWFs from Russia and China, it will likely ignore quasi-objective criteria like past investment track records.

It will almost certainly ignore the ultimately more valuable, albeit more subjective, assessment of the political risk that a particular government owner poses to the country in which an investment might be made. This is dangerous. While increased transparency and disclosure should of course be encouraged, such an overemphasis on transparency of SWFs alone may lead to unnecessary conflicts with allies which, for a multitude of reasons, may fail to meet the requisite level of transparency. Likewise, some governments may try to reassure the West by complying with transparency rules for their SWFs but may at the same time use a broad array of other financial tools to advance foreign-policy interests.

The Abu Dhabi Investment Authority (ADIA), for instance, the largest sovereign fund with assets estimated to approach $875 billion, has been a responsible investor in the U.S. and global markets for over three decades. In financial circles, ADIA is considered a high-quality investor and has never been accused of acting in a manner inconsistent with international political or financial norms. One would assume that, after 32 years, if they were up to something suspicious, there would be some evidence to point to.

Yet ADIA's strong track record is often ignored and it consistently receives failing grades as an SWF because it does not publicly disclose information about its holdings, investments or governance structures. In fact, ADIA's limited transparency is not inconsistent with its financial peer group of large international hedge funds and private-equity funds.

By contrast, Russia's National Wealth Fund, established in February of this year, has announced that it intends to disclose its financial holdings in a highly transparent manner, leading to high marks on the various SWF transparency indices. However, Russia, through various non-SWF entities, including its central bank and vehicles such as Gazprom, is surely contemplating how to use its recently acquired financial heft to advance its national interests abroad.

The European Union and the U.S. should be cautious about specifically targeting SWFs. As significant providers of capital to our markets, SWFs have thus far been a positive influence for the global economy, the financial sector and in particular debtor nations like the U.S. We should think hard before imposing unnecessary burdens on SWFs. We may only further weaken the already fragile global economy while gaining false comfort that we've actually addressed the more strategic issues that state capitalism legitimately raises.

Financing America’s Infrastructure

Communications — Mon, 09 Jun 2008 16:48:00 -0400

Today the New America Foundation released a policy paper by Douglas Rediker and Heidi Crebo-Rediker, co-directors of the New America Foundation's Global Strategic Finance Initiative. The executive summary is pasted below. Also, see a PDF of the entire policy paper: http://www.newamerica.net/files/Financing_America_Infrastructure.PDF

Contact: Erin Drankoski, 202-997-8727, drankoski@newamerica.net. For further information on New America's Global Strategic Finance Initiative and Economic Growth Program, click here.

Executive Summary

America's basic infrastructure is outdated, worn, and in some cases, failing. Most experts agree that it is inadequate for meeting the demands of the 21st-century global economy. If we are to remain competitive, we must invest in capital assets like roads, ports, bridges, mass transit, water systems, and broadband infrastructure. Many other countries-both rich and poor-see investing in infrastructure as imperative for economic survival and success in an increasingly competitive economic environment. But the United States has lagged in infrastructure investment, in both relative and absolute terms. We are spending less than 2 percent of GDP on infrastructure, while China and India are spending 9 percent and 5 percent of GDP, respectively.[i]

If the nation's infrastructure needs are apparent, so too are the limits on available funds in federal, state, and local government coffers. In this presidential election year, we can see these limits clearly, as the nation's spending priorities are magnified by electoral politics. Although significant government funding will likely continue to play a key role in the development of public infrastructure, the scale of our funding needs increasingly compels us to look beyond government to close the financing gap. It is for this reason that public support for private sector infrastructure investment is essential.

The good news is that while the federal government struggles to find funds to address its spending needs there is abundant private capital for infrastructure investment. An estimated $400 billion in global funds are available for equity investment in infrastructure, and the funds available to support the debt component amount to several trillion dollars if we include global central bank reserves, global pension funds, and sovereign wealth funds.[ii] Rather than focus on these large pools of global capital as a threat, we should view them as an opportunity. So, while we have enormous infrastructure financing needs, there are also enormous pools of capital available for investment. The trick is to bring the two together in a commercial, sustainable, and politically acceptable way.

