Tracy Dove: On Sovereign Wealth Funds, the 1980's and Austria's Kreditanstalt Bank, 1931
[Tracy Dove, editor of The Russia News Service, is a Professor of History and the Department Chair of International Relations at the University of New York in Prague.]
It's another one of those jump out the window days on Wall Street again, where incompetence and outrageous irresponsibility are taking their toll on the cash reserves of our nation's leading banks. This time its Citibank's turn at the great confessional before the national conscience, and it looks like another $20 billion will be reported as evaporated and in need of timely replacement. What makes this bank failure all the more unpalatable to the American palate is that the short fall is being made up by Sovereign Wealth Funds (SWFs) behind which stand the very same nations which the 9/11 terrorists called home. Is this a new, more subtle terrorist attack on lower Manhattan, or are these just foreign-held dollars looking for the best bargain out there? From an historical perspective, it is simply water seeking its own level.
One of the more spectacular cases of massive bank losses in history is the story of Austria's Kreditanstalt- Europe's largest bank in the 1920's. Backed by Rothschild money and seemingly buffered from any catastrophe, it was the pride of the European side, despite its exposure in short-term credit. After 1929, gold repatriation began to deplete the bank's capital base, and by May, 1931, the institution declared insolvency; the Austrian government took over the bank. Note that it wasn't due to bad debt that Kreditanstalt faltered, but by massive depletion of reserves. Today's Citibank offers a lesson in how far the banking industry has progressed: in that case it was simply bad management that was responsible for the losses. But should ownership in such a prestigious monument of economic development such as Citibank be sold off to a lurking SWF?
Kreditanstalt ultimately survived the Depression and World War II, though in an altered and disfigured form. Interestingly, it became a major investor in the Austrian economy, and on its board sat none other than the Austrian government. Back then, it was better to keep bad debt in the family, so to speak, and keep ownership of this duality within the country. This little alpine nation shares an interesting history of blocking foreign capital or nationals from owning any part of what the Austrians consider "national institutions". Up until the country reluctantly joined the EU, Germans were not allowed to buy land in Austria- for fear of 80 million Germans over-running the 5 million Austrians in one swoop. Again. Most nations have laws that foreigners cannot hold certain assets, or percentages of assets, in even some of the most benign of industries. Volkswagen must always be German, Airbus manufacture will be in Europe, and Russia is in the habit of taking those things back that it considers are in danger of being misused- so Europe expanded the EU so it could lock the gates later, and the United States went the other way.
The catalyst was the "Washington Consensus", which was the belief that free trade was also a political goal and that Washington should use the World Bank and IMF to convince the world to open its markets to foreign capital- preferably American. When the dollar was down back then, for those of us who remember, it was the Japanese who came in and bought up Manhattan and some other over-priced real estate, and back then everybody thought it was the end of the American century. But the Japanese economy tripped and fell over its monumental debt and the Japanese investment machine divested shortly after. In the 1980's, we learned that foreign capital was good. Today, we can only send Christmas cards to Daimler Benz, which spent ridiculous amounts of money over here- and then ran away. Meanwhile, the banks learned in an uncluttered legal environment they could re-package their real estate obligations and sell them on the uncluttered stock exchange and no one would hold them to the 10% rule of how many mortgages a bank can make. By the turn of this century the American banking industry had the opposite problem that Kreditanstalt had back in the 1920's: too much cash and lots of ways to make more.
So in some ways the coming recession will have something in common with the American Great Depression of the 1930's, but the effects it will have on international finances won't be the same. This is where SWFs come in. Unlike institutional investor money with its origin in another world capital, an SWF is actually a lot of cash held by a government that is overseeing an economy with considerable reserves it has to invest. Naturally, the only economies that have this problem are the oil-producing ones, so an SWF is really a foreign government that is purchasing what it believes to be a good deal. It is more aggressive than a bank or fund, and the motives behind the investment are subject to political extortion invisible to the naked American eye. But it isn't dangerous.
Citibank is in dire straits because of bad loans; the SWFs which are interested should be encouraged to purchase as much of this debt as it wants to. A government bailout can be considered for a banking industry that is hit with external forces, such as Kreditanstalt was in 1931, but this is not the case today. The problem with the present situation is that the fault lies with the banking industry. Just as homeowners have to take a hit on the value of their homes now, so must banks be prepared to reduce their earnings and pencil in their losses as part of good faith. CEO's usually lose their jobs over mistakes like these.
In the end, the SWF is simply the oil money that was spent on Saudi crude before. The coming recession should be long and shallow- thanks to the return to the US of a massive cash influx, which is aided by the weak dollar. If we take the 20th century example and apply it to the present case, a simple devaluation of the US dollar is the best remedy for the banking industry. Why are those foreigners so interested in US companies? Understand that the SWFs will lose the value of their dollars as soon as they are turned into Euros, Yen or Yuan for investments in those countries. But they won't lose it if they invest in America, where at this time there just happen to be some really good deals to be picked up. In the end, a sell-off of property in the United States will buy us out of the recession, and we should remember how difficult it was in history to reach the understanding of capital behavior that we have today.
