For years it was received wisdom to fret about buccaneering hedge funds, their extreme leverage and exotic and complex derivative strategies, and the threat they posed to the stability of the financial system. We were right about the riskiness of some of their strategies, and one-third of their kind are expected to disappear below the stormy seas of volatility this year. Many of the survivors are hors de combat, having struck the Jolly Roger and limped back to their secret coves, there to deleverage and lick their doubloons.
But we were wrong about the risk they posed to the system overall. "Doggone it!" as governor Sarah Palin would say, the real threat turned out to be the banks and their old-fashioned real estate lending rather than newfangled hedge fund investing. The banks and related institutions lent against property to anything that moved and, after stunning losses, these banks would be...