The U.S. municipal bond markets have functioned well for many years, channeling private capital into financing certain elements of U.S. infrastructure. But current budgetary constraints and other market conditions mean that municipal finance is no longer adequate to meet the challenge of financing the scale of investment needed. And our current financing structures are unable to take advantage of the large pools of capital that are available for infrastructure financing.

We recommend two initiatives to help finance U.S. infrastructure needs beyond direct government grants. First, we suggest the enactment of legislation and the development of regulations to facilitate the origination and issuance of public sector covered bonds in the United States, which will provide a market-based, efficient, and secure mechanism to attract capital for infrastructure investment. Second, along the lines of a proposal by Congresswoman Rosa DeLauro (D-CT) last year,[iii] we recommend that the federal government consider the creation of a new, government-owned and -capitalized infrastructure financing entity-a National Infrastructure Finance Enterprise-that would pool, package, and sell existing and future public infrastructure securities in the capital markets. The proposed entity would also seek to develop an in-house capability to originate infrastructure loans and would be able to fund itself through the international capital markets.[iv] We believe that the entity should be capitalized at a far higher level than proposed in the DeLauro bill. Further, its scope should extend beyond that of the National Infrastructure Bank as currently proposed by Senators Christopher Dodd (D-CT) and Chuck Hagel (R-NE).[v]

Despite the current climate of suspicion and distrust regarding capital markets and financial engineering techniques, we believe that this should not preclude their responsible use in the future to help address infrastructure problems that require the investment and deployment of large amounts of capital.

[i] Robert L. Reid, "The Infrastructure Crisis," Special Report, Civil Engineering (Online Magazine of the American Society of Civil Engineers), January 2008, http://pubs.asce.org/magazines/CEMag/2008/Issue_01-08/article1.htm.

[ii] As of April 2008, global central bank reserves were estimated to exceed $6 trillion; OECD pension funds were estimated to total approximately $18 trillion; and sovereign wealth funds were estimated to exceed $3.5 trillion. These three pools of capital are expected to grow at a tremendous pace over the coming years. See "Foreign Investment and Sovereign Wealth Funds," Douglas Rediker and Heidi Crebo-Rediker http://www.newamerica.net/files/GSFIWorkingPaper1.pdf.

[iii] The National Infrastructure Development Act of 2007 (HR 3896) was introduced by Congresswoman DeLauro on October 18, 2007.

[iv] There is historical precedent for this. NIFE could be established much like Fannie Mae at its inception, before it became a publicly held, exchange-listed, government-sponsored enterprise.

[v] The Dodd-Hagel National Infrastructure Bank Act of 2007 would establish a federal bank that could prioritize and assist with the financing of infrastructure projects of substantial regional or national significance, using both public and private capital.

Public Comments on the Proposed Regulations On Foreign Investment Into the U.S.

Ron Tang — Mon, 09 Jun 2008 03:38:00 -0400

The Honorable Nova Daly
Deputy Assistant Secretary
U.S. Department of the Treasury

Dear Mr. Daly:

We are pleased to submit these comments with respect to the recently proposed regulations regarding the implementation of the Foreign Investment and National Security Act of 2007 (“FINSA”) amendments to Section 721 of the Defense Production Act of 1950 (“Exon-Florio”).

Background

As a general matter, we believe that U.S. and global economic health are strengthened by the free flow of investment capital and by the increased liquidity that open markets provide. As significant providers of capital, foreign investors have thus far been a positive influence on U.S. markets and for the economy as a whole.

We recognize, however that economic interests and the free flow of capital, while important, must be balanced against national security interests. Following extensive analysis, we believe that the U.S. Congress, Administration and the American people should be comforted that, as regards foreign investment, this country’s national security interests and financial market integrity are well protected and well regulated. We believe that, in determining the potential impact of proposed FINSA regulations, it is important that they are understood in the context of the entirety of the existing laws and regulations that confront a foreign entity or person seeking to invest in the United States. These proposed FINSA regulations represent just one of multiple areas of restriction, oversight and regulation that confront a foreign investor and that attempt to address this balance.

