So in any event, the U.
Why would it? The contagion effects were not apparent to anybody, not just the administration. They misjudged the situation, probably because it was seen too much as a financial issue rather than an overall strategic issue.
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Like a classic run on the bank, money began to pull out of the entire region. They called it contagion. And what that really reflected was indeed globalization, was the way these economies had become locked together and investors looked at emerging markets. They said there was a problem in Thailand; well, then there's a problem in these other countries. And so each step of the crisis created these shock waves that carried on into the next. Malaysia's economy had seemed stable. Suddenly, it, too, was facing relentless pressure from global markets.
The index kept on going down, no matter what we do. And we felt totally helpless. We felt that there was no way we could recover. So, I mean, the feeling was very bad, very frightening. Its government collapsed; its cities descended into chaos.
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They just said, "I want out. And in the case of Indonesia, the social fabric collapsed. Churches have been burnt; mosques have been attacked; they have killed each other. This will take years to heal. And it's all the fallout of an economic collapse. The IMF organized huge loans for Indonesia and other Asian nations, on the condition they cut government spending, raise interest rates, and eliminate corruption. The public blames the doctor for the fact that the patient is sick, but the patient was sick to begin with. But these things are societally wrenching, and there are huge vested interests, and you wouldn't get into these crises if the vested interests weren't that important.
That I think is why it takes political change to deal with a crisis as big as this. In the old days you needed to conquer a country with military force, and then you could control that country. Today it is not necessary at all. You can destabilize a country, make it poor, and then make a request for help, and for the help that is given, you gain control over the policies of the country, and when you gain control over the policies of a country, effectively you have colonized that country.
In late , contagion reached Korea, one of the most successful economies in the world. But the world was much globalized that we thought it was at that time. Well, it didn't take a great deal of quantitative insight to see that that was not a long-term viable situation.
It was a state of panic, and it was at that point that I went to the Central Bank and was shown how much money was left in the Korean Central bank. It was essentially all gone. Pressured by their governments, the banks agreed to share some of the pain: They rolled over their loans. Korea was then given the largest bailout in history. Chapter Russia Defaults . From about the first of February until the beginning of August, there was a period in which financial markets essentially decided that risk didn't exist anywhere.
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Investment flowed elsewhere. Some came to Russia, where the Moscow stock market was the best performing in the world. But economic reforms had stalled, and Russia was heavily in debt. Even so, investors were convinced they'd found an emerging market that couldn't fail. Well, it turned out that that was wrong. Its currency plummeted. Global investors were stunned. Behind each fence and barnyard wall there must be a risk that we hadn't though of, you know, like the redcoats retreating from Lexington.
The economic crisis seemed to have taken on a life of its own. But what I didn't know, and nobody could possibly have known, was not what was going on at the moment that you were looking at, but what was going to happen at the next moment. House of Representatives: When you get in a room with both Alan Greenspan and Robert Rubin and they say they're scared to death, and they've never seen anything like this, and they're worried about whether they can get through it, I get worried, because they know a heck of a lot more about it than I do. You had the contagion sweeping across the developing countries.
As Rubin said, we'd never seen that before. I mean, maybe in the Depression they saw that over a period of time, but nothing happened that quickly. Chapter The Crisis Reaches America . A little-known but powerful private investment fund was on the brink of bankruptcy.
Maybe we had way back in history.
Maybe the Romans had financial institutions that were disproportionately large to the overall activity of the world that they operated in, but LTCM was a specific type of hedge fund. They were involved whether it was the Singapore exchange, the Tokyo stock exchange, the London stock exchange, the New York.
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There was no market that they weren't [involved in] -- maybe the largest player, or close to the largest player. Contagion had arrived on Wall Street. Incredibly, the failure of this single investment fund threatened the entire global economy. And of course it's not just what's on the balance sheet of banks and so forth, but that would translate into people not working, businesses not operating, small businesses not being able to get their capital they need.
And this in a global economy. It was almost inconceivable to see what the picture was, but it was sort of just not working, and people just not working. Jon Corzine, then at Goldman Sachs, was among them. All one knew was it was going to be extraordinarily dangerous to enter into that. And everybody, I think, understood the Fed's concern that that had real implications to the real economy. The fate of the global economy was in the hands of these bankers. He or she is paid to serve the best interests of the shareholders, so the most that one could do in a position like mine is to say the public interest may well be served by Long Term Capital Management not failing, but there is no public-sector money to solve the problem.
The taxpayer is not going to do this. You folks have to decide whether it's in your interest to do it. Wall Street had averted disaster, but the global crisis had one final chapter to go. Onscreen caption: Rio de Janeiro, Brazil, December What had started in Asia now reached Brazil, the eighth largest economy in the world. But this time, a loan package was put in place early. Brazil's government cut spending and enacted reforms. It worked. Brazil's problems were contained.
Global financial markets gradually returned to normal. ROBERT RUBIN: Well, and it's not clear when you would say it ended, but what happened was that the countries that actually took ownership of reform -- Korea, Thailand, the Philippines, Brazil -- began to reestablish stability in their financial markets, and their economies started to recover.
And after a while there came a point we began to feel, "Well, maybe we're past the crisis. It takes decades for a country to grow up to a certain level, and all of a sudden it disappears. When we tasted the richness, we wanted more, being greedy. I blame myself also; I never had enough. Yeah, it's quite a view, and I really feel bad because no one can enjoy it now. It's all left to the bank. Nice fairway and nice lake. It's so sad.