WE WERE HERE TEN YEARS AGO (COMMENT).

WE WERE HERE TEN YEARS AGO (COMMENT). The kinds of financial problems that we are seeing are not new, although the scale of them is. My brother Elmer commented here that we have had four crashes in the last twenty years, with excessive leverage featuring prominently in them. I have gone back and found this article from Business Week for September 21, 1998 about the Long-Term Capital Management crisis. Long-Term Capital Management was founded by brilliant men, two of whom had won a Nobel Prize in Economics, to engage in complicated trading strategies driven by computer models. The article was written just before the Federal Reserve Bank of New York had to organize a $3.625 billion rescue of Long-Term Capital Management. The following quotations from the article explaining what went wrong ten years ago hold true today: 1. “To work, the quant models need liquid markets on all sides of the trade.” 2. “The carnage was widespread because so many people were making the same kinds of bets.” 3.”[T]he use of more and more borrowed money, resulting in many trades leveraged to the hilt.”