Comment

Under the express language of Section 721, the President is authorized to review “mergers, acquisitions and takeovers... which could result in foreign control”. These regulations must obviously be consistent with this legislative language. The Treasury Department deserves credit for reminding us of the legislative history to Exon-Florio, highlighting that “the Conferees in no way intend to impose barriers to foreign investment”. This is an important point to remember when reviewing the proposed regulations.

It is because of the limitations of the scope and intent of the relevant legislation that we express our concern that some of the proposed regulatory language may result in a deterrent, if not an outright barrier, to legitimate foreign investment -- even if that is not the intention of either the legislation or regulation.

We recognize the advantages to maintaining flexibility on the part of the Committee on Foreign Investment in the United States (“CFIUS “). We nevertheless believe that the corollary of increased flexibility for the U.S. Government is increased uncertainty on the part of the potential foreign investor. This is likely to discourage consideration of potential investment opportunities and may well have a negative effect on foreign investment into the country.

Our concern emanates from a belief that domestic and foreign investors alike generally reward predictability and certainty, while shying away from uncertainty and the unquantifiable risk it presents. This is likely to negatively impact valuations or even the decision to pursue a given investment at all.

The proposed regulations retain significant flexibility (and therefore uncertainty) and avoid providing a specific “roadmap” or comprehensive “safe harbor” guidance to investors. As a result, there is likely to be a good deal of uncertainty as to whether any individual transaction might, inter alia., fall within the definition of a “covered transaction” (Section 800.206) or whether it is structured to afford the investor the necessary level of “control” (Section 800.203) to warrant review by CFIUS.

We believe that uncertainty for potential investors about whether an individual transaction will require CFIUS review is likely to add both cost and risk to a transaction, which may well result in a negative impact on potential investment into the U.S. Investors will be presented with a choice of erring on the side of caution by incurring costs, delays and transaction risks in subjecting their potential investment to CFIUS review and scrutiny, or to assume the risk that a non-reviewed transaction is later determined to have required such approval, and is subject to scrutiny, sanction and disruption after the fact. The alternative is to simply decline to pursue the investment.

Conclusion

It is clear that there is a need for the U.S. Government, including CFIUS, to retain flexibility in all instances where national security interests are at stake. But it is imperative that we recognize that it is not in our national interest to unnecessarily discourage legitimate foreign investment into the United States. We believe that the proposed regulations would be improved if they created less uncertainty, more predictability and included more explicit “safe harbor” provisions to provide guidance to those international investors who seek to invest their capital in this country. The risk is that they may desire to invest, but will decline to do so for fear of how their investment may be treated under these regulations. Any unnecessary deterrent to foreign investment is neither appropriate under Exon-Florio, nor would it increase our national security. On the contrary, it could endanger our economic security, instead.

A PDF version of the letter is available below.

Financing America’s Infrastructure

Ron Tang — Sun, 08 Jun 2008 23:41:00 -0400

America’s basic infrastructure is outdated, worn, and in some cases, failing. Most experts agree that it is inadequate for meeting the demands of the 21st-century global economy. If we are to remain competitive, we must invest in capital assets like roads, ports, bridges, mass transit, water systems, and broadband infrastructure. Many other countries -- both rich and poor -- see investing in infrastructure as imperative for economic survival and success in an increasingly competitive economic environment. But the United States has lagged in infrastructure investment, in both relative and absolute terms. We are spending less than 2 percent of GDP on infrastructure, while China and India are spending 9 percent and 5 percent of GDP, respectively.

If the nation’s infrastructure needs are apparent, so too are the limits on available funds in federal, state, and local government coffers. In this presidential election year, we can see these limits clearly, as the nation’s spending priorities are magnified by electoral politics. Although significant government funding will likely continue to play a key role in the development of public infrastructure, the scale of our funding needs increasingly compels us to look beyond government to close the financing gap. It is for this reason that public support for private sector infrastructure investment is essential.

The good news is that while the federal government struggles to find funds to address its spending needs there is abundant private capital for infrastructure investment. An estimated $400 billion in global funds are available for equity investment in infrastructure, and the funds available to support the debt component amount to several trillion dollars if we include global central bank reserves, global pension funds, and sovereign wealth funds. Rather than focus on these large pools of global capital as a threat, we should view them as an opportunity. So, while we have enormous infrastructure financing needs, there are also enormous pools of capital available for investment. The trick is to bring the two together in a commercial, sustainable, and politically acceptable way.

