while their financial clout may be large, hedge funds ’ physical presence is small. given the amazing communication capabilities available virtually around the globe, trades can be initiated from almost any location. indeed, most hedge funds are only a short step from cyberspace. any direct us regulations restricting their flexibility will doubtless induce the more aggressive funds to emigrate from under our jurisdiction. the best we can do in my judgment is what we do today : regulate them indirectly through the regulation of the sources of their funds. we are thus able to monitor far better hedge funds ’ activity, especially as they influence us financial markets. if the funds move abroad, our oversight will diminish. in the first line of risk defense, if i may put it that way, are hedge funds ’ lenders and counterparties. commercial and investment banks especially have the analytic skills to judge the degree of risk to which the funds are exposed. their self - interest has, with few exceptions but including the one we are discussing today, controlled the risk posed by hedge funds. banking supervisors are the second line of risk defense in their examination of lending procedures for safety and soundness. we neither try, nor should we endeavor, to micro - manage bank lending activity. we have nonetheless built up significant capabilities in evaluating the complex lending practices in otc derivatives markets and hedge funds. if, somehow, hedge funds were barred world - wide, the american financial system would lose the benefits conveyed by their efforts, including arbitraging price differentials away. the resulting loss in efficiency and contribution to financial value added and the nation ’ s standard of living would be a high price to pay - to my mind, too high a price. fifth, how much weight should concerns about moral hazard be given when designing mechanisms for governmental regulation of markets? by way of example, we should note that were banks required by the market, or their regulator, to hold 40 percent capital against assets as they did after the civil war, there would, of course, be far less moral hazard and far fewer instances of fire - sale market disruptions. at the same time, far fewer banks would be profitable, the degree of financial intermediation less, capital would be more costly, and the level of output and standards of living decidedly lower. our current economy, with its wide financial safety net, fiat money, and highly leveraged financial institutions, has been a conscious choice of the american people since the 1930s. we do not have the choice of accepting

roger w ferguson, jr : economic policy for our era - the ohio experience remarks by mr roger w ferguson jr, vice - chairman of the board of governors of the us federal reserve system, at the cleveland millennium conference 2000, held in cleveland, on 11 may 2000. * * * what makes an economy world - class? a world - class economy, as i understand the term, is an economy that successfully competes at the international level. i doubt whether there are many places in this nation that have as clear a perspective on the world economy as does northeast ohio. one - quarter of the nation ’ s manufacturing output is produced in an area that lies within a half day ’ s drive from cleveland. the region generates more than 40 % of the nation ’ s transportation equipment, 30 % of its industrial machinery, and 44 % of its metals industries that make up an important part of the nation ’ s re - energized trade sector. consider that ohioans exported more than $ 2, 200 in merchandise per person in 1997. about one in four dollars of metalworking machinery production, of which this region is a major contributor, was exported. steel mill producers in ohio - another of your revitalized industries - have more than doubled their export volumes since the mid - 1980s. and in the transportation equipment industry, the foreign - owned honda assembly plant in marysville, ohio, which produced roughly half a million cars in 1998, is the largest automobile assembly plant in north america. today, i would like to offer some observations, from the perspective of a policymaker, on the events that have already transformed much of the national and regional economies and that are continuing to reshape business around the globe. specifically, i want to reflect on the changing role of economic policy in our current environment of rapidly improving communications and expanding markets. to sustain the gains that this region and other regions have made in the past decade and to best ensure our continued global competitiveness, we need to fashion economic policy that, above all else, helps to facilitate communication through efficient and effective markets. recent economic developments the national economy is enjoying an impressive period of prosperity. national income, after adjusting for inflation, has grown about one - third since 1991 - or by about 3½ % per year. us joblessness has fallen to a level not seen in thirty years, and wealth is being created at a pace rarely seen. growth in this region has been even more impressive. on a per capita basis, ohioans have seen