Friday, December 03, 2010

Hedge Funds At The Window.

The basic argument for lax regulation of hedge funds is that they don't need it. Rich people and institutions invest money in hedge funds and if it doesn't work out, well, too bad. It's a free market. They're not too big to fail.

Except, of course, when they were about to fail. Then they got loans from the Fed.

This is not to say that the Fed erred in propping up a bunch of hedge funds. Keeping the global financial system from meltdown was Job One. The Fed probably did more than enough to keep that from happening and that was, given the situation and the known facts at the time, the right thing to do.

But the shadow banking system and its hedge fund off-shoots needed trillions of dollars to stay afloat in the latter half of 2008 and the first half of 2009. The argument for allowing it to carry on as before has long since become untenable.