I'm a Ponzi, You're a Ponzi, We're All a Ponzi

Scherer
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You and Klein's post are under KT's giving the impression that nothing new has been posted since yesterday. Please fix

Michael, the big problem here is that you seem to think that the problem exists only in hedge funds. But the reliance on the most recent sale price of an asset to determine its current value is how the entire financial sector determines asset values.

Indeed, in theory its impossible for "unrealized gains" to reflect the actual value of an asset, because the value of that asset is based on supply and demand, and the moment you try and "realize your gains" you are increasing the supply, thereby lowering the price of your asset.

Interesting post on the Wall Street Journal's blog (not to be confused with the Edit Page, of course):

It's hard to tell what's more striking about Raghuram Rajan's 2005 presentation at the Kansas City Fed's Jackson Hole symposium — the way many of the dangers he laid out came to pass, or the way he was attacked, and then discounted...

Mr. Rajan came to the conference, dedicated to soon-to-retire Fed Chairman Alan Greenspan, with strong bona fides as a pro market advocate. He and University Chicago colleague Luigi Zingales wrote a 2003 book, “Saving Capitalism from the Capitalists,” that argued at length that free-market capitalism is the best way to organize an economy, and that free financial markets – through their ability to direct funds to where the economy needs them most – are crucial to the system's success. But when he suggested at Jackson Hole that markets could get it badly wrong sometimes, and that central banks should consider responding to that, he was lambasted as nostalgic for the old days of highly regulated banking.

Fed Governor Donald Kohn – who for years has played the role of providing intellectual ballast to the central bank's decisions and now serves as its Vice Chairman – said that for central bankers to enact policy's aimed at stemming risk-taking would “be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.” Former Treasury Secretary Lawrence Summers said the premise of Mr. Rajan's paper was “misguided.”

“This is a common feature of people when they come across dissent – they want to put you in a box and label you and dismiss you,” says Mr. Zingales. “He is definitely not anti-market. That's the most mistaken characterization of Raghu.”

The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them.

Nice simple explanation of a rather widewpread problem. Do I recall a debate taking place several weeks ago about even further loosening the reporting rules concerning the value rporting of unsalable assets? I seem to recall a proposal to take a bad situation and make it even worse, then the meltdown happened and all the discussion moved on to more dire subjects.

Argh.

It's hard to tell what's more striking about Raghuram Rajan's 2005 presentation at the Kansas City Fed's Jackson Hole symposium — the way many of the dangers he laid out came to pass, or the way he was attacked, and then discounted...
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Mr. Rajan came to the conference, dedicated to soon-to-retire Fed Chairman Alan Greenspan, with strong bona fides as a pro market advocate. He and University Chicago colleague Luigi Zingales wrote a 2003 book, “Saving Capitalism from the Capitalists,” that argued at length that free-market capitalism is the best way to organize an economy, and that free financial markets – through their ability to direct funds to where the economy needs them most – are crucial to the system's success. But when he suggested at Jackson Hole that markets could get it badly wrong sometimes, and that central banks should consider responding to that, he was lambasted as nostalgic for the old days of highly regulated banking.
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Fed Governor Donald Kohn – who for years has played the role of providing intellectual ballast to the central bank's decisions and now serves as its Vice Chairman – said that for central bankers to enact policy's aimed at stemming risk-taking would “be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.” Former Treasury Secretary Lawrence Summers said the premise of Mr. Rajan's paper was “misguided.”
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“This is a common feature of people when they come across dissent – they want to put you in a box and label you and dismiss you,” says Mr. Zingales. “He is definitely not anti-market. That's the most mistaken characterization of Raghu.”
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The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them.

Do I recall a debate taking place several weeks ago about even further loosening the reporting rules concerning the value rporting of unsalable assets?
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you seem to be talking about the push to get rid of "mark-to-market" valuation (i.e. a stock/bond or other asset is worth what it sold for last in 'the market') of assets by financial institutions.
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One of the reasons why so many financial institutions were (are?) on the verge of default is "mark to market", because the "market" for certain classes of assets disappeared since no one knew what those assets represented. In other words, a mortgage backed security could be 100% solid or completely worthless based on its underlying assets, but nobody knew what those underlying assets were, so nobody wanted to buy any of them -- and when nobody wants to buy something, its gets 'marked down' to practically nothing.
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As a result of all this "marking down", banks etc looked insolvent on paper when in fact they were solid based on the real value of underlying assets -- and the Fed takes over banks based on their solvency "on paper". To that extent, suspending mark to market made sense while the Fed made the effort to determine which banks were really solvent, and just looked bad because the market for mortgage backed securities had collapsed.

Whatever. I want to hear about Blagojevich and how he'll ruin the Obama Administration forever.

It really is astounding that people are writing about this now, and not when it was happening. There's no news here. The whole reason hedge funds were allowed to operate without normal regulatory oversight because what they were doing violated sound investment principles. The excuse given was that they were "sophisticated" for "sophisticated and experienced investors only" who would do their own due diligence.
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LTCM went down exactly this way--they couldn't liquidate their positions in a way that would preserve any capital. Why? Because they were so heavily leveraged. Why, ten years later, it's considered breaking news that other funds were doing this is really irritating.

jay,
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You're right. It is like deja vu all over again. Can we get off this merry-go-round this turn?