I can see the reasoning in very large hedge funds being seen as contrary to those who would like to see more orderly markets. In our endless quest for 'reasonably' orderly markets traders need some disorder in order to profit. Be it provided by war, weather
or prosperity, unless you're in it for the share earnings, the long haul, then you're in and out on the downs and ups. This means short selling, it can also mean pumping.
If a single hedge fund is large enough, or if several large funds 'happen' to simultaneously use their weight, they may move the market. Perhaps as alleged with oil? Most readers probably know someone who was running a billion dollar hedge fund jumping
from oil to gold, then it seemed,
everyone was on oil.
We've already seen that
spam can move the market in individual companies' shares by around 6%. Hedge funds can move bigger markets or at least that's the perception.
Perhaps if hedge funds were size limited, there would be less room for criticism or opportunity for complete disorder. It would certainly provide a few jobs.
Let's not forget why we hedge and why these instruments and 'products' were created - generally to reduce risk. Create some semblance of order. It could be that we are seeing the results of too much money in the control of too few.
How will this play out with fewer, but larger, banks?
Surely if we see even 20 large banks dominate the industry after this market readjustment it will also create issues, although not in the same way as hedge funds might?
Banks obviously have to trade a range of investments on behalf of their customers, where a hedge fund may have a single target industry or even company.
It's not difficult to see how even choosing a couple of companies in a sector and lifting their price could lift the sector, in a bull market, or even in a steady boring market. A series of such events might start a trend.
The main issues seem to be that there was too much money speculating in secondary 'products', large hedge funds speculating in commodities, internet day-traders following the latest spam, whim or rumour and nobody really knew what was going on overall. We
just knew that there was a lot more money being generated by secondary speculation but everyone was doing sort of fine, apart from a few expensive military expeditions and poor health services.
The combination of all these things caused the current event and was precipitated by the last straw - easy credit in an already overvalued (pumped) real estate market.
Most countries also have a consumer credit problem staring them in the face. If the markets aren't stabilised then that house of cards will collapse too, but we need consumers to keep buying.
So credit makes the world go round - these days anyway. It used to be something you used in emergencies, not standard operational procedure or as a means to over-extend oneself, let alone using credit to speculate on someone else doing so. It's amazing how
things change in a few short decades.
If this is the case then we must have more credit. A never ending supply.
The young have a 'right to have' view of credit. What will they do if it isn't delivered?
It looks to me as though the only real way to fix this is for everyone to just print more money and hand it out in tax breaks. If all the major economies do it then everyone could be pretty even and just continue on as before. Better keep those markets a
little more stable and transparent though or we're at it all over again.
So what do you say? More smaller hedge funds and save/make a few FI jobs? Make them be registered over a certain size? Transparency?
We saw a heroic attempt by the biggest hedge fund to 'move' the market in a positive way, or at least arrest its slide. They failed.
We cannot rely on hedge funds, no matter how big, to save us and restore faith in a sour market, no matter how good their intentions or how deep their pockets are.
Print more money? Perhaps it'll start filtering down to the poor again and help a few undernourished economies. What's it matter anyway? As long as everyone is doing it, and I think the only ones who aren't planning to, are probably in denial. There's no
point in worrying about inflation too much, rates can manage that and if everyone is living on credit they're pretty well going to remain orderly.
So, as far as I can see, there is no single cause at which to lay blame for this event, except greed and it wasn't quite everybody's fault, but almost.
The main problem we have now is that it's not going to be possible to wipe everybody's debts, but we have to do it to at least some. Apparently.
Some people will be less than happy, but at least everyone won't be unhappy.
Being a surfer, fisherman, and sailor I see the market as an ocean with waves, and every now and then there is a big one out of nowhere. That's just the way it is. If I was building a private ocean I'd want to limit the maximum size of the waves to a safe
limit, without taking the 'fun' out of it..
Congress, governments and markets have to get together now and decide how big the waves will be and keep an alert eye on them.
On the issue of trust - which is essential for restoring the markets, I may be critical of their less than stellar ID fraud handling, but the Experian's and other credit reference providers are the only thing standing between us and the Great Depression,
according to some schools of thought. The Depression resulted in loss of knowledge of customers' creditability. When the small town banks closed the local knowledge was lost and it took a long time to build trust.
At least with modern credit agencies, the knowledge, this time, isn't lost, which enables a faster recovery.