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How Central Banks Turned Hedge Funds into A New Recession Risk

The low interest rate environment and regulations on banks since the 2008 recession have spurred hedge funds to take crazier risks.

  • Low central bank interest rates are turning hedge funds into a systemic recession risk, say the IMF and European Central Bank.
  • Low bond yields are driving investors into riskier assets. A selloff could spillover and wreak havoc on the broader economy.
  • Holes in regulations on the banking sector after the 2008 financial crisis are also to blame. Funds are now doing what banks no longer can.

The last decade’s low-interest rate environment has created a recession risk that didn’t exist before. Hedge funds and institutional investors have historically presented little systemic risk to the overall economy. But now the next financial crisis could start there.

Hedge Funds Now Pose A Recession Threat

In its most recent Financial Stability Review, The European Central Bank is worried that spillover from a hedge fund crisis could threaten to bring down other parts of the economy.

Sudden price shocks to financial assets could lead the non-bank financial sector to “respond in ways that cause stress to spread to the wider financial system.”

The US Federal Reserve is once again force-feeding liquidity into the system. At its fastest rate ever. That’s putting our future at risk. Learn why.

 

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