In his pre-mayoral political life, Boris Johnson’s talent for tactlessness forced him into a “global itinerary of apology” that encompassed the city of Liverpool and the nation of Papua New Guinea. But none of Mr Johnson’s statements is likely to cause more widespread offence than his praise yesterday for hedge funds.

The Mayor of London maintained that the city’s economy would be damaged by a clampdown on hedge funds as proposed in a draft EU law. Hedge fund managers, he argued, would merely transfer their operations to other financial centres to escape more onerous regulations.

Mr Johnson’s views are politically isolated and entirely correct. In the greatest financial crisis since the Great Depression, hedge funds are an easy target but no villain. The collapse of the financial system was engineered not by unregulated hedge funds but by the most regulated part of the system, the commercial banks, through irresponsible risk-taking and lending. Giving new life to cliché, the EU proposals seek to close the stable door after the horse has bolted, but succeed merely in kicking the farmyard cat in frustration.

Hedge funds are different from traditional investment vehicles because of the techniques they use. They can use leverage (that is, they borrow to invest). They sell stock short (they sell stocks that they do not own, in the hope of buying them back later at a lower price). And they can lock up clients’ money for a specified period. They serve a useful purpose for the economy by enabling investors to diversify their wealth and directing scarce capital to businesses that can use it productively.

The EU proposals would place limits on leverage and require hedge funds to use European banks as custodians. There is scant economic justification for these measures. Hedge funds might indeed pose a risk to stability by borrowing too much from the banks. The remedy is to impose limits on banks’ lending, not to penalise the banks’ customers. And a requirement to use European banks is a purely nationalist measure.

In the financial crisis, the hedge funds are a stabilising force. Who else would provide a market for the toxic assets that need to be purged from banks’ balance sheets? Once that market is established, then a price can be set for any asset. The banks can resume lending, and the economy will eventually recover.

Those who make their living in hedge funds are a significant part of the regional economy. They pay tax, including stamp duty on house purchases. And they exemplify an international ethos that matches London’s status as a cosmopolitan city. It is to the mayor’s credit that he recognises the value of a despised minority and proclaims it.

Times Recommends

• Strip away the figleaf and reveal naysayers
• Dave’n’George: there may be trouble ahead
• I do not accept that £64,000 a year for politicians is peanuts