Aussie Central Banker Views Geithner Hedge Fund Speech

The remarks on hedge fund regulation by NY Fed chief Timothy Geithner have created quite a buzz. I blogged about these seminal remarks and the Wall Street Journal has carried at least one article about them. Now, Glenn Stevens, Deputy Governor of the Reserve Bank of Australia has responded to Geithner’s remarks. Generally, the deputy governor generally agrees with the remarks but has his own unique take on some matters. For example, while all who examine hedge fund regulation sing the mantra that at least the funds help with liquidity, Stevens is skeptical of the conventional wisdom that hedge funds add to liquidity.

Liquidity means being able to change a position without affecting the price, explained the senior official, and depends on someone being prepared to make a price. Hedge fund activity adds turnover, he continued, which probably means that in good times there is more incentive for price makers. But under conditions of pressure, he concluded, leveraged investors are more likely to need to use the liquidity of the market than be able to contribute to it. When liquidity is most needed, he exclaimed, hedge funds are liquidity takers not providers.