More on Hedge Funds

| Mon Sep. 22, 2008 1:11 PM EDT

MORE ON HEDGE FUNDS....Via Atrios, Nouriel Roubini provides a potted history of the Great Financial Crisis of 2007-08. I'll skip right to the good part:

The first stage....The next step....The third stage....The fourth stage....The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.

Hedge fund apologists have been pretty smug about how all our current problems have been caused by investment banks, which are (lightly) regulated, and none at all by the big bad hedge funds, which operate with no regulation at all. And so far they've been right. But does anyone believe this is going to last? And what will Bernanke and Paulson do if and when a systemic rout in the hedge fund market threatens to undo their bailout plan? Will they bail out the hedge funds too?

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