Short-sellers and hedge funds are not to blame

The financial crisis of 2008 isn’t over yet, and already short sellers and hedge funds have been fingered as two of the worst offenders. But, says Tim Price, they are not the problem; they are part of the solution.

The financial crisis of 2008 isn't even over yet, and the finger-pointing and mud-slinging have already begun. Silvio Berlusconi, uniquely well-positioned to lecture others about ethical behaviour, railed against what he called "speculative attacks" on Italian banks. German finance minister Peer Steinbrck called for a worldwide ban on "purely speculative short selling". God even got dragged in. The archbishops of Canterbury and York waded into the fray on the evils of the short sale. John Sentamu, archbishop of York, called short-selling traders "bank robbers and asset strippers".

Which would all be fine, were it not hopelessly wrong. As Simon Ruddick of Albourne Partners pointed out in a letter to the Financial Times this week, short selling, and hedge funds more generally, are not the problem, but part of the solution. Directing one's anger at short sellers and hedge-fund managers is a classic example of shooting the messenger. "The global credit binge was neither created nor fuelled by hedge funds. They are now being vilified for having played a role in bringing this madness to an end. Investment banks running with 29 times leverage, or building societies lending out radically more money than they had received in deposits, were fully-regulated entities. Did the regulators blow the whistle? Or the management or shareholders of those banks...?"

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