Over the years, I have frequently disagreed with Tyler Cowen. I always find his subject matter intriguing, but I invariably seem to end up on the opposite side of the trade from him, most notably on the subject of Predatory Borrowing.

Today, however, I find nothing in Professor Cowen’s NYT article — Bailout of Long-Term Capital: A Bad Precedent? — to disagree with. I reach the exact same conclusion in Bailout Nation — that LTCM was a missed opportunity to discuss Moral Hazard, to send the markets a clear message.

Long-Term Capital Management is actually the better part of one chapter in the book — Chapter 6. The Irrational Exuberance Era 1996 – 1999, and a healthy part of another — Chapter 13: Moral Hazard: Why Bailouts Cause Future Problems.

For your Sunday morning reading pleasure, here is an excerpt:

About the same time Easy Al was cutting rates that September, William J. McDonough, the president of the New York Federal Reserve Bank, was having a little get together one Tuesday evening at the Fed’s fortress like building on Maiden Lane. He called for a meeting of the pater familias – the heads of 16 largest banks, along with the New York Stock Exchange Chairman. The discussion was over what to do about the imminent collapse of Long Term Capital Management.

Roger Lowenstein’s narrative, “When Genius Failed”, is a fascinating read for anyone interested in the grisly details of LTCM. For our purposes, we need only note :

a) The Fed was cutting rates, and;

b) The Fed was using its authority and prestige to help work out the demise of what was a private partnership.

The central bankers jawboned the 14 largest banks — with the notable exception of future bailoutee Bear Stearns — into kicking in $3.65 billion dollars to buy out the assets of LTCM. These included leveraged assets of over $100 billion, and derivatives with a notional value of over $1 trillion dollars.

The belief that LTCM had to be bailed out was widely held. It was 1987 redux, and the media accolades poured in. In the aftermath of the LTCM rescue, TIME put Greenspan, Robert Rubin and Larry Summers on the cover as “The committee to save the world.”

The chaos surrounding a liquidation of LTCM would cause the markets, in Chairman Greenspan’s words, to “seize up.”

But this raises uncomfortable regulatory questions. If this huge leveraged fund presented such systemic risk, then why weren’t there regulations limiting the size and the leverage hedge funds could use?

There is no middle ground.  Either these funds are too dangerous to be allowed to exist without strict controls, or this was not a case of systemic risk.

Of course, that’s not how Greenspan saw it. The failure of LTCM would have had a very negative impact on psychology. Woe to the Fed Chair who allows traders to become morose! That was how Mr. Atlas Shrugged rationalized the intervention. (Thank goodness Ayn Rand was already dead).

Whether that would have turned out to be true is a matter of much dispute. The evidence leads me to surmise that not only would LTCM’s demise not have caused the system to collapse, it would have done a world of good.

Consider what was at stake: First, LTCM’s portfolio had a $100 billion dollars in leveraged paper. But it wasn’t all Russian debt going to zero, and it had some real value. The problem wasn’t the quality of the overall assets, rather, it was using $1 to buy $100 dollars worth of paper. It doesn’t take much spread widening to lose a substantial amount of capital when you are running that much leverage. As we shall see in Part III, that would have been a ripping good lesson for the investment banks to have learned circa 2004.

The other issue was the trillion dollars in derivatives. How did an unregulated, three-year old, heavily  leveraged partnership manage to have so much in insurance entrusted to them by counterparties? The only answer I can deduce is that the number of idiots on the planet is greater than previously believed by several orders of magnitude.

This was yet another lesson sorely not learned.

What would have happened had this notational amount of derivative paper become worthless? Short answer: Not a whole lot. The loss would have been the premiums paid to LTCM, not the trillion dollar notational value. If your car insurance company disappeared tomorrow, you wouldn’t lose the value of your vehicle — only the premium payments you made. This is why it’s advisable to do business with firms such as GEICO or Allstate, and not “Billy Bob’s Auto Insurance and Bait Shop.”

The penalty for getting into bed with a counterparty that was young, untested, highly leveraged and reckless should have been expensive. Instead, it was a minor inconvenience. It was yet another lesson not learned from LTCM, and contributed mightily to moral hazard. Future repercussions would be severe.

Had LTCM been allowed to fail naturally, perhaps a lesson might have been learned: risk and reward are each sides of the same coin. Alas, it was a missed opportunity for the traders and risk managers at major banks and brokers to learn this simple truism. The parallels between what doomed LTCM in 1998 and forced Wall Street to run to Washington for a handout in 2008 are all there, and the significance of these missed opportunities are now readily apparent.