The U.S. municipal bond markets have functioned well for many years, channeling private capital into financing certain elements of U.S. infrastructure. But current budgetary constraints and other market conditions mean that municipal finance is no longer adequate to meet the challenge of financing the scale of investment needed. And our current financing structures are unable to take advantage of the large pools of capital that are available for infrastructure financing.

We recommend two initiatives to help finance U.S. infrastructure needs beyond direct government grants. First, we suggest the enactment of legislation and the development of regulations to facilitate the origination and issuance of public sector covered bonds in the United States, which will provide a market-based, efficient, and secure mechanism to attract capital for infrastructure investment. Second, along the lines of a proposal by Congresswoman Rosa DeLauro (D-CT) last year, we recommend that the federal government consider the creation of a new, government-owned and -capitalized infrastructure financing entity -- a National Infrastructure Finance Enterprise -- that would pool, package, and sell existing and future public infrastructure securities in the capital markets. The proposed entity would also seek to develop an in-house capability to originate infrastructure loans and would be able to fund itself through the international capital markets. We believe that the entity should be capitalized at a far higher level than proposed in the DeLauro bill. Further, its scope should extend beyond that of the National Infrastructure Bank as currently proposed by Senators Christopher Dodd (D-CT) and Chuck Hagel (R-NE).

Despite the current climate of suspicion and distrust regarding capital markets and financial engineering techniques, we believe that this should not preclude their responsible use in the future to help address infrastructure problems that require the investment and deployment of large amounts of capital.

For the full text of the policy brief, please see the PDF attached below.

NY Event: It's the Economic Recovery Plan, Stupid

Communications — Thu, 22 May 2008 04:30:00 -0400

A New America Event
05/22/2008 - 8:30am

As the debate on the economic slowdown moves from "if" to "when" to "how long," The New School's Schwartz Center for Economic Policy Analysis (SCEPA) and the New America Foundation will host a panel of top economists and business executives to discuss the best plan for an economic recovery.

Space is limited, please RSVP to specialevents@newschool.edu or (212) 229-5662 x 3570.

Watching Sovereign Wealth

Ron Tang — Thu, 28 Feb 2008 00:00:00 -0500

When the adjectives most often used to describe you are "secretive," "opaque" and "mysterious," you've got an image problem. Such is the predicament of sovereign wealth funds, the government-controlled investment vehicles, often in authoritarian states, that have become the bane of Western politicians. Yesterday, the European Commission became the latest body to propose transparency guidelines for these funds.

But the good news for sovereign wealth funds is that increased disclosure and transparency may actually be a win-win for everyone. A little openness can go a long way.

Market participants and regulators would benefit by gaining some insight into potential contagion risks and concentration issues that could arise when large, nontransparent investors trade assets, causing unexplained price or currency movements and increasing market volatility. The countries in which these funds invest would benefit from greater knowledge about the funds' motivations and investment guidelines. But perhaps most important, citizens of the countries whose funds are being invested would gain a tool to hold their leaders accountable for how these funds are invested. In fact, one of the most unexpected consequences of the rise of sovereign wealth funds may be their role as a catalyst for spreading grass-roots democracy around the world.

Here's how. When even the most secretive sovereign wealth fund makes an investment, it must comply with the disclosure obligations of the countries in which it is investing. So, when the newly formed China Investment Corporation bought into Blackstone last summer, it was compelled to disclose the terms of the deal and other material information as part of Blackstone's regulatory filings in the U.S. That turned out to have some very real consequences back home.

Soon after CIC invested in Blackstone, the holding lost nearly $1 billion in less than a month. Chinese citizens immediately let their political leaders know how they felt about their country's savings being squandered by flooding the Internet and other media outlets with angry criticism.

