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 Global Crisis/ Innovation Blog

Insanity:  1997/8, 2007/8 —  2017/8 ?

By Shlomo Maital

    In 1997/8,  a housing bubble and a wrongheaded decision not to rescue those ruined by it created a global crisis.

    In 2007/8, a housing bubble and a wrongheaded decision not to rescue those ruined by it created a global crisis. 

     It is not a misprint.  The events of 97/8 and 07/8 are strikingly similar. Only the names of a few of the players and the countries are different. 

    In 1997, Thailand found it had created an enormous housing bubble, including an entire ‘city’ that could house 700,000 people (about the size of Boston) between central Bangkok and the airport, funded by numerous fly-by-night banks. On July 2, the baht, the Thai currency, collapsed, helped by forex speculators.  America chose not to provide emergency loans to Thailand, via the IMF.  It was a horrendous decision. The ‘contagion’ quickly spread to the rest of Asia, and ultimately, on Aug. 18, 1998, led to Russia’s default on its debt (as Asia sank into recession, the price of oil plummeted, Russia’s oil revenues collapsed, and the Russian government couldn’t pay its debts). 

    The decision not to bail out Thailand was taken by U.S. Sec. of the Treasury Robert Rubin, who had been co-Chair of Goldman Sachs, where he worked for 26 years.  He was joined by Fed Chair Allan Greenspan.  I am certain they hugely regret it.

      In 2007/8, America found it had created an enormous housing bubble, including entire neighborhoods in California that emptied when mortgagees defaulted.   On Sept. 17, 2008, U.S. Secretary of the Treasury Henry (Hank) Paulsen, who had led Goldman, Sachs, along with Ben Bernanke, Fed Chair, chose NOT to rescue Lehman Brothers, facing bankruptcy. It was a horrendous decision.  The Lehman “contagion” led to a 20 % drop in stocks in one week, biggest in decade, and greatly worsened the global crisis.  I am certain Paulsen and Bernanke hugely regret this disastrous mistake. 

   The similarity between those two events is staggering, is it not? 

   Albert Einstein once wrote, “insanity is doing the same thing over and over and over, and expecting different results.”

    Those who run the global capital market system are making the same mistakes over and over.  Why would we expect anything other than recurring global crises?   Why is it totally justified to call this situation “insanity”?  

     And when will sanity be restored?   Before, or after, the crisis in 2017/8?  Can we expect from those who control our money and economy, an “innovation” — acting sanely, after learning minimally from history? 

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Blog entries written by Prof. Shlomo Maital

Shlomo Maital
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