“I would shut down the hedge fund industry”: Talbott/Johnson, Part II

“I would shut down the hedge fund industry”: Talbott/Johnson, Part II

July 23, 2009

From Part II of the John Talbott/Simon Johnson exchange at on the following topic:

The economic crisis: Who caused it? Was it preventable? Was criminal activity involved in bringing it about? And is it over?

From John Talbott:

People today seem to think that just because two people want to trade something, it must be good. Because the CDS market is big, it must be useful, goes the argument. It gets at the belief system that you suggested people have adopted: that markets are inherently good. Maybe always efficient, but not always good. There are some things like company default risk that shouldn’t be traded. In the past people wanted to buy and sell slaves, child pornography, women’s bodies, or weapons of mass destruction, or to offer payments to elected government representatives and bribes to international governments and competitors. Just because a market can develop does not mean the functioning of that market is good for society. Markets cannot self-reflect. That is what humans do. Only we can decide if a particular market is doing more harm than good.

. . . I would shut down the hedge fund industry. They are nothing more than enablers for these banks and companies like AIG to concoct schemes to avoid regulation or increase risk. Basic investment theory says you can’t beat the markets, so I will bet that the hedge funds that are claiming to do so are doing it illegally through insider trading and market manipulation of individual stocks and asset prices. Don’t take my word for it. Let’s have the government tap the phones and check the e-mails of the hedge funds for a six-month period on a confidential basis and see what happens to their reported outsized profitability and trading brilliance.

Simon Johnson:

. . . there is great frustration and mounting anger among other members of our business elite. What the big banks have gotten away with is absolutely not in the interest of “real economy” entrepreneurs and the venture capital that backs them financially. It’s also not in the interest of small and medium-sized banks who find themselves under increasing pressure — particularly as commercial real estate goes bad — but who are small enough and politically unconnected enough to fail. And the executives who run large nonfinancial corporations are beginning to figure out how badly they got clobbered and by whom.

They are worried about the budget deficit, about the issue of money, and — most of all — about their future taxes. All of these worries are completely appropriate. And they understand very clearly who is responsible: the biggest of the big banks.

Why does this matter? These business elites wield great influence, partly behind the scenes. They are increasingly articulating to their contacts in the administration and on Capitol Hill that “too big to fail” is no longer acceptable.

From commenter usxpat: “Salon has become a very interesting place!”

Part II of the exchange can be read in full at Part I of the complete exchange is still available as well. The third and final part in the exchange—in which Talbott and Johnson talk more about the way forward—will appear tomorrow.

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