Let's say in 1998 when LTCM collapsed, the Fed did absolutely nothing. If any banks collapsed due to LTCM, nothing was done as well. How would history have changed from that point on? The Tech Bubble would not have happened. The Housing Bubble was also not have happened. The Dow would have never seen 5 digits (Dow 10,000 first came about in 1999 in the current world.) A recession would have absolutely happened.. would it have been a depression? Severe recession? More/less severe than the 2008 - present one? Where would we be in 2011?
I think about this a lot. LTCM, at least to me, signifies the acceptance that the Fed could control long term economic cycles through crafty manipulation of short term rates. Remember when the press used to call Greenspan "Maestro"? No Problem, not LTCM, nor Russia, nor Mexico, nor Asian contagion, nor 9/11, was beyond fixing by the Central Bankers. We got asset appreciation, cheap capital, and the seeds of our destruction. And yes, we are currently using the same tools to fight our current issues. Scary.
That's true. Each successive bailout required a greater commitment from central bankers and emboldened specs to take ever greater risks. It's also important to remember that LTCM occurred roughly 9 months to a year before the repeal of Glass-Steagall.
Seems to me most of your assertions are wrong. Sure, some of the banks would have taken a hickey..... but by letting LTCM fail behavior would have changed and I suspect we'd be much healthier now.
both of you are correct. reread what he wrote. re:bubbles bubbles come and go. it is healthy because it cleanses the system. it is gov't interference that interferes with the cleansing process.
We have a debt-based money system. Every dollar in circulation represents a debt, which accumulates interest. Right now, total credit market debt (read: total money supply) is 60 Trillion dollars. At an average interest rate of 3%, that's 1.8 Trillion dollars (13% GDP) that's siphoned from the productive economy ever year, to service all debts, private and public. America is literally suffocating under an ocean of debt. The purpose of recessions/depressions is to liquidate, or write-off, non-performing debt. This shrinks total money supply, and therefore, reduces interest payable on that debt. Historically, a manageable level of total credit market debt is ~150% of GDP, or 65% less than where we stand today. This is why Ron Paul continually harps on the liquidation of bad debt as necessary to future growth - interest is eating us alive. Since the 80's, GDP grew linearly while total credit growth (and interest) went parabolic. IOW, total debt and accumulating interest have outstripped our ability to repay. The natural market remedy is a severe recession where debts are wiped out and the cycle begins anew. Problem is, Banks are heavily exposed to a collapse and won't let that happen. Banks run the Treasury and literally own the Federal Reserve. LTCM would have precipitated a massive recession. As would 2001, as would 2008, had Wallstreet not leaned on the FED, Treasury and Congress to intervene. As it stands today, total credit market debt is 33% more than it was in 1929. The ensuing downturn would have been absolutely severe, which is why, in part, Congress agreed to play along. It would have been chaos. And it will be chaos when they eventually pull the plug. Banks now run the economy via our Government, which they control.
LTCM was not actually bailed out by the Fed. What happened is that the Fed twisted the arms of numerous banks to lend money to LTCM to allow them to get out of their positions without causing chaos in the markets. This was done. The banks eventually got their money back. Fortunately for the outside investors of LTCM the management of the firm insisted that they cash out before the debacle started (management was getting greedy and wanted the future profits for themselves). So the outside investors actually made money. The biggest losers were the managers and employees of LTCM themselves, they got wiped out. Strangely, this was one of the few financial blow ups where justice was done.
It started a long time before that. Go back to Continental Illinois and the S&L debacle. Then go back to the creation of the FDIC, FSLIC, federal reserve etc. In 1907 Morgan let Knickerbocker trust fail which caused a panic which was part of the rationale for a central bank. So you can argue it from both sides I guess.
IMO, the historical irony of the LTCM debacle is not that it created moral hazard on Wall Street (which has always had it) - it's that created moral hazard at Fed and Treasury by exagarating their sense of control.