Guys, its not the Fed or treasury or congress that decides on bailouts, its the chicken! <iframe width="560" height="345" src="http://www.youtube.com/embed/IPEYycCRKXo" frameborder="0" allowfullscreen></iframe>
If Central Banks are going to use tools to manipulate the economy during troughs of the cycle then you must use also suppress peaks.
Just my further thoughts on this alternative history timeline: Summer 1998 - Dow hits 9000, LTCM crisis follows. Fed ignores LTCM and lets it collapse. Sept 1998 - Lehman brothers collapses, Fed doesn't give a $#@. Dow = 6000. Nov 1998 - Market further tumbles, Dow = 4000. Fed wonders if we're in for another depression, cuts interest rates from 4% to 2%. Feb 1999 - Oil plunges to $5/barrel from $10/barrel in 1998. Unemployment hits 9%, up from 4% in 1998. Fed YoY CPI registers -0.2%. Fed reduces interest rates from 2% to 0%. June 1999 - World is in a global recession, however, the US is seen as a bright spot with the ongoing development of the Internet. Nasdaq rallies, up 30% for the year. Jan 2000 - Recession declared over, Fed raises interest rate from 0% to 1%.
Probably a few other banks would have gone under, I believe Merrill Lynch had enormous exposure. Corzine was forced out of the top spot at GS because of the episode as well. One thing is for certain, the "shadow banking system" grew exponentially within a few years of the LTCM bailout.
I have enjoyed everyone's post, all very interesting. I enjoyed the Southpark Video, I like this video hope it is informative and funny. Quantitative Easing Explained http://www.youtube.com/watch?v=PTUY16CkS-k&sns=fb
Another question would be: where would we be if the Fed and the SEC and the Fannie/Freddie Congressional Oversight Committee had done something about mortgage-backed securities and mortgage lending rules after the original MBS blowup in the 80's with Salamon Brothers / Plaza (Liar's Poker fame).