When it emerged that China Development Bank, having already lost another cool billion in its investment in Britain's Barclays Bank, was considering pouring $2 billion into Citigroup as part of the American lender's January rescue package, Chinese politicians quietly killed the deal. While no official explanation was given, China experts believe that the State Council's rejection of the CDB-Citi investment was driven by fear of taking another highly visible loss and the desire to avoid the resulting political backlash at home. It is not just the public grumbling that was noteworthy, but that Chinese political leaders heard it and apparently reacted.

And it is not just China. Following the flurry of sovereign investment in Western banks over the last several months, people world-wide expressed real concerns, alarmed about foreign government shareholdings in the fragile international banking system.

Multibillion-dollar investments by Singapore's funds in UBS, Merrill Lynch and Citigroup spurred real domestic debate about transparency, corporate governance and government accountability. As one blogger noted: "I am from Singapore, and I think this is scary too... the fact that we are bailing [out] some of the biggest screw-ups in history." Soon Singapore's parliament took note, calling in the finance minister and grilling him on the soundness of injecting these funds into so many distressed banks. Shortly thereafter, Singapore's fund, the Government of Singapore Investment Corporation, announced that it would be more transparent.

Sovereign wealth funds have served as a catalyst for more accountability to a domestic audience before. In the period before the first Gulf War, Kuwait's fund lost an estimated $5 billion, resulting in a highly publicized London-based corruption scandal. Kuwait's investments were made, lost and stolen in regulated European markets boasting strong legal systems and a free press. Members of Kuwait's ruling family were openly called to account in English courts.

Consequently, Kuwait's postwar parliament was able to assert itself. In 1992 it called for oversight of the Kuwait Investment Authority, arguing that it was the peoples' money and that those who managed it were accountable to the Kuwaiti people. To this day, the KIA remains far more open to public scrutiny than its Arab peers and is widely cited as instrumental in fostering political openness in what is arguably the most democratic country in the Gulf.

U.S. lawmakers, the European Union and the International Monetary Fund are now considering how to best advance calls for increased sovereign wealth fund disclosure. They should not forget that the issue need not be framed as a threat to withdraw the privilege of investing in our markets. Many countries with large sovereign wealth funds are tired of being lectured to. They know that, given global imbalances and the funding needs of a capitalist economic system, such threats are unlikely to be effective.

Rather, the push for increased transparency might be better framed as one where the main beneficiaries of disclosure, accountability and prudent investing of "funds for future generations" will likely be those future generations themselves.

Secretive, undemocratic regimes may not readily embrace fund disclosure for the sake of the people they rule over. But it can be assumed that Russia launched its National Wealth Fund earlier this month with high levels of transparency and disclosure in part to insulate fund managers from allegations of theft or other improper conduct should an investment go sour in the future.

As was the case with China, Singapore and Kuwait, investing globally in our markets has already piqued the interest of those who stand to benefit from those investment decisions. It is likely that increased disclosure of a sovereign wealth fund's attempt to invest for the "wrong" reasons would engender criticism not just from the West, but from those with the most to lose. This could begin to break down the distinctions between "the state" and "the people."

The idea that undemocratic governments might consider the voices of their own citizens regarding how their money will be invested may be one of the most underappreciated benefits of sovereign funds' disclosure. It may also be one of the most effective

