I didn't know until I watched Frontline: The Warning on PBS last night that:
- In 1998, Clinton's economic team (Greenspan, Rubin, Summers, Geitner) engineered a rescue of Long Term Capital Management (LTCM), a once-prominent but failing hedge fund caught up in obscure derivatives trading. In fact, to sell the rescue, the team used almost exactly the same rhetoric as they did 10 years later -- arguing that the collapse of LTCM would set off a full-scale market meltdown that could threaten the stability of the US economy.
(More after the fold)
- That in the months prior to LTCM's meltdown, Brooksley Born, then-Chairman of the Commodity Futures Trading Commission, was investigating whether over-the-counter derivatives should be regulated.
- That in the months prior to LTCM's meltdown, Greenspan, Rubin and Summers tried to bully Born into halting her investigation. In fact, they trashed her all over DC, told their contacts in the press and elsewhere that she "didn't understand" (even though she was the first female president of the Stanford Law Review and had decades of experience in securities laws), and, when she remained resolute in the face of their attempts to intimidate her, these men convinced Congress to strip her agency of its regulatory authority.
- That even after the collapse of LTCM in 1998, which essentially vindicated Born's position that the derivative market could endanger the US economy, NO ONE DID ANYTHING to regulate them.
What I don't understand is: how could these people still be in charge of the economy?
Had the government acted in 1998, wouldn't the bubble have been smaller and, even if it still burst, wouldn't regulation have mitigated the blows to the world economy?
Even now, after coming as close as we have to the Great Depression, we are still not regulating these derivative markets!!
Why didn't Greenspan and Rubin and Summers act in 1998? Well, I guess, they argued that LTCM was an anomaly. Which seems a little dense, no?
I don't believe the ideological explanations: that their worshipping of Ayn Rand and the free market blinded them to the dangers of deregulation. Call me a cynic, but I think that's just a cover for plain old graft and corruption. Unless this team is removed, Wall Street will be allowed to feed at the trough until there is no money left.