By Q1 2009, the hedge fund sector had experienced trading losses of around $ amounting to one fifth of their total assets (He, Khang and Krishnamurthy, 2010), a scale that would have wiped out almost all banks given their leverage. Yet many hedge funds have survived. And none has been bailed out with taxpayers’ money. Because hedge funds have so much lower gearing, or leverage, than banks they have been able to absorb much bigger falls in asset values. Close to 3,000 hedge funds have closed, that is liquidated, since mid-2007 2 – but they have done so with a quiet whimper rather than with an alarming bang. Falls in the value of assets that hit the wealth of institutions – but not their existence – do much less damage than falls that wipe out firms and cause bankruptcy. So sharp asset price variability, per se, is not the most serious problem. It is the combination of (and the interrelation between) high debt – or leverage – and variability in asset prices that is problematic. 2  “Global Hedge Fund Industry Report”, Hedge Fund research Inc, Q2 2010. BIS Review 133/2010  3  I believe that an important way to help preserve financial stability is to have policy instruments directed at debt gearing (or leverage) and to be used in the light of what has happened to asset values.
William C Dudley: Unconventional monetary policies and central bank independence Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Bank of Mexico international conference “Central bank independence – Progress and challenges”, Mexico City, 15 October 2013. *  *  *  It is a pleasure to be here today. Does the implementation of unconventional monetary policies pose a threat to central bank independence? My short answer, which I will elaborate on, is that while the threat is low, central bankers need to be cognizant of such risks, and clearly explain the motivations for their actions in order to mitigate such risks. The best way for central banks to maintain their independence is to use all their available monetary policy tools to best achieve their objectives. Because the use of our unconventional monetary policy tools has been in pursuit of our dual mandate objectives of maximum sustainable employment in the context of price stability, I do not see the use of these tools as creating significant new risks to our independence. As always, what I have to say today reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. To start, it is important to be clear on what we mean by unconventional monetary policies.