Long Term Capital Management was the predecessor for the great credit crisis of 2008.

- Bailout Nation,
Part II. Stock Market Bailouts, Chapter 6. The Irrational Exuberance Era 1996 – 1999

(citations omitted)

That seems just about right to me . . .

>

Sources:
Bailout Nation
McGraw-Hill, February 12, 2009

Bailout of Long-Term Capital: A Bad Precedent?
TYLER COWEN
NYT, December 26, 2008

http://www.nytimes.com/2008/12/28/business/economy/28view.html

Category: Bailouts, Credit, Federal Reserve, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Bad Precedent: The Long-Term Capital Bailout”

  1. Mannwich says:

    And just imagine what the latest “Granddaddy” of all bailouts today will do to encourage more of this crap down the road………assuming we get that far, of course, which is not a given at this point.

  2. petervdh says:

    Could you perhaps say the same thing about not rescuing Lehman? It made the fed at least ‘unpredictable’ and definitely brought back risk in the market. Was this a hard way to crush potential moral hazard in the future or was it still plain stupid?

  3. KJ Foehr says:

    Moral hazard and it repercussions have become unavoidable in the land of the “free” and the home of the formerly brave, where negative consequences are no longer acceptable.

  4. VoiceFromTheWilderness says:

    That sounds like terribly clear thinking. Way to go BR.

  5. Machiavelli999 says:

    “Sending a message to the market” was probably the thinking about letting Lehman fail and you can see the consequences. On the other hand, the bailout of LTCM really did “save the world” and people still don’t really understand how the US economy escaped recession during this crisis. I suggest an effective bailout restored confidence and trust and the world kept on spinning.

    Libertarians like Tyler Cowen never consider the role of trust and confidence when discussing whether to do or not to do bailouts.

  6. RW says:

    I’m inclined to disagree with both Tyler Cowen and BR on this one: Cowen because his argument is a red herring — the roots of the current debacle were private misfeasance and government nonfeasance rather than the obverse and the putative lesson(s) of LTCM are largely irrelevant — and BR because I think the best way to deal with moral hazard and the probability of panic/system seize-up both then and now would be to declare the offending financial agent a depository institution and force orderly liquidation (and appropriate prosecution) via the only outfit, governmental or private, that really seems up to the task, the FDIC.

    Shorter version: There is no sense in risking multiple Lehman-level failures and a failure involving OPM doesn’t provide a sufficiently sharp lesson to the right students in any case; i.e., the corporate officers of AIG, Citi, et al probably fear Sheila Bair even more than they love Hank Paulson.

  7. These ‘bailouts’ go all the way back to ’13–the Seminal ‘bailout’ of the Financier-Class.

    The biggest Risk to those boys, at that Time, was that the Manufacturing-Sector, yes, file under: Ripley’s, was becoming self-financing–through retained-earmings and direct Equity/Debt sales–to the extent, that their dependence on ‘Bank Loans’ was waning significantly..

    We ingnore the ‘Bailout of ’13′, only grope, blindly, at branches, ever missing the Root..

  8. andrewt says:

    Robert Reich said, in short, if it’s too big to fail… it’s too big.

  9. maynardGkeynes says:

    The LTCM bailout was also an outrageous Fed sanctioned antitrust conspiracy. In effect, the Fed invited the 14 largest competitors in the market to get into the same smoke-filled room to agree on prices for LTCM’s positions. The victims, besides the public at large, were the shorts holding positions opposite to those of LTCM’. They had the right to bet against LTCM, and were sold out in favor of the big banks.

  10. trainreq says:

    At some point, can’t we just describe the U.S. financial system as a continuing criminal enterprise, subject to the casket statute?

  11. BG says:

    IMHO, it is time to recognize that we can not bet the future of the global financial system on financial instruments and institutions based upon excessive risk. Instead we should repeal Glass-Steagal, and force ANY financial institution deemed “too large to fail” to divest or break-up its operation into smaller more manageable pieces that are fire-walled in some way as not to threaten or continue to be excessively intertwined with its parent.

    The foundation of the US financial system should be a low-risk BORING business not some speculative entity that must be saved from itself by extorting money from tax-payers every few years. Break-up, divest and spin-off any financial institution that threatens the viability of the whole. We will be much better off with smaller, more competitive financial institutions that return to more traditional banking practices versus the greed and corruption that we have experienced over the last decade.