Mission Accomplished

Cecille Isidro — Thu, 15 Nov 2007 17:30:00 -0500

Perhaps it's time to add the European Bank for Reconstruction and Development to that list of things that, like houseguests and fish, can overstay their welcome. The bank now strays so far from its original remit that it risks spoiling the legacy of its earlier successes. The EBRD should quit while ahead, declare victory and be privatized.
At its pinnacle, the EBRD was a triumph of financial statecraft. Established in 1990 with funding from the U.S., the EU and other governments, it provided financing to companies in postcommunist Central and Eastern Europe at a time when the private sector shunned them. The EBRD was also specifically tasked with using finance as a tool to promote market-oriented economics, multiparty democracy and pluralism. For the most part, it worked. As recently as last year, the bank's Board of Governors found that the EBRD "exceeded all strategic projections and targets" -- all while turning a healthy profit, more than $3.25 billion last year. The EBRD was that rare bird that did well while doing good.
When the Baltics and Central and Eastern European countries ascended to full membership in the EU, with ample private capital available to them, the EBRD shifted its primary focus eastward to Russia and other parts of the former Soviet Union. That made sense at the time, as these countries still lacked access to the kind of capital that the EBRD could provide. That's not the case anymore. Today, major banks, funds and private-equity players from around the world are virtually tripping over each other to deploy capital in these markets. The EBRD's investments are increasingly competitive with the very private investors they are, by charter, supposed to "support but not crowd out."
What's more, the bank's activities today look dubious from a policy standpoint. Russia, which increasingly thumbs its nose at the U.S. and Europe, now accounts for almost one-half of all EBRD board-approved investments. Commitments in Russia last year alone reached $2.6 billion, and just this week the bank's regional director announced that EBRD investment in Russia would reach $10 billion this year. With a significant chunk of the EBRD's funds now directed toward financing for companies controlled by the Russian state, Kremlin-friendly oligarchs and large public companies such as Lukoil, it is increasingly difficult to see how these investments are consistent with the bank's goal of furthering pluralism, multiparty democracy or market economics.
Russia doesn't need the money -- at least, not from the EBRD. It's not just private capital that's pouring into Russia and its neighbors. Even the EBRD's multilateral peers, the European Investment Bank and the Asian Development Bank, have recently expanded their mandates to include increased focus and funding for virtually all of the EBRD's remaining territory.
And Russia itself is increasingly wealthy, boasting more than $440 billion in foreign reserves, including over $110 billion allocated to its sovereign wealth funds. This summer, Russia even announced the creation of its own $10 billion Russian Development Bank to invest in the same types of projects as the EBRD itself.
If there's not a lack of investment capital, the EBRD still might absolve itself by pointing to its success in pursuing its policy mandate. But, as Willem Buiter, the EBRD's former chief economist, recently noted, the bank is increasingly active in markets characterized by "the spread of corrupt, crony and clan capitalism and to various degrees authoritarianism." Mr. Buiter noted that the bank's "democratic credentials are becoming more tarnished year by year" and that the EBRD will have to choose whether to continue to deploy capital to these countries or lower its standards of promoting compliance with its broader mandate.
As it provides financing to companies and projects controlled by the Kremlin or Kremlin-friendly oligarchs, the EBRD can no longer make the argument that it is promoting democracy, pluralism or good governance. At least not with a straight face. EBRD President Jean Lemierre seemed to tacitly admit that the bank's mission has changed, when he asked "what's the big deal?" about funding opportunities controlled by the state or held in highly concentrated government friendly hands.
The EBRD now does business on terms that differ significantly from those intended by its founders. Oligarchs and other partners get not only financing but the "blessing" of the EBRD, to which they can point when governments, democracy advocates and others raise questions about their bona fides. The EBRD, in return, receives fees and income from these transactions.
We don't begrudge the EBRD its right to capitalize on its contacts and expertise, to do deals, and to make profits. But deals and profits for their own sake are the mandate of the private sector, not the EBRD. If its policy mission is increasingly compromised, then the bank should congratulate itself on a job well done and be sold to the highest bidder. Remember that $3.25 billion profit? Not a penny was returned to shareholder governments, which could redeploy those funds where they are really needed.
There is no precedent for winding down or selling a multilateral development bank. The EBRD would be a great place to start, as it was created for a particular purpose which has, by all accounts, been achieved. This raises the larger question of how to ensure that future well-intentioned institutions do not overstay their welcomes by taking on bureaucratic lives of their own. The privatization of the EBRD could provide a template for a graceful exit for other development banks once their missions are likewise accomplished.

Douglas Rediker in CQ Weekly on Sovereign Wealth Funds

Communications — Sun, 04 Nov 2007 13:25:00 -0500

Last week, the New York hedge fund Och-Ziff Capital Management disclosed that it was selling a $1.3 billion ownership stake to an investment firm controlled by the government of Dubai. In September, another Dubai-controlled fund announced that it was buying about a fifth of the Nasdaq stock exchange. A Chinese government bank just entered into a partnership with the investment bank Bear Stearns Companies Inc. And the Blackstone Group private equity firm recently sold a $3 billion ownership stake to China's state investment company.
Flush with cash thanks to big trade surpluses and high oil prices, some foreign governments are looking for new ways to invest. Instead of playing it safe and buying U.S. Treasury securities, many are using special investment arms known as sovereign wealth funds to take ownership stakes in U.S. companies in such sectors as financial services and technology to maximize their returns. Many of the deals will not be subject to government review because, while the dollar amounts are large, the purchasers won't be controlling the companies.
The buyout activity is nonetheless posing a dilemma for Congress, which just addressed concerns about foreign investment that grew from a deal last year, quickly scuttled, that would have given a… more

