Last night, I had a conversation with my wife’s family (all of whom are liberals or moderates with liberal leanings). Her aunt asserted that the main reason that led to the current market collapse was hedge funds -- that instead of investing into developing businesses, people were basically allowed to gamble their money with a hope of becoming rich. And more and more banks (she used Leeman Brothers as an example) used this method.
I am not really sure how her argument worked, and when I pressed her to explain, the conversation moved elsewhere. But since I don’t know almost anything about hedge funds, I asked my cousin (who is a Republican and an invester himself), who said that because hedge funds were one part of the problem; the government’s encouragement of sub-prime mortgages was another.
I didn’t really have time to understand what he meant either.
So, can anyone explain what role hedge funds had to play in the market collapse and also how libertarians would argue against the claim that we need more regulation of entities like hedge funds? (Using as simple terms as possible. As I said, I have almost no background in this area.)
Links to good explanations are also welcome.
Excellent 7min clip relevant to the subject. Hugh Hendry (hedge fund manager) debates with a european socialist about markets. Sparks start flying towards the end.
z1235:Excellent 7min clip relevant to the subject. Hugh Hendry (hedge fund manager) debates with a european socialist about markets. Sparks start flying towards the end.
I love the anti-speculation nonsense from the socialist. "How dare they trade our debt at a high price that reflects our likelyhood of default?! This must be hidden so that we can try to stay on the gravy train!"
He gets bonus points for the "think of the children" style appeal.
Technically speaking, there is no such thing as a "hedge fund" and anyone who uses the term is either speaking colloquially or doesn't know what they are talking about. The correct term for the entity that such people are referring to is a private equity fund.
The investors in a private equity fund are qualified to invest their own money in funds that are not subject to some of the consumer protection laws that public companies are required to abide by. These investors must provide evidence that they have some money, that they know that they could lose the money in their investments, and that they have some experience in investing. In other words, the regulators have reason to believe that these investors actually know something about investing. They are the only investors who are treated like adults who can make their own decisions and live with the consequences. If they don't actually know how to operate potentially dangerous machinery they don't try to unless and until they learn. We can call these people responsible adults. We know that responsible adults do sometimes make mistakes but they nonetheless make better decisions than anyone else.
Consequently, those who advocate private equity fund regulation are advocating that investment decisions by responsible adults be replaced by investment decisions by government regulators. The questions to such people, then, are clear. Can regulators make better decisions than responsible adults? Can they set aside enough money to ensure that they can pay their bills on time? Can they spot a fraudulent investment and avoid putting money into it instead of having to deal with the consequences later?
Unless the answers to all of these questions is absolutely yes and without exception, it would seem that we're better off if decisions are made by responsible adults, despite the fact that they sometimes make mistakes.