Read entire article at Naked Historian at the website of US Politics Today
It's another one of those jump out the window days on Wall Street again, where incompetence and outrageous irresponsibility are taking their toll on the cash reserves of our nation's leading banks. This time its Citibank's turn at the great confessional before the national conscience, and it looks like another $20 billion will be reported as evaporated and in need of timely replacement. What makes this bank failure all the more unpalatable to the American palate is that the short fall is being made up by Sovereign Wealth Funds (SWFs) behind which stand the very same nations which the 9/11 terrorists called home. Is this a new, more subtle terrorist attack on lower Manhattan, or are these just foreign-held dollars looking for the best bargain out there? From an historical perspective, it is simply water seeking its own level.
One of the more spectacular cases of massive bank losses in history is the story of Austria's Kreditanstalt- Europe's largest bank in the 1920's. Backed by Rothschild money and seemingly buffered from any catastrophe, it was the pride of the European side, despite its exposure in short-term credit. After 1929, gold repatriation began to deplete the bank's capital base, and by May, 1931, the institution declared insolvency; the Austrian government took over the bank. Note that it wasn't due to bad debt that Kreditanstalt faltered, but by massive depletion of reserves. Today's Citibank offers a lesson in how far the banking industry has progressed: in that case it was simply bad management that was responsible for the losses. But should ownership in such a prestigious monument of economic development such as Citibank be sold off to a lurking SWF?
Kreditanstalt ultimately survived the Depression and World War II, though in an altered and disfigured form. Interestingly, it became a major investor in the Austrian economy, and on its board sat none other than the Austrian government. Back then, it was better to keep bad debt in the family, so to speak, and keep ownership of this duality within the country. This little alpine nation shares an interesting history of blocking foreign capital or nationals from owning any part of what the Austrians consider "national institutions". Up until the country reluctantly joined the EU, Germans were not allowed to buy land in Austria- for fear of 80 million Germans over-running the 5 million Austrians in one swoop. Again. Most nations have laws that foreigners cannot hold certain assets, or percentages of assets, in even some of the most benign of industries. Volkswagen must always be German, Airbus manufacture will be in Europe, and Russia is in the habit of taking those things back that it considers are in danger of being misused- so Europe expanded the EU so it could lock the gates later, and the United States went the other way.
The catalyst was the "Washington Consensus", which was the belief that free trade was also a political goal and that Washington should use the World Bank and IMF to convince the world to open its markets to foreign capital- preferably American. When the dollar was down back then, for those of us who remember, it was the Japanese who came in and bought up Manhattan and some other over-priced real estate, and back then everybody thought it was the end of the American century. But the Japanese economy tripped and fell over its monumental debt and the Japanese investment machine divested shortly after. In the 1980's, we learned that foreign capital was good. Today, we can only send Christmas cards to Daimler Benz, which spent ridiculous amounts of money over here- and then ran away. Meanwhile, the banks learned in an uncluttered legal environment they could re-package their real estate obligations and sell them on the uncluttered stock exchange and no one would hold them to the 10% rule of how many mortgages a bank can make. By the turn of this century the American banking industry had the opposite problem that Kreditanstalt had back in the 1920's: too much cash and lots of ways to make more.
So in some ways the coming recession will have something in common with the American Great Depression of the 1930's, but the effects it will have on international finances won't be the same. This is where SWFs come in. Unlike institutional investor money with its origin in another world capital, an SWF is actually a lot of cash held by a government that is overseeing an economy with considerable reserves it has to invest. Naturally, the only economies that have this problem are the oil-producing ones, so an SWF is really a foreign government that is purchasing what it believes to be a good deal. It is more aggressive than a bank or fund, and the motives behind the investment are subject to political extortion invisible to the naked American eye. But it isn't dangerous.
Citibank is in dire straits because of bad loans; the SWFs which are interested should be encouraged to purchase as much of this debt as it wants to. A government bailout can be considered for a banking industry that is hit with external forces, such as Kreditanstalt was in 1931, but this is not the case today. The problem with the present situation is that the fault lies with the banking industry. Just as homeowners have to take a hit on the value of their homes now, so must banks be prepared to reduce their earnings and pencil in their losses as part of good faith. CEO's usually lose their jobs over mistakes like these.
In the end, the SWF is simply the oil money that was spent on Saudi crude before. The coming recession should be long and shallow- thanks to the return to the US of a massive cash influx, which is aided by the weak dollar. If we take the 20th century example and apply it to the present case, a simple devaluation of the US dollar is the best remedy for the banking industry. Why are those foreigners so interested in US companies? Understand that the SWFs will lose the value of their dollars as soon as they are turned into Euros, Yen or Yuan for investments in those countries. But they won't lose it if they invest in America, where at this time there just happen to be some really good deals to be picked up. In the end, a sell-off of property in the United States will buy us out of the recession, and we should remember how difficult it was in history to reach the understanding of capital behavior that we have today.