    If some financial institutions can not resist the temptation of gambling, let them suffer their own demise and leave the rest of us non-players out of it! We have been lulled to sleep over the years by letting Congress (while being bribed by Wall Street) approve all of the bank mergers of the last 20 years. We know that concentrating all of our finances into a few mega-banks was a bad idea; but, we did it anyway. It is now time to do what we damn well know is the right approach and tell the enablers with the greasy palms to go get fucked!

  12. KJ Foehr says:

    MEH,

    Some roots cannot be cut.

    IMO, people do not ignore it as much as accept the fact that, like the pacemaker in Cheneys chest, it cannot be removed without killing the patient. I.e., at this point, I feel your “cure” would be worse than the disease.

    Further, how is it that, as far as I know, every developed country has a central bank? If it is such a bad thing, why have some not tried to eliminate it already? Or are there examples of countries as successful as the USA has been since 1913 that do not have one?

  13. 10 cc says:

    KJ,

    It is always discouraging when anyone accepts the “inevitability” of a Central Bank or the idea that abolishing an existing one is a “non-starter”. After all, we’ve terminated three in this country’s history. Andrew Jackson became president largely by taking his anti-bank case to the electorate.

    The sad truth is that even here in your “land of the free”, we will never really be free until we are free of bankers; at least big bankers.

    Yes, we would still have politicians but if their leash to the banking cartel could be severed, we might even be able to make them work for us again.

  14. Patrick Neid says:

    I have always felt the grease for the skids was the mythical “plunge protection team” from 1987. Whether they actually existed was besides the point. Fact or fiction, they prepped the investing public to accepting intervention especially when it seemed to favor the majority.

    How good was this prep work? Very few eyebrows are being raised to trillions of dollars floating out of thin air.

  15. ButtoMcFarty says:

    Does this sort of thing go on in other G7 countries??

    I’m particularly interested in Japan.
    Anyone??

  16. Estragon says:

    LTCM isn’t much of a precedent for the handling of the current problem, and that’s the problem.

    IIRC, the “bailout” of LTCM was essentially the FRBNY banging the heads of LTCM creditors and counterparties (Goldman et al) together to make them eat their own cooking. It’s arguably a legitimate role for a central bank to play in helping get counterparties in a room to understand it’s in their own best interest to work together and avoid fire sales. The fed easing may have been nudged along by LTCM, but there were signs of slowing (asian financial crisis etc.) which were also in play and may have led to easing anyway.

    With the real bailouts we’ve seen in the period since, LTCM is by comparison a picture of restraint and sober sound judgement.

  17. KJ,

    with this: “how is it that, as far as I know, every developed country has a central bank?”

    guess what? more reading..
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Rothbard+Central+Banking

    with this: “If it is such a bad thing, why have some not tried to eliminate it already? Or are there examples of countries as successful as the USA has been since 1913 that do not have one?”

    how do you equate ~ U$D 60 Trillion in NPV Debt, with ‘success’?

    as well, see:
    “How strangely will the Tools of a Tyrant pervert the plain Meaning of Words!”
    –Samuel Adams
    http://quotes.liberty-tree.ca/quotes_by/samuel+adams

    and:
    10 cc Says: December 28th, 2008 at 2:37 pm

    captures, well, the idea..

    ~~

    BMF,

    the phenomenom has been worldwide, including Japan, see, also: England, France, Germany, Switzerland, Russia, et a;., etc., ad infi..

  18. Tom K says:

    “If some financial institutions can not resist the temptation of gambling, let them suffer their own demise and leave the rest of us non-players out of it!”

    I agree with your comment, but why wait ’til next time?

    I don’t necessarily agree the solve is in forced divestiture or more regulation. “Smaller, more competitive” doesn’t equal less greed or corruption.

    The key is TRANSPARENCY. Let those who want to take on high risk happily do so…with eyes wide open, knowing the “rest of us non-players” will not be responsible for any negative outcomes.

  19. debreuil says:

    I don’t know about you guys, but I’m looking deep in my heart, and I’m not missing Lehman. Imagine what the future would have been like if they hadn’t gotten rid of the scumbags from the twenties. Wait, maybe we won’t have to imagine this time. Crap.

  20. usphoenix says:

    @BR Thanks. What’s the oldies song “It’s been a long time comin”.

    @Machievelli999 Disagree. It only delayed the inevitable. DUH. And made it worse.

