We Call Upon the Hedge Funds - Dan O'Connor - Mises Institute

We Call Upon the Hedge Funds - Dan O'Connor - Mises Institute: "What also separates the hedge funds from most of our financial system is that none of the hedge funds had their hands out in search of bailouts during the turmoil of 2008. In fact, a myriad of hedge funds went bust in this period. Some of them, worth billions of dollars, not only collapsed but did so in a very smooth fashion. Their collapse represents the natural process of liquidation, on which Mises and Hayek placed such a great emphasis in their analyses of the boom and bust periods historically caused by the expansion of money and credit.

Many of the more prescient hedge funds recognized the fact that 2006–2007 was an over-inflated boom period, specifically in the mortgage industry. Those who acknowledged this boom for what it was were able to shift their capital away from the mortgage industry or bet against it. Those companies that remained highly invested in the mortgage industry (e.g., AIG and Lehman Brothers) failed."

"The US government is deeply afraid of failure, which is in fact an integral part of a pure capitalist model. Many economists and politicians define America's economy as "capitalist" but one of the most essential aspects of capitalism, failure, is being blocked by government. Those who continue to criticize America's "capitalist" system need to realize how far the country has strayed from it.

Short selling actually adds efficiency to the market, because it identifies weaker companies and filters them out of the market more quickly. This increases competition and encourages companies to perform as best as they can. For example, if hedge funds short sell Britannica and buy Wikipedia long, this sort of market action only promotes a speedier way to filter out the obsolete player. If Britannica fears its stock being sold short, it is more likely to urgently shift up its business strategy in order to meet the changing needs and habits of consumers.

In 2003, The Economist noted that 'constraints on short selling allowed stocks to become more overvalued during the most recent bull run.… More short selling then might have made the bear market less painful now.' Suppressing short selling with tighter regulation of hedge funds also stifled the market's ability to police itself."