Interviewee: Sebastian Mallaby, Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations
Interviewer: Roya Wolverson, Staff Writer on Economics, CFR.org
June 14, 2010
As U.S. financial reform comes to a head in Congress, hedge funds have come under fire for taking risky bets that shook the financial system. In his new book More Money than God: Hedge Funds and the Making of a New Elite, CFR's Sebastian Mallaby details the rise of hedge funds over the past fifty years and analyzes misconceptions about their role in financial markets. Accusations that hedge funds add risk to the economy are misguided, says Mallaby, since many hedge funds spotted the housing bubble and bet against it before other financial firms. And unlike "too big to fail" financial firms, hedge funds are "small enough to fail," which means they do not enjoy the backstop of the U.S. government, and they take on all their own losses.
In Europe, hedge funds are being blamed by European governments for betting against the euro and exacerbating the eurozone crisis. However, Mallaby says financial markets are right to make punishing bets against profligate countries like Greece and Portugal, because it forces them to learn from their mistakes. Mallaby describes a similar scenario that unfolded in 1992, when hedge fund investor George Soros led a bear raid against the British pound, which led to the breakup of Europe's exchange-rate mechanism. Even though politicians and the press complained about the incident, the cheaper pound increased the competitiveness of Britain's exports and boosted the economy, he says.
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