Redstate

Posted at 9:56am on Mar. 26, 2008 Hot Money

How the world invests

By blackhedd

I was the first person I know to write about the similarity between the credit crisis that erupted in early summer of 2007, and the Long-Term Capital Management Crisis of the early fall of 1998. How did I make the connection? By observing how the prices of various asset classes were moving relative to each other.

Modern risk management depends on predicting these relationships with mathematical models. Late last spring, asset prices started doing things that were supposed to be impossible. Just as in the summer of 1998.

The 1998 crisis had no impact on the real economy. If you weren't paying attention, you weren't even aware of it. The prior year, however, there was a financial crisis that had a devastating impact on the real economies of a number of East Asian nations, including Thailand, South Korea and Indonesia.

It just occurred to me that there is a similarity between now and 1997.

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