5 January  2009, Times

Bernard Madoff's $50 billion Ponzi scheme continues to rock the financial world. But most hedge funds actually engage in similar — albeit legal — practices in the short run. These practices helped inflate their gains, as well as hedge fund managers' salaries and bonuses, in the past, but subsequently helped bring about the recent failure of many major hedge funds.

At the heart of this is the distinction between realized gains and unrealized gains. Gains are realized when assets are liquidated into cash. For instance, if you buy a stock for $100 and it is currently trading at $200, you have made $100 in unrealized gains. If you sell it at $200, you have made $100 in realized gains. Most hedge funds do not regularly liquidate their entire portfolio, so they always report unrealized gains to their investors and to the public.

1 January 2009, Mises Institute



As a long-time critic of the part-time economist and full-time political partisan Paul Krugman, I would be remiss if I did not give him at least some credit for being able to point out the obvious:Bernard Madoff's Ponzi scheme really is a prototype for the modern US economy. Yes, Krugman is right, but, alas, I am also required to add that a broken clock is still more consistent at telling time than Krugman is at explaining economic phenomena.

Indeed, the US economy has gone through two destructive financial bubbles in the past decade, although the government's response to the last bubble has been to spread the damage throughout the economy to where the damage can no longer be relatively contained. The Madoff revelations are simply another blow to the reeling financial industry that not long ago was "creating" multimillionaires who had not yet made it to their fifth reunions at Harvard or Duke.

31 December 2008, Mises Institute

The 2007–2008 financial crisis had its genesis in the United States housing markets, but it rapidly spread to other economies, first to the United Kingdom, but then almost everywhere else, including such unlikely spots as Iceland whose banking system collapsed.[1] Because events in the United States triggered the crisis, this essay will concentrate on the US causes although they had their many counterparts elsewhere.

There are at least three long-standing background influences that contributed to the financial debacle that dominated the US economy in 2008:

Paul Krugman seems particularly proud of a piece he wrote a decade ago. His new remake, Hangover Theorists, is as wrong now as it was then. Let's take a look.

The hangover theory, which I wrote about a decade ago, is still out there.

The basic idea is that a recession, even a depression, is somehow a necessary thing, part of the process of “adapting the structure of production.” We have to get those people who were pounding nails in Nevada into other places and occupation, which is why unemployment has to be high in the housing bubble states for a while.

The trouble with this theory, as I pointed out way back when, is twofold:

1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking — why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business?

2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble.