The immediate focus should be the close inter-connections between hedge funds, investment banks and commercial banks. The hedge funds have become the privileged children of the international financial scene, being entitled to the benefits of free markets without any of the responsibilities.
Our reconstruction of the transactions that hedge funds undertook in Australia in June suggests that they could engage in almost infinite leverage in their off-balance sheet transactions if they so chose. One has to ask whether the Basle capital requirements are excessively generous in their treatment of financial market activities.