The Role of Hedge Funds in Economic Collapse

Paul Krugman blogs today and wonders if, "Iceland the victim of a financial conspiracy. Really, seriously.

There are reports that hedge funds are trying to break the bank of Iceland for a few bucks.

As Krugman notes:

Such things really do happen. During the 1997-1998 financial crisis there was, almost certainly, a financial conspiracy against Hong Kong. According to the Hong Kong Monetary Authority, several major hedge funds engaged in a “double play”, shorting both the city-state’s stock market and its currency. The alleged plan was to put the HKMA in a double bind: it would be forced either to raise interest rates to defend the Hong Kong dollar — driving stocks down — or to devalue the currency. Either way the hedge funds thought they’d make a killing. They were, however, caught in a bear trap when the HKMA did the unexpected and bought up a large fraction of the HK stock market."

According to Krugman, who is in a position to know, Bear Stearns figures prominently in what is going on in Iceland.

I would not be surprised if Bear were also involved in the 1997-8 machinations too. They have always had a rep as being the most brutal of the large investment banks.

This is yet another case for greater regulation of the financial markets.

A tax on currency transactions might be a bad idea either. Even a tax of less than 1/10% would eliminate much of the currency speculation that leaves a path of poverty and destruction around the world.