    You used THE KEY WORD: TRUST, and those unworthy of investor trust, but still wanting more, bought their way out. Only a matter of time.

    @trainreq A+++ Except, they may still buy their way out for a while with our money. We don’t have a Coliseum with lions anymore.

  21. rlert says:

    The problem with Cowen’s analysis is that the current situation and LTCM have a fundamental difference. LTCM was principally a liquidity problem. One can argue that the LTCM trades were “correct” in that they were trying to arb a market inefficiency (unless you have a theological belief that markets are always efficient). On the other hand, as Krugman ad BR were fairly early to point out, the current situation appears to be more of a solvency problem than a liquidity problem. It seems to me that at least theoretically one can construct an argument for providing a solution to a liquidity problem when the market is being driven more by behavioral factors than economic factors. It is a bit more complicated when the issue is solvency. At any rate, there is enough difference between the two that it is a poor analogy, which was the logic of Cowen’s article.

  22. KidDynamite says:

    I’m surprised no one took issue with his horrible “car insurance” analogy. The proper analogy would be if you crashed your car and called up your insurance company, only to find out they were no longer in business…. Just as we saw in AIG’s demise, the damage is absolutely NOT limited to “insurance premiums paid” because suddenly a trade that was hedged is now, clearly, NOT hedged if the counterparty who has issued the hedge disappears.

  23. DL says:

    If LTCM had been allowed to fail, I think we would have been better off in the ensuing
    years, particularly in the year 2008.

    I shudder to think of what sort of mutated monster Bernanke and Paulson have created now.

  24. druce says:

    Well, I sort of see your point. Logically, if you’re going to be laissez-faire, you have to be laissez-faire all the way. and make sure market participants have the fear of God when it comes to risk. No oversight plus government rescues is a moral hazard and recipe for disaster.

    But I fail to see how letting credit markets freeze up would have been a better idea in 1998 than it turned out to be in 2008.

    It’s like repeatedly extinguishing small forest fires just lets the underbrush accumulate until you get a catastrophic fire. You’re saying the firefighters should have stood by and let the forest burn to the ground, and then market participants would have learned their lesson.

    Clearly, the LTCM crisis showed that absolutely no one is willing to accept the consequences of a true laissez-faire approach, not even the Greenspans.

    Therefore, your argument is just a straw man, and the only logical lesson to learn is that in exchange for government firefighting in times of stress, the markets need to accept sound ‘forest management’ practices; not let opaque, structurally unstable markets get so big they threaten the whole system, report risks transparently, and accept limitations on risk in exchange for government rescue in times of stress.

  25. algernon says:

    Amen. Well highlighted, Tyler Cowen & Barry

  26. KJ Foehr says:

    MEH,

    OK, I’m reading.

    But you haven’t answered my question as to why others haven’t tried eliminating central banking if it is such a bad idea. Even China has one. Starting from where they were 30 years ago, they could have built any kind of system they wanted to. So are they trying to emulate our success or our our failure?

    The success I am talking about here is our standard of living, material possessions, brick and mortar, most of the greatest universities in the world, roads, bridges, infrastructure, winning WW2, being the only nation to have a put a man on the moon, outlasting the Soviet Union and winning the cold war, being the country most immigrants for the last maybe 100 years have wanted to come to – they came here because we were successful, the land of opportunity; people throughout the world admire America for our success. Do you think they are all wrong, that it has all been an illusion?

    The successes I mentioned are real things; debt is just paper. It was created, and it can be destroyed as it currently happening, and will likely happen in the future, perhaps even at the US Treasury level. See: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aFgHlh.Dn4Lc

    And I am not saying central banking is inevitable; I don’t have the answers as you guys apparently do. I am merely asking questions, trying to learn. But if we dissolved the Fed tomorrow, what would happen to our economy? In our current situation that would seem to be a certain path to a disastrous depression. That is what I am saying now: Ben has no choice but to work within the system as it is. Or do you think now would be an appropriate time to let the current system collapse completely and begin a new one? Would the country even survive such a cataclysm?

    And what evidence is there to show that free-market banking, or whatever it is called, is a better system in such an advanced, complex economy / world as ours?

    OK, back to my reading, and thanks for the links, BTW, the first one is quite good so far.

