The Long Financial Crisis (updated)

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It’s commonplace to describe the financial crisis as a once-in-a-century event, but I question whether that is the case. Perhaps we’re not in the midst of a short-lived financial shock, but a long crisis that stretches back into the 1990s.

Here’s Paul Blustein on Alan Greenspan:

The Fed chief told the G-7 that in almost fifty years of watching the U.S. economy, he had never witnessed anything like the drying up of markets in the previous days and weeks.

Greenspan wasn’t speaking in Autumn 2008 when Lehman’s collapsed, however, but ten years’ earlier in the wake of the spectacular blow-up of Long-Term Capital Management, which lost $4.5 billion almost overnight in what the fund’s principals post-rationalised as a 100-year flood.

Long-Term (with its superbly hubristic name) was brought low by derivatives, just as Lehman’s would be a decade later.

(Robert Rubin, Clinton’s Treasury Secretary, was one of those left picking up the pieces – part of ‘the committee to save the world’, with Greenspan and Larry Summers. Rubin went on to preside over Citigroup as it needed a succession of massively expensive bailouts, when its derivatives tanked in the subprime crisis.)

Committee to Save the World

The proximate cause of Long-Term’s failure was Russia’s Rouble crisis, when the country defaulted on its debt after the IMF refused to mount a second bailout.

The Russian crisis itself came in the midst of a long series of dramatic economic failures that hits the world between 1997 and 1999, mostly in East Asia (Thailand, South Korea, Indonesia etc), but which also battered Brazil and would devastate Argentina in 2002. Blustein again:

Time and again, panics in financial markets proved impervious to the ministrations of the people responsible for global economic policymaking.

IMF bailouts fell flat in one crisis-stricken country after another, with the announcements of enormous international loan packages followed by crashes in currencies and sever economic setbacks that the rescues were supposed to avert.

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On the web: skirmish in the Falklands, NATO futures, State Dept’s media relations, and “cloud computing”…

– As the diplomatic temperature continues to rise in the South Atlantic, Simon Jenkins suggests that the Falklands are “the Elgin marbles of diplomacy” and a “post-imperial anachronism” that should lead Britain to the negotiating table. Hugo Rifkind, meanwhile, explains why he won’t be shedding tears for Argentina’s President, Cristina Fernández de Kirchner, while The Economist highlights her failure to see the current crisis as an economic rather than a political opportunity.

– Rob de Wijk explores (pdf) the future options for NATO as it come to terms with changing geopolitics. Andrew J. Bacevich, meanwhile, cites a failure to sufficiently “reignite Europe’s martial spirit” and carve a global role for NATO in the 21st Century as cause for the US to draw back engagement in the alliance. Let it return to its origins and “devolve into a European organization, directed by Europeans to serve European needs”, he argues.

– Elsewhere, the London Review of Books blog offers reaction to plans for the new US Embassy in London. Associated Press, meanwhile, has news of an internal State Department report criticising its media operations.

– Finally, VoxEU explores the emergence of “cloud computing” and its potential impact on our lifestyles, business innovation, and economic growth. Charles Leadbeater assesses the associated rise of “cloud culture” and the importance of guarding this new space from the overbearing influence of government and big business. Elsewhere, over at Brookings Mark Muro wonders if the rise of Amazon’s Kindle could be a “symbol of American decline”.