Boris Johnson has just been on the Today Programme on the latest phase of his "Save Europe's Hedge Funds" campaign.
 
He fears that proposed new EU legislation will drive hedge funds - and perhaps private equity - to relocate to the US and Switzerland.
 
And he's probably right. Hedge fund managers tell me they hate the combination of the additional bureaucracy and the probable restrictions on how much they can borrow that's contained in the legislative draft.
 
So does the Europe Union need hedge funds? And, since most of them are here in the UK, does London need hedge funds and private equity?
 
Many of you, I know, think this is a fatuous question. You hate the lot of them.
 
But the arguments are more nuanced than you might think.
 
The case for the defence goes like this.
 
1) They help the distribution of capital to those who can use it most productively. This is importantly true of private-equity and venture capital firms that back start-ups and growing companies. It's also true of the smarter hedge funds. It's almost certainly not true of private-equity funds that borrow to buy big mature businesses (see below).
 
2) They contribute to the liquidity of markets.
 
3) Over many years, their investment performance has tended to be rather better than that of conventional fund managers. So they provide a useful investment alternative for the pension funds on which millions of us rely. However the performance of better and worse funds varies enormously and they do not represent a homogeneous asset class. So this argument should not be over-stated.
 
4) They've created a bit of high-value employment in the UK, quite a lot of it at banks, accountants and legal firms that provide services to them. And not all of their employees strive night and day to avoid paying UK taxes.
 
5) Hedge funds were "incentivised regulators", in the ironic phrase coined by one hedge-fund manager. What I mean by that is that hedge funds such as Paulson, Soros, Landsdowne, Kynikos and so on spotted the excessive risks being accumulated in the global financial economy and in individual banks long before alarm bells were ringing at the regulatory authorities and central banks. If the authorities had been awake and spotted the bets these firms were making on financial meltdown, more effective pre-emptive action might have been taken rather earlier.
 
6) They were much less responsible for the global financial crisis than the big banks and investment banks.
 
There is also a case for driving them into the sea. It goes like this.
 
a) They created a market for all sorts of toxic financial products that the world could have done without. The growth of the market in collateralised debt obligations, credit default swaps and so on would have been significantly less without the liquidity provided by hedge funds.
 
b) Vast numbers of them were primarily a play on the availability of cheap debt at a time of rising asset prices. Their investment prowess has been overstated.
 
c) Hedge funds increased the vulnerability of the financial system because of the way they provided vital short term finance (liquidity) to investment banks, which they were forced to withdraw at moments of acute stress for the likes of Bear Stearns and Lehman -because they in turn were an ATM for investors who were able to demand their cash back at a moment's notice.
 
d) Private equity firms who've bought bigger mature businesses were simply placing a bet - which they've lost - on the economy continuing to grow and debt remaining cheap for them. They were not, as they claimed, superior managers of businesses. This year they will suffer record losses. Which in turn will generate substantial losses for the already weakened banks that have lent to them (a big hello to HBOS, RBS and Barclays, inter alia). There could be defaults on more than £40bn of European private-equity loans this year.
 
e) Their uber-generous remuneration model was unwisely imitated by banks and investment banks, which contributed to bankers taking crazy risks to generate massive bonuses.
 
f) Some short-selling hedge funds may have contributed to the instability of systemically important banks, by fomenting anxieties about those banks which prompted the withdrawal of vital financial support to them (by the way, no regulator has ever proved malicious behaviour by hedge funds in this respect).
 
The rational evaluation is that hedge funds and private equity don't provide a particularly socially useful function, but then we tolerate all sorts of institutions and practices that don't conspicuously contribute to public welfare. For me it's important that they've on the whole done a better job of identifying irrational exuberance in markets than regulators, central bankers and politicians that are funded by us, by taxpayers.
 
It worries me slightly that there's a mood to banish a breed who've shown an ability to shout out that the emperor is striding around buck naked.
 