  27. KJ,

    w/ this: “But if we dissolved the Fed tomorrow, what would happen to our economy?”– No Economy can move, seamlessly, through a wholesale shift in its core functions. Even after ’13, the people-facing ‘Gold Std.’ lasted 20 years, ’til ’33, the Silver subsidiary coinage, ~50 years, ’til ’64, and any semblance of a ‘Gold Std.’ ’til ’71..
    here’s a quick overview of ‘Gold Std.’:
    http://www.econlib.org/library/Enc/GoldStandard.html

    But, back to the Q, LSS: it’d be a process, as well, to unwind the FedRes–if, in fact, it would be wholly necessary. The biggest problem it foists, along with its duopolistic partner, the USG, is lack of Choice. With it, there is One ‘legal tender’, with no, ready, competition.

    To that end, ‘legal tender’ laws need to travel, one-way, as well, taxation on ‘currency transactions’ v. the U$D, should be on the same Coach..

    w/this: “why others haven’t tried eliminating central banking if it is such a bad idea.” if you understand the spread of CB’ing, over time, you’ll see the answer–LSS: these catz shouldn’t be confused with Schoolmarms–see the problems that Jefferson, Jackson, and Garfield encountered, for starters…

    and w/this: “Even China has one. Starting from where they were 30 years ago, they could have built any kind of system they wanted to.” no doubt that the PBOC is a ‘CB’, this: “they could have built any kind of system they wanted to.”(and acheived a similiar result…)–you should wonder about..

    And, re: Infrastructure, see: “…the Texas Transportation Institute, a research arm of Texas A&M University, released its 2007 Urban Mobility Report on September 18, detailing how congestion on U.S. roads is getting worse. It’s a problem that forces Americans to spend 4.2 billion extra hours each year in their cars—approximately 38 extra hours for each urban driver—and wastes 2.9 billion gal (11 billion L) of fuel, at a total cost to the national economy of $78 billion.

    As a result of these incidents and the Texas institute’s report, major news organizations began to discuss what was wrong with the nation’s infrastructure. The Minneapolis bridge collapse and the recurring problems for airline passengers, in particular, also led to a series of congressional hearings in the summer and autumn and briefly drew comments from several of the leading candidates in this year’s presidential election.

    The mood of this debate was bleak from the outset, as evidenced by three sentiments, all expressed on August 5, less than a week after the I-35W collapse.

    On that day, John McQuaid, a Pulitzer Prize–winning journalist recently with the Times-Picayune in New Orleans and now based in Washington, D.C., as a fellow with the Open Society Institute, wrote an op-ed piece (“The Can’t-Do Nation: Is America Losing Its Knack for Getting Big Things Done?”) for the Washington Post in which he stated that America is losing its reputation as a problem-solving nation—one that once constructed such great engineering projects as the Panama Canal and Hoover Dam—and instead has become a “can’t-do nation.” Pointing to the Minneapolis bridge disaster, the failure of the levees in New Orleans during Hurricane Katrina, and America’s current foreign policy troubles, McQuaid pondered the question, “has there ever been a period in our history when so many American plans and projects have, literally or figuratively, collapsed?”

    As people were reading McQuaid’s piece, they could also find an editorial (“A Bridge Collapses”) that day in the New York Times warning that “the nation’s physical foundations seem to be crumbling beneath us.” The Minneapolis bridge, it said, the Manhattan steam pipe, and New Orleans’s “substandard levees . . . are some of the most dramatic signs of the nation’s failure to maintain and enhance its aging physical structures at a time when demands on roads, transit systems, sewage treatment plants, and other vital facilities are rising.””
    http://pubs.asce.org/magazines/CEMag/2008/Issue_01-08/article1.htm

    Longer Story Short: our ‘information economy’, our manufacturing of bits ‘n bytes, digi-dollars, and CGI, our ethereal commerce, needs a bedrock foundation from which it can be cantilevered..

    We don’t have that, either..

  28. DeDude says:

    It’s very simple. If it’s to big to fall it is also to big to operate without strict adult supervision.

  29. KJ Foehr says:

    MEH,

    From your post, “The Minneapolis bridge, it said, the Manhattan steam pipe, and New Orleans’s “substandard levees . . . are some of the most dramatic signs of the nation’s failure to maintain and enhance its aging physical structures at a time when demands on roads, transit systems, sewage treatment plants, and other vital facilities are rising.””

    That some of our infrastructure is seriously degrading is a given (yet another consequence of the denutting of government by free-marketeers), my point is the fact that we were able to build it to begin with – all in the presence of the Fed Reserve system – is evidence of our success and the Fed’s benigness.

