The Abu Dhabi Investment Council is negotiating an $800 million deal for a 75% stake in New York’s Chrysler Building, provoking wails about sovereign wealth funds buying up America and threatening the nation’s future.

Concerns about foreign ownership of the skyscraper -- an Art Deco gem that has been part of midtown’s skyline since 1930 -- aren’t new, and are little more than a variation on a familiar xenophobic theme.

In 1989, Japan’s Mitsubishi Estate Company agreed to pay $846.9 million for a 51% stake in Rockefeller Center.

For some, it was close to the end of the world - even before Mitsubishi increased its holdings to 80%.

Time magazine said, “For many Americans, the deal was an unsettling reminder of the decline of U.S. financial dominance and Japan’s simultaneous rise.” Democratic Senator Joseph Lieberman of Connecticut noted, “This year when they turn on the lights of that Christmas tree in Rockefeller Center, we Americans are going to have to come to grips with the reality that this great national celebration is actually occurring on Japanese property.”

Horrors -- what would Santa Claus say?

The market had the final word on the deal: New York’s commercial real estate market collapsed and rents fell as vacancies surged. Cash flow generated by rent didn’t cover the mortgage and Mitsubishi dug deep to make up the difference. Major leases expired during the downturn, giving tenants leverage to negotiate good deals. Facing default in 1995, Mitsubishi walked away from the investment.

There’s a difference between a publicly traded company like Mitsubishi and sovereign wealth funds owned by nations hostile to democratic values, but the market enforces discipline and is likely to give authoritarian nations a healthy jolt of Adam Smith 101.

Petrodollars need a home, sparking the current round of real estate investment. The basic question: paper -- stocks and bonds -- or real assets like landmark property in New York? Right now, real estate looks like the better bet because it can be purchased with cheap dollars - and the return will be more profitable when the greenback rebounds.

Turning away foreign investment would devastate the U.S. economy. The unresolved question: are sovereign wealth funds legitimate investors looking to earn solid returns or a Trojan horse slipped into the U.S. economy? It may be giving government too much credit, but: The Foreign Investment and National Security Act of 2007 created an interagency committee to vet critical foreign investments.

Evan Bayh, the Democratic Senator from Indiana and Chairman of the Banking Subcommittee on Security and International Trade and Finance, says:

“Occasionally, foreign governments will have agendas different from our own. They will pursue them using all resources at their disposal, including financial levers. No great nation can permit such interference with its sovereignty.”

Similar concerns killed the Dubai Ports deal and China National Offshore Oil Corporation’s bid for Unocal, now part of Chevron (CVX).

If sovereign wealth funds are hard-headed strategic investments with long-term goals, the managers will be on the lookout for political backlash that could damage their return. Critics ask: how would Uncle Sam react to a Chinese provocation in the Taiwan Straits if Beijing holds foreign exchange reserves and investments worth trillions? The answer might be: Why would China take hostile action that would threaten the value of its investments and damage its economy at home?