Thomas Cooley Defends Hedge Funds
Thomas F. Cooley is the Richard R. West Dean and the Paganelli-Bull Professor of Economics at New York University Stern School of Business, as well as a Professor of Economics in the NYU Faculty of Arts and Science. He was appointed Dean of NYU Stern in 2002.
The former President of the Society for Economic Dynamics and a Fellow of the Econometric Society, Dean Cooley has received numerous awards for his teaching and is recognized as a national leader in both macroeconomic theory and business education. He is a widely published scholar in the areas of macroeconomic theory, monetary theory and policy and the financial behavior of firms.
Before joining NYU Stern, Dean Cooley was a Professor of Economics at the University of Rochester, University of Pennsylvania, and UC Santa Barbara. Prior to his academic career, Dean Cooley was a systems engineer for IBM Corporation. Dean Cooley received his BS from Rensselaer Polytechnic Institute, and his MA and PhD from the University of Pennsylvania. He also holds a doctorem honoris causa from the Stockholm School of Economics.
Question: Are hedge funds good for the American economy?
Thomas Cooley: Well, I don't think that-- I don’t see hedge funds as being particularly detrimental, you know, they're just-- hedge funds is a very broad category that represents different investment strategies. Now, one of the things that is true is that hedge funds rely on complicated securities, trading complicated derivative securities, which people don't understand very well. And they rely on high degrees of leverage. So if they have, you know, a billion dollars in their hedge fund, they might borrow as much as $30 billion to trade with. And so, their strategies are backed by high amounts of leverage. And that creates some problems. But what we've learned is that the investment banks were very highly leverages as well, some by 35 or 36 to 1. And that means that if you're leveraged that heavily when the market's head down, you can be brought to your knees very quickly. It's like having only three percent equity in your home. So if home prices fall by three percent, you might as well walk away. So that was the status of Bear Stearns, that's what brought Bear Stearns down.
NYU economist Thomas Cooley explains complicated derivative securities.
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