Hedging Disaster
May 3rd, 2007Via: Boston Globe:
As hedge fund and private-equity operators try ever harder in the face of more competition to produce exorbitant returns, they do ever-riskier and more conflict-laden deals. This trend increases the damage to the economy, the extremes of inequality, and the risks to the system.
When Long Term Capital Management — a hedge fund specializing in currency speculation — went broke in the late 1990s, it had borrowed so much money from so many Wall Street banks that the Federal Reserve had to organize a rescue lest the fund take down several banks with it. It would be much harder for the Fed to mount a similar rescue today. And with thousands of hedge funds managing an estimated $1.7 trillion , many making highly speculative bets with borrowed money, a shift to higher interest rates could trigger an old fashioned financial panic.
Beyond the risk of a crash, hedge funds and private equity operators are driving the wrong brand of capitalism. Theirs is a capitalism of windfall returns for financial engineers, and less security and income for workaday Americans. Hedge fund capitalism also signals that real entrepreneurship — patiently nurturing a new idea and building a company of managers and employees — is for suckers.
Research Credit: PD