Loving them may not be easy, unless you've made a mint by backing the shrewder funds over the years. But exiling them from these shores may be an over-reaction - and, in that sense, the proposed European legislation may be misplaced. 
 

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For bankers and insurers today has in some ways been maddening, because in a way they are further from knowing how they'll be regulated in a year's time.

Because there is now a very clear difference between the policy of the government and the policy of the Tories.

And if the opinion polls are to be believed, it's the Tory plan that'll be implemented after the next election.

Which means that the Bank of England will become a lot more powerful.

As I mentioned in a recent note, the shadow chancellor George Osborne will create what's known as a Twin Peaks regulatory system (or a version of it), with the Bank of England monitoring financial risk at banks, building societies and big insurers.

A new consumer and markets regulator would replace the Financial Services Authorities. It would be responsible for making sure financial firms conduct themselves in ways that don't damage their customers.

For those running the FSA right now, this is a pretty fair old nightmare - because it will make it pretty difficult for it to continue the process of upgrading its staff through recruitment over the coming few months (why would you join a regulator that's being dismantled?).

By the way, some of those running the FSA would argue that a flaw in the Tory approach is that in separating prudential supervision and what's known as conduct-of-business regulation, it would be harder to assess risk in the round at any particular bank or insurer.

A big bank can end up being very badly damaged by selling the wrong stuff to the wrong customers. But under the Tory proposal, responsibility for keeping an eye on that wouldn't rest with the re-empowered Bank of England.

As for Mervyn King's disappointment that he hasn't won the right from the current chancellor for the Bank of England to go into banks and demand relevant information, some bankers had been somewhat alarmed at the notion that they might have had to report to two separate regulators (though they'll certainly have to do a bit of this under the Tory prescription).

Surely if the governor asks the FSA nicely enough, it'll supply him with the information on specific banks that he'll be wanting in the weeks to come.

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The chancellor has today instructed the Bank of England to monitor in a more methodical way the risks building up at any particular moment in the financial sector and the economy.

And if the Bank perceives dangerous systemic risks, it will then be charged with recommending "specific actions which could be taken to counter" them.

Also, the Bank - in its regular Financial Stability Report - will have to say whether any necessary remedial actions should be implemented by it, or by the Financial Services Authority, or the government or "whether they require internationally co-ordinated action",

So, on the face of it, the Bank will have more authority to prevent a repetition of the lending binge that precipitated the worst banking crisis since 1913 and the worst global recession since the 1930s.

To use the financial phrase of the moment, it will be setting "macro-prudential policy".

But this will be seen very much as phase one in the creation of an institutional structure to combat overheating in financial markets (as and when that's a problem again - and the more pressing problem is that markets remain semi-frozen).

The Treasury's policy paper, called "Reforming financial markets", says that creating a formal mechanism for curbing future instances of excessive lending will require an international agreement on the appropriate tools (such as whether banks should be required to hold additional capital during periods of strong growth).

But the governor of the Bank of England, Mervyn King, is getting far less than he wanted.

He asked for the legal right to inspect individual banks. And he hasn't got it.

What's more, the FSA has actually received new powers - including receiving a new responsibility for maintaining financial stability. In fact, if anything, the FSA will be perceived as encroaching on territory that the Bank of England cherishes as its own preserve.

In a nutshell, the chancellor is attempting to reinforce the tripartite regulatory system - or the distribution of responsibilities between the FSA, Bank of England and Treasury that was allocated by Gordon Brown as chancellor in 1997.

What that means is that on this issue, voters in the forthcoming general election will have a very clear choice. Because the Tories are pledging to bury the tripartite system.

And, in the process, the Tories would probably give the Bank of England even more power than it may actually want.

Update, 13:15: George Osborne has announced that a Tory government would give prudential supervision of banks, building societies and other significant institutions to the Bank of England. It will create a separate consumer and markets regulator. It would mean the end of the FSA.

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