Capitalism’s Greatest Strength Is Its Ability To Reinvent Itself, But Have We Gone Too Far This Time?
Hedge funds, venture capitalists and laissez-faire capitalism on my mind.
By the time you read this, you will be aware of the fact that four banks have gone bust since news first emerged about Silicon Valley Bank’s problems.
But these convulsions aren’t new at all; it’s all part and parcel of laissez-faire capitalism.
Students of late 20th century finance and economics will remember Long Term Capital Management, a hedge fund outfit which went by the title — LTCM — -which went bust as a result of its exposure to the Asian financial crash of 1997 and the Russian equivalent in 1998.
What was mind blowing about this episode was that LTCM had some of the finest brains in its ranks: Myron Scholes and Robert C. Merton; gentlemen who had been awarded the Nobel Prize in Economics for developing the Black-Scholes model — a complex mathematical formulae which very few people understood — I certainly didn’t and I have a Master’s in economics.
It took fourteen investment banks to put up the money to bail out a hedge fund which had pushed capitalism to the precipice.
You would think that Wall Street would be chastened by the events of 1998 and apply caution and far less leverage in its trades?
No such thing.
Within three years, we had the extraordinary episode of the dot.com bubble coming apart when vast numbers of online shopping companies went bust, when it turned out that they were vastly over valued.
With the great exceptions of Google, eBay and Amazon, every other popular online platform came apart in 2001.
Again, you would think that the masters of the universe would apply caution to their affairs given what took place in 98 and 01?
The Federal Reserve’s decision under the leadership of Alan Greenspan to lower interest rates in the aftermath of 9/11 meant that an opportunity to make an absolute fortune couldn’t be passed up.
What this meant was that these amoral folks in Wall street created all kinds of instruments such as credit default swaps…