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Why all financial entities, including hedge funds, must be regulated

Who dropped the ball?

Investors can find value if they pick and mix

The debate about future regulation will rage, but some principles can be laid down:

• Transparency must be paramount • Proper enforcement of existing regulation is the first priority, before creating new principles or extending existing ones • Since all liabilities of all financial institutions, including contingent liabilities and off-balance-sheet items, have proved able to generate requirement for government support, regulation must be able to "reach" them • International coordination is no longer avoidable, including catching offshore/tax-haven funds in the regulatory net (globally, and not just on a country-by-country basis) • Bretton Woods II is a misnomer: Bretton Woods I was a fixed exchange rate regime, rather than regulatory, and China’s heavily managed yuan rate (with other Asian currencies often managed in parallel: the "soft pegs") is arguably already Bretton Woods II, and a thoroughly bad arrangement too • Glass-Steagall II would be a better name for the idea of heavily regulated "utility" banks with a lightly regulated parallel sector for investment banking – but I shall argue that this will not work

The transparency point is obvious, but light regulation has made opacity a major problem.

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