Thursday, October 1, 1998 -- Vol. Two, No. 39 -- Media Inquiries: Keith Appell (703) 683-5004
News Weeklies Note Moral Hazards of Long Term Capital Management Bailout, But Not IMF Bailouts
If It's Bad Here, Isn't It Bad Worldwide?
With the Fed-engineered bailout last week of the
hedge fund Long Term Capital Management (LTCM), the press suddenly discovered the concept
of "moral hazard." This term refers to the effect bailouts of bad investments
have on future investment decisions: With the precedent of bailouts in their minds,
investors are more likely to take imprudent risks.
While the news weeklies picked up on this theme
with LTCM, most still haven't connected it with the International Monetary Fund
its role in bailing out investors worldwide.
"Washington and Wall Street buzzed last week
with outraged talk of 'moral hazard,' and for once it didn't have anything to do with Bill
Clinton's sex life," writes Senior Writer John Greenwald in the October 5 Time.
"Instead people were talking about the danger created when government backing for
private lenders encourages them to take bigger risks -- in search of bigger rewards."
According to Greenwald, the "fear is that the Long Term Capital bailout could
encourage banks to make still more risky loans, confident that the government won't let
them get into trouble."
The October 5 Newsweek also notes the
moral hazard aspects of the LTCM bailout. It quoted former Federal Reserve Vice Chairman
Wayne Angell, who said, "The appearances of this are just horrible. We complain about
Russia and Japan and their insider dealings, and then the Fed comes along and seems to be
helping out every reckless fat cat." It also quoted Lawrence Tisch, whose family owns
the Loews conglomerate and competes against those covered by the too-big-to-fail doctrine.
"His problem," according to the magazine's Wall Street Editor, Allan
Sloan, is that "giant competitors can take excessive risks while Loews accepts lower
returns because it has to be prudent."
Not to be left out, U.S. News & World
Report's Phillip J. Longman and Jack Egan reported, in the October 5 issue, that many
"Wall Street observers are alarmed by the precedent the New York Fed may have set by
brokering the LTCM bailout." They quoted an investor who said, "The Fed, which
is supposed to protect the sanctity of the dollar, is now stepping in to bail out hedge
funds," and wondered, "Who will be next, the Beardstown Ladies?"
But all of this acknowledgment of moral hazard
hasn't, by and large, led the news weeklies to apply it to the IMF. Only one story over
the past four months -- a September 28 U.S. News & World Report article by
Longman and Egan -- mentioned moral hazard in relation to the IMF. "In effect, while
the IMF punishes ordinary citizens by imposing various austerity measures, it protects
even the most foolhardy foreign speculators from the consequences of their own
mistakes," they write. "As a result, critics argue, the agency winds up
encouraging more overinvestment and the speculative booms and busts that go with it."
But the lesson the two draw is not that
international institutions should first do no harm, but that they should be given more
power. Some experts, they report, are calling for "a global New Deal -- a set of new
institutions that would save global capitalism from itself by taming its excesses."
Without quoting opponents of such ideas, they lament that "strong leadership, at
least from the United States, isn't in the cards."
at least they mentioned moral hazard in relation to the IMF. Others still haven't gotten
that far. -- Tim Lamer
L. Brent Bozell III, Publisher; Brent Baker, Tim Graham, Editors;
Ross Adams, Jessica Anderson, Geoffrey
Drake, Paul Smith, Clay Waters, Media Analysts; Kristina Sewell, Research
Associate. For the latest liberal media bias, read the
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