Doug Rediker and Heidi-Crebo Rediker Highlighted in National Journal

Communications — Sat, 03 Nov 2007 07:54:00 -0400

Remember the slogan about Bill and Hillary Clinton in the 1992 presidential race -- two for the price of one? The New America Foundation seems to be getting something similar with the hiring of husband-and-wife tandem Douglas Rediker and Heidi Crebo-Rediker (although they'll both get paid at the think tank). The Redikers, former investment bankers in Europe, have returned to the United States to co-direct the foundation's Global Strategic Finance Initiative. The couple met in Washington about 20 years ago. After Douglas worked in Hungary and Heidi worked in Russia, they married in London, where they have spent the past 16 years working for Merrill Lynch and Lehman Brothers, among other firms. ...
At New America, the Redikers will have their hands full explaining the pace of financial markets to Washington legislators and regulators. "Policy makers still operate under a time consideration that is much more deliberative," Douglas says. "Markets operate in seconds."
For the complete article, please visit The National Journal website.

New America Foundation Launches Global Strategic Finance Initiative

Communications — Thu, 18 Oct 2007 11:10:00 -0400

The New America Foundation is pleased to announce its launch of the Global Strategic Finance Initiative. The Initiative, co-directed by Douglas Rediker and Heidi Crebo-Rediker, is sponsored by the Economic Growth Program and American Strategy Program. The Global Strategic Finance Initiative will address the fast changing relationship between global capital flows, financial markets, foreign policy and national security.
“We believe that in the global era, the creative use of financial tools may prove every bit as important to national security as traditional diplomacy and military power,” said Steve Clemons, the Director of the American Strategy program. “The Initiative aims to inject financial issues into the policy debates of the 2008 presidential campaign and offer innovative solutions and sound advice for the next administration.”
The announcement of the Global Strategic Finance Initiative parallels this week’s events. Over the next several days, the world’s financial elite – finance ministers, central bankers, and financiers – will descend on Washington, D.C. for the annual meetings of the G-7, International Monetary Fund, and World Bank. Perhaps more than ever before, the issues they will discuss – sovereign wealth funds, the role of the IMF itself, the weak U.S. dollar, and even esoteric issues like the benefits and risks of securitization – will be of paramount interest to a wide American audience. The Global Strategic Finance Initiative will draw upon the Redikers’ extensive experience in international capital markets and finance to provide a new perspective on these crucial issues.
“We are extremely excited to join the New America Foundation where we will explore the increasingly important interaction between global financial markets and foreign policy. It is an area that requires just the kind of new thinking and paradigm shifts that thrive at New America,” said Ms. Crebo-Rediker.
Also, in an article published yesterday in The National Interest Online, “The Financialization of Foreign Policy,” the Redikers outline both the challenges and the opportunities that the new financial system presents. “We should all be encouraged as other nations embrace market based economics and accumulate more wealth. But, we need to think strategically about how to advance our interests at home and abroad,” explained Mr. Rediker.
For more information, visit the Global Strategic Finance Initiative website, and read the first GSFI working paper, “Foreign Investment and Sovereign Wealth Funds.”

