Somebody in Charge: A Solution to Recessions? by P. Lemieux

By P. Lemieux

Could the monetary difficulty were avoided with larger management? This booklet explores solutions to this question from a scholarly and educational monetary viewpoint.

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With its total cash of $100, the hedge fund purchases an MBS worth $100. It now has $100 in assets, $97 in debt, and $3 in capital. Its leverage ratio is 33, that is 100/3. It’s easy to see that the higher the leverage, the higher the profit made by the hedge fund owner. Suppose that the $97 is borrowed at 5 percent interest (by issuing commercial paper) and that the MBS pays 6 percent in interest. 85 a year for its borrowing and gets $6 in interest revenue. 15 over $3). The higher the leverage, the more “free” profits to be made.

If somebody had not wanted to consume the equivalent of what he produced, “he would not have troubled himself to produce” as Mill puts it. One does not work and produce for the pleasure of working and producing—if one does, he is engaging in leisure, not work. Work is what we do in order to consume. Thus, the equivalent of everything that is produced is necessarily consumed. Mill understood that there can be a temporary oversupply of certain goods on certain markets. Consumers demand changes, new goods appear, new processes of production are developed, suppliers don’t make perfect forecasts.

80 Contrarians are, by definition, less numerous than those who follow the herd. They run high risk, but get high rewards when they are right. They also help bring securities prices to their correct level. Their very actions contribute to incorporating all the available information in the prices. They bring other market participants to wonder whether the herd is mistaken. 81 Mark Hart III, a Texas hedge fund manager, reportedly made a fortune in late 2007 by betting against subprime mortgages. 82 Buying CDSs on sovereign bonds exerts upward pressure on their prices, signaling to the market that some participants have reasons to believe that the emperor is naked.

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