kevin m warsh : hedge funds testimony of mr kevin m warsh, member of the board of governors of the us federal reserve system, before the committee on financial services, us house of representatives, washington dc, 11 july 2007. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * chairman frank, ranking member bachus, and other members of the committee, i appreciate the opportunity to appear today on behalf of the board of governors of the federal reserve system to discuss the systemic risk implications of the growth of hedge funds. the board believes that the increased scale and scope of hedge funds has brought significant net benefits to financial markets. indeed, hedge funds have the potential to reduce systemic risk by dispersing risks more broadly and by serving as a large pool of opportunistic capital that can stabilize financial markets in the event of disturbances. at the same time, the recent growth of hedge funds presents some formidable challenges to the achievement of public policy objectives, including significant risk - management challenges to market participants. if market participants prove unwilling or unable to meet these challenges, losses in the hedge fund sector could pose significant risks to financial stability. the board believes that the " principles and guidelines regarding private pools of capital " issued by the president's working group on financial markets ( pwg ) in february provides a sound framework for addressing these challenges associated with hedge funds, including the potential for systemic risk. 1 the board shares the considered judgment of the pwg : the most effective mechanism for limiting systemic risks from hedge funds is market discipline ; and, the most important providers of market discipline are the large, global commercial and investment banks that are their principal creditors and counterparties. the emphasis on market discipline neither endorses the status quo nor implies a passive role for government. in recent years, the global banks have significantly strengthened their practices and procedures for managing risk exposures to hedge funds. but, further progress on this front is needed – in no small part because of the increasing complexity of structured credit products such as collateralized debt obligations. 2 the board believes that even those banks with the most sophisticated risk - management practices must further strengthen their enterprise - wide systems to put the pwg principles fully into practice. as the pwg principles rightly emphasize, supervisors of global banks are responsible for promoting market discipline by monitoring and evaluating banks'management of their exposures to hedge funds. as the umbrella supervisor of u. s

of rising inflation. history has shown that many of the countries that have tried to exploit this alleged connection eventually experienced both : high inflation and high unemployment. thus, low inflation and not high inflation, is conducive to fostering sustained economic growth and job creation. concluding remarks i would like to sum up as follows : central bank independence is not an end in itself. as a matter of fact, such independence is, instead, a precondition for a stability - oriented monetary policy and helps to enhance its credibility. a monetary policy of this kind keeps inflation contained and inflation expectations solidly anchored. an environment of low inflation is, in turn, a prerequisite for sustained non - inflationary economic growth. therefore, a central bank ’ s best contribution to the economic development of a society is to pursue, above all, the goal of maintaining price stability. it is with good reason that central bank independence and the associated credibility of monetary policy are highly valued. thus, governments are, as a general rule, strongly advised not to interfere with a credible and independent central bank, but to value its contribution to overall stability and to the social as well as economic development of the country or region concerned. in this context, one should always remember that monetary policy credibility, – which is of utmost importance for the stable value of money – is hard won. it can, however, be easily lost, leading to longterm negative repercussions for the overall performance of an economy. references deutsche bundesbank, monetary policy transparency, monthly report, march 2000. deutsche bundesbank, the value of stable money, annual report 1996, pp. 78 – 88. european central bank, the accountability of the ecb, monthly bulletin, november 2002. issing, otmar, communication, transparency, accountability : monetary policy in the twenty - first century, federal reserve bank of st. louis review, march / april 2005, ( part 1 ), pp. 65 - 83. neumann, manfred j m, monetary stability : threat and proven response, deutsche bundesbank ( ed. ), fifty years of the deutsche mark – central bank and the currency in germany since 1948, oxford 1999, pp. 269 - 306. woodford, michael, central bank communication and policy effectiveness, presented at the federal reserve bank of kansas city symposium, “ the greenspan era : lessons for the future ", jackson hole, wyoming, 2005.