Should the NPRF be used for bank recapitalisation?
I have always thought the fund a good idea. It helped increase national saving by reducing measured budget surpluses. (These surpluses would have been difficult to sustain politically.) And I believed it would make pension benefits more secure in the face of a rising tax cost as the population ages. Along with many others, I thought the fund only a good idea if investment decisions were not politicized. That seems almost quaint.
I now think it serves another purpose that I simply did not appreciate. Others were more prescient. It provides a valuable bulwark against the tail risk of a real “run-on-the-country” kind of crisis (that includes both bank and government debt). The risk is nicely captured by Larry Summers in his 2000 Richard Ely lecture on international crises. As he says, in this kind crisis the mode of investment analysis shifts from “economics to hydraulics.” Fundamentals become irrelevant as everyone tries to get their money out before everybody else.
The existence of a large and relatively liquid NPRF makes falling into such a bad equilibrium less likely. I therefore think the Government should be slow to commit a large chunk of the fund to bank recapitalization. My sense is that it would be better to borrow the funds, notwithstanding the recently increased spread. Having a substantial liquid sum on the asset side of the government’s balance is valuable insurance in perilous times.