Wall Street isn’t falling

: The Western world faces the worst financial crisis since the ’30s. So they say. But they’re wrong. [The] troubles that have claimed Lehman Brothers and Merrill Lynch are not so much a financial crisis as an ownership crisis. It is not markets that have failed, but a peculiar form of ownership — stock market-listed companies with dispersed shareholders. To see this, consider the curious incident of the dog that hasn’t barked — hedge funds. We have not (so far) seen a widespread collapse of these...

Before the credit crunch started, countless experts warned us that hedge funds were a source of “systemic risk”. They were wrong. Instead, the big dangers to the financial system have come from elsewhere... There’s a pattern here. The biggest shocks to the financial system have all come from stock market-quoted companies. By contrast, hedge funds [have] been innocent bystanders. These are, generally, owned as private partnerships. So, one form of ownership has caused a crisis, and another hasn’t. The reason for this lies in what economists call the principal-agent problem, and what everyone else calls the difficulty of getting your employees to act in your interests rather than their own. Big, quoted companies have been unable to solve this problem. [In] hedge funds, things have been different...

Excerpted from a comment by Chris Dillow in ‘The Times’

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