Sebastian Mallaby: belief

Transcript context

…I have some questions about other topics. You have some highly regarded books about hedge funds and about the Fed. In the late ’90s, the bailout of Long-Term Capital Management — was that a kind of original sin that just set us on a path of bailing more things out at higher and higher price tags? Should we have just let LTCM fall? No, I think the original sin was Continental Illinois, much earlier in 1986, I believe, when the Fed bailed out this bank which it thought was too big to fail. I’m not sure it really was too big to fail, but it was a moment when the Latin American debt crisis was still casting a shadow, when the banking system was perceived to be fragile, and the Fed just wasn’t willing to let it go. That was the original sin because taxpayer money was used to bail it out. The interesting thing about Long-Term Capital Management, which people forget, is that the Fed convened the creditors of Long-Term Capital Management at the Fed offices in New York, but it refused to provide any taxpayer money whatsoever to backstop Long-Term Capital Management. That was salutary. I think, if you look at what happened in the 2008 crisis, actually, hedge funds were not driving the crisis because the prime brokers who extend leverage to hedge funds learned the lessons from LTCM, and they didn’t extend loans without taking good collateral. In actual fact, hedge funds turned out to be the relatively more stable part of the system in 2008, which was a time when insurance companies and investment banks and money market funds and commercial banks and all of these other players cost the taxpayers billions, and hedge funds didn’t. What is it you understand about Alan Greenspan — having written a whole book about him — that other intelligent, educated people do not?…

Stored transcript either side of the excerpt. The highlighted words are the published quote; the surrounding text is unedited source, never generated.