The Federal Reserve's Role In The Financial Collapse by Gretchen MorgensonSubmitted by bobbyw24 on Wed, 05/25/2011 - 09:56
This is an adaptation from "Reckless Endangerment", an exploration of the origins of the recent financial crisis, by Gretchen Morgenson and Joshua Rosner. The book will be published today by Times Books. This excerpt examines the cozy relationship between Alan Greenspan's Federal Reserve and the banks the Fed was charged with regulating. This is the second of three excerpts.
To regulators at the Federal Reserve Board, the financial crisis of 1998 and the collapse of the giant hedge fund Long-Term Capital Management had been an undeniably terrifying event. Officials at the prestigious New York Fed knew how extraordinary it had been for them to help the hedge fund; they were sensitive to the fact that they had aided in a speculator's rescue and worked hard to downplay their role.
In the months and years after the rescue, many Fed officials spoke publicly of the lessons to be learned from the disaster. Chief among them were the dangers of increasingly interconnected world markets and economies and the threats of institutions that had grown so large that their failures could imperil the entire financial system.
"It was a humbling and enlightening experience for us all," said Roger Ferguson, a member of the Board of Governors of the Federal Reserve, in a 1998 speech touching on the Long-Term Capital rescue. "It should cause all of us to reassess our practices and our views about the underlying nature of market risks."