Was bailing out Long-Term Capital Management a good idea?
Here is my latest NYT column. It starts as follows: The financial crisis is a result of many bad decisions, but one of them hasn’t received enough attention: the 1998 bailout of the Long-Term Capital Management hedge fund. If regulators had been less concerned with protecting the fund’s creditors, our current problems might not be quite so bad. Bear Stearns, Merrill Lynch, and Lehman Brothers were all major creditors of LTCM. Given that regulation is inevitably imperfect, and cannot foresee or prevent every firestorm in advance, this was one chance to send a very stern message to those creditors. Perhaps no LTCM bailout would have meant dire consequences at the time, but still: …Fed inaction might have had graver economic consequences, especially if a Buffett deal had fallen through. In that case, a rapid financial deleveraging would have followed, and the economy would have probably plunged into recession. That sounds bad, but it might have been better to have experienced a milder ver
