Fed bailouts could cause bigger financial ‘fires’, says Nobel winner Scholes
(LONDON) The US Federal Reserve runs the risk of creating ‘bigger fires’ if it does not allow some banks to fail, said Myron Scholes, the Nobel Prize winner who was a partner in Long-Term Capital Management.
Mr Scholes, speaking in London at an event on Monday hosted by the University of Chicago Graduate School of Business, said that the Fed had ‘done well in the short run’ by helping engineer the sale of Bear Stearns to JPMorgan Chase. Still, the policy could be the equivalent of putting out small forest fires, while leaving fuel for blazes like the one that scorched a third of Yellowstone National Park in 1988, he said.
‘The fires are going to get bigger and bigger’ if the Federal Reserve keeps playing fireman, Mr Scholes, 66, told a standing-room-only crowd of about 250 fellow University of Chicago business-school alumni, reporters and guests. ‘The central bank shouldn’t set a policy of always putting fires out.’
Mr Scholes, winner of the 1997 Nobel Prize in economics for work on valuing options, was a partner at Long-Term Capital in 1998, when it lost US$4 billion in a few weeks and also prompted the Fed to orchestrate a bailout. He’s now chairman of Platinum Grove Asset Management, a US$5 billion hedge fund based in Rye Brook, New York.
He recalled being caught off guard in March when spreads on Japanese government bonds widened to record levels after news of the Bear Stearns transaction. ‘It was almost as if Pandora’s box opened,’ he said. ‘The flows were tremendous.’
He also said that the credit-market contagion that led to record losses at some of the world’s largest financial institutions may be far from over.
‘Our financial institutions are wounded right now; we need time,’ he said. ‘If the recession is shallow it’s going to be long. It’s going to take time to work things out.’
He predicted that a contraction in credit would continue until March 9 next year. ‘Whether it ends up being March 9 or March 10, I’ll have to get back to you,’ he said. — Bloomberg
Source : Business Times - 25 Jun 2008
Loading ...
Post a Comment
Tell me a bit about yourself; who you are, where you're from, what information you would like to see on this site. As I continue to provide you with Singapore property happenings, your feedback will encourage me to post more frequently. Thank you.