On 26 February, Dr Philippa Malmgren, a former member of the US National Economic Council and financial markets adviser to President George W. Bush, spoke at an event organised by Kinetic Partners in London. Her subject was the implications of the financial crisis and its repercussions for geopolitics, policy making, and politics. In particular, she raised some pertinent questions about what all this means for the hedge funds industry. What follows is an edited transcript of her presentation.

The role that I play, and which I have built my business around, is trying to help people in the markets understand what is happening in the world of policy and politics, because people in the markets need to be able to discount future outcomes. They are incredibly good at dealing with the risks of the portfolio that you can quantify, and incredibly bad at dealing with those you can’t quantify.

On the other side, I’ve spent a lot of time with policy makers because in general they are pretty clueless about how markets work, as we’re witnessing from current events. They need to understand why the markets are going in a particular direction, what the thought process is. I am literally like an interpreter/translator between these two camps. I don’t know if you guys remember Star Trek, but I feel a bit like I live between the Federation and the Klingons: they inhabit the same universe, but one likes order and the other likes chaos, and they can’t communicate together very well.

Today this is very important to understand, because the relative balance of power between policy and markets has dramatically shifted in favour of the policy, or more aptly, state side. The power of the state to re-define the game cannot be underestimated. I think what we are on the verge of now is markets beginning to recognise that what we’re going through is not just about losses that have already been incurred, but that the rules of the game are changing in such a way that of the activities we have been undertaking in the financial market, many will no longer be permitted going forward. Instead a whole new environment will be created by a new rule set, and this new rule set is highly likely to be what markets will perceive to be ‘unfortunate’ in the same way as Sarbanes-Oxley.

I was personally the White House negotiator for Sarbanes Oxley, and fought it tooth and nail, for which I was labelled a friend of the corporate criminals at the time. This is the atmosphere today as well. I can tell you that there is almost no-one brave enough to go up in front of a Congressional committee and fight on behalf of free and open markets. No one is brave enough to do this. The voice of the markets has been really diminished, and the voice of the state really enhanced.