Inside Track: The Financialization of Foreign Policy

Cecille Isidro — Wed, 17 Oct 2007 08:29:00 -0400

Over the first half of 2007, central banks in the world’s emerging economies accumulated over $600 billion of new reserves. That’s double the total reserve position of the International Monetary Fund (IMF) -- an institution whose mission used to include preventing the collapse of these same governments, and whose new managing director recently raised questions about the body’s “relevance and legitimacy.” Over the same period, China, Russia and Japan joined the list of governments establishing “sovereign wealth funds”, whose worldwide assets now approach $3 trillion. The U.S. Treasury, meanwhile, is focusing its attention on the Strategic Economic Dialogue with China, while attempting to influence governments from Iran to Myanmar by ratcheting up financial sanctions against them.
A message to those who think of finance as a mere footnote to foreign policy: Wake up. Today, these two worlds are intertwined as never before. Remember when phrases like “nuclear option,” “balance of power” and “mutually assured destruction” only referred to the military? Not anymore. These and other similar terms have now been embraced by strategists in the 21st century’s latest battlefield -- finance. While the U.S. remains the world’s undisputed military superpower, other nations are increasingly advancing their national interests through the use of financial statecraft -- an area where the U.S. is no longer the unchallenged powerhouse.
The past several years have seen international financial markets transformed from U.S.-dominated to being truly global in scope and leadership. Sources, intermediation and destinations of capital and financial expertise outside the U.S. have grown at a tremendous and unprecedented pace. While this may be a positive development for the rest of the world (and the financial services industry), the larger strategic impact on the U.S. remains uncertain. The U.S. continues to boast the world’s largest GDP, but its overall share is declining and American financial hegemony is on the wane.
There are now competing centers of global finance and capital, not only in Europe but also in Asia and the Middle East, with values, priorities, motivations and interests that often differ from those of the U.S.Those who seek alternatives to U.S. financial markets now have multiple options to choose from.
China, Russia, Venezuela and others are increasingly playing the financial card as an instrument of power and influence. Will China resort to the “nuclear option” of dumping U.S. dollars, or view the US-China economic relationship as one of “mutually assured destruction?” Will Russia succeed in its call for a new “balance of power” by gaining the support of rising powers in the creation of a new financial architecture? Will Venezuela succeed in winning “hearts and minds” by refinancing other nations’ IMF debt while garnering valuable IOUs and global PR points? Perhaps more important, will the U.S. recognize that these finance-related battles are being fought and rise to the challenge?
To ensure that the U.S. does not find itself running behind in a game it should be dominating, it should undertake a multi-disciplinary review of three general areas of strategic finance.
First, Washington should explore the impact of large, highly concentrated and rapidly growing pools of liquidity outside U.S. borders, as well as the markets on which global capital is increasingly traded. In particular, the rapid growth of central bank reserves and the emergence of sovereign wealth funds need immediate attention. The U.S. needs to balance economic, political and security interests in attempting to influence how and where those funds are invested -- not least of which include ensuring that the U.S. attracts its fair share. The U.S. needs sophisticated policies, structures and tools that can be used to attract and best utilize this liquidity.
Second, what will the world’s financial architecture look like in years to come? As the global financial system rapidly evolves from one that is U.S.-centric to one of true global multipolarity, changes to the status quo are both desirable and inevitable. By taking a fresh look at existing entities, exchanges and practices, including the IMF, the U.S. can and should take the lead in either reforming or establishing new institutions more suited to 21st century demands. While the coming changes in financial architecture are probably inevitable, the U.S. taking leadership on them is not. The U.S. needs to seize the momentum in the face of shifts in global finance and take the lead, rather than being reactive -- or worse, indifferent.
Third, the U.S. should intensively pursue positive uses of financial statecraft, in addition to utilizing coercive ones such as sanctions, to advance U.S. foreign policy goals. Financial innovation and market expertise remain largely untapped assets in America’s diplomatic arsenal and should be included in any discussion of how best to further our interests abroad. In particular, we should consider how the U.S. can harness the power of and cooperate with U.S.-based global financial institutions, as the British government recently did in tapping the capital markets to fund international immunization efforts.
In the coming years, as the role of finance increases, the U.S. will continue to be a global leader. It will just not be the only one. It is imperative that the U.S. understand, prepare for and manage this new global landscape. The U.S. should seize opportunities presented by this new multipolar financial reality and play to what is still one of its greatest strengths. Despite its superpower status, too often, the U.S. appears to view our international options as limited to a choice between military, traditional diplomacy, foreign aid and trade-based levers. Other nations have already taken note of the opportunities presented by rapidly changing global financial markets. Washington would be well advised to do the same.