    BTW, who would build / rebuild the infrastructure if the libertarians ruled?

    Also from yours, “On that day, John McQuaid, a Pulitzer Prize–winning journalist recently with the Times-Picayune in New Orleans and now based in Washington, D.C., as a fellow with the Open Society Institute, wrote an op-ed piece (“The Can’t-Do Nation: Is America Losing Its Knack for Getting Big Things Done?”) for the Washington Post in which he stated that America is losing its reputation as a problem-solving nation—one that once constructed such great engineering projects as the Panama Canal and Hoover Dam—and instead has become a “can’t-do nation.””

    I don’t place the blame for our “can’t do” condition on the Federal Reserve system. I place it on the growth of the “painfree ethos” in our culture, and on the general apathy and complacency that has developed as a result of our prosperity over the last half century – realizing much of that has been false in recent years due to our over reliance on debt, but that does not diminish the detrimental effect on the character of easy living Americans.

    Therefore, I don’t see how eliminating the Fed reverses our ongoing transformation from a “can-do” to a “can’t-do” nation.

    Back to reading.

  30. objectivistguy says:

    Re: “Thank God Ayn Rand was dead”

    If Rand was alive, she’d likely have been bashing Greenspan long before LTCM. Seeing him morph into certified politician, wanting everyone to love him and think of him as the maestro, she would probably have denounced him in no uncertain terms.

  31. KJ,

    with this: “I don’t place the blame for our “can’t do” condition on the Federal Reserve system. I place it on the growth of the “painfree ethos” in our culture, and on the general apathy and complacency that has developed as a result…”

    the ‘painfree ethos’ was inseminated by the creation of the USG/FedRes Duopoly..

    Need more ‘money’? Don’t want to raise Taxes? Fear cutting other Spending?

    No Problem, we, here at the FedRes can serve your needs..think NINJA loans have gotten a bad name? don’t let it worry you, we’ve a better deal for you~

    Your Notes are Good @ FRBNY, our Window is always open for you-the USTreas..

    Someone’s telling you that your Notes amount to a Chattle Debt on your kinder? They’re ‘Chicken Little’!

    When times improve, pay us back, it’s that simple..

    And, sadly, we’ve been that Simple.

    Legal Tender is the ripest Monopoly on the Board, makes Boardwalk look like a Foreclosed Baltic Ave.(in Detroit..)
    ~~
    and, w/this: “my point is the fact that we were able to build it to begin with – all in the presence of the Fed Reserve system”– two things, you should compare the Infrastructure/Asset Base built before ’71, and that after ’71, at least two ways, total amount, and quality, and see what you come up with..

    as well, understand that the FedRes is just a different kind of ‘Toll-taker’–if there’s no Traffic, there are no Tolls–it has been in their interest, for their interest in Interest, to keep the road attractive while the Traffic could traffic, we’ve been running out of gas, we get much less traffic for our marginal unit of Debt, this game is fixin’ to go into Reverse–prob is, the FedRes can never refund the Tolls –their units of account are fictious, only their Power is real..

    “BTW, who would build / rebuild the infrastructure if the libertarians ruled?”

    see: The first American turnpike road was a state enterprise, authorized by a Virginia act of 1785. The first American turnpike to be constructed and operated by a private corporation was the Lancaster Turnpike built (1792) in Pennsylvania. Thereafter turnpikes were regularly private enterprises, and turnpike corporations held the leadership in the development of the American corporation system. The construction of turnpikes proceeded rapidly, and by 1825 a map of the Eastern states showing the turnpikes would have looked much like a present-day map showing the railroads. Famous turnpikes included the post road from New York to Boston (now part of U.S. 1), the two roads from New York to Albany (on the two sides of the Hudson River), and the roads from Albany to Buffalo, main lines of communication with the developing West.
    http://www.infoplease.com/ce6/bus/A0861667.html

    guess where some of the first dividend-paying shares came from?

  32. druce says:

    Brad Setser counters Cowen, far more convincingly than I could, but same basic point – complete meltdown in 1998 wouldn’t have been any better an idea then than it was in 2008.

    http://blogs.cfr.org/setser/2008/12/31/relitigating-1998-at-the-end-of-2008/

    the failure was to go to the edge of the precipice, and then not build the oversight structure to address sources of opacity, contagion and systemic risk.

    that was the dry tinder… the kindling was the deals that would blow up if a major counterparty got downgraded or if house prices ever declined.