History will judge LTCM rescue quite differently from what this article says, which had been the prevailing consensus at the time.
Hero tale about Greenspan and Rubin? Now it is so laughable.
Ping!
>Clinton’s grasp of Realeconomik includes the tenet that short-term political gains are never worth long-term economic risks.<
yeah, right.
LTCM probably wouldn’t have collapsed if we didn’t have deflation during the mid 90’s, as the price of gold fell to a low of $253 per ounce in 1999 and oil was around $10 a barrel. There were a lot of bankruptcies as deflation is very hard on borrowers (for example, Russia defaulted on its bonds, Asian debt crisis, etc).
Good post, definition from CATO (1999):
In September 1998 the Federal Reserve organized a rescue of Long-Term Capital Management, a very large and prominent hedge fund on the brink of failure. The Fed intervened because it was concerned about possible dire consequences for world financial markets if it allowed the hedge fund to fail.
The Fed’s intervention was misguided and unnecessary because LTCM would not have failed anyway, and the Fed’s concerns about the effects of LTCM’s failure on financial markets were exaggerated. In the short run the intervention helped the shareholders and managers of LTCM to get a better deal for themselves than they would otherwise have obtained.
The intervention also is having more serious long-term consequences: it encourages more calls for the regulation of hedge-fund activity, which may drive such activity further offshore; it implies a major open-ended extension of Federal Reserve responsibilities, without any congressional authorization; it implies a return to the discredited doctrine that the Fed should prevent the failure of large financial firms, which encourages irresponsible risk taking; and it undermines the moral authority of Fed policymakers in their efforts to encourage their counterparts in other countries to persevere with the difficult process of economic liberalization.
bump