Tag, your economy is “It”

Judy Estrin cites a culture of shortsightedness as part of the reason why America is suffering from an innovation gap (see September 11th post). This culture not only stifles innovation, but in times of financial trouble, it can be a detriment as well. In Louise Story’s recent article “Hedge Fund Glory Days Fading Fast,”  she quotes someone saying, “Everyone is looking for a panacea, everyone is looking for a quick way to make money fast, and everyone is pinning their dreams on the backs of these hedge funds.” The only problem now is that due to the recent housing crisis, people are losing confidence in hedge funds, and a number of them, each holding billions of dollars, are failing.

Only ten years ago, in September of 1998, one of the most famed collapses of a hedge fund, Long-Term Capital Management (LTCM), occurred and the fund became the recipient of an economy-saving government bailout. History repeats itself in funny ways. Just like today’s hedge funds are struggling to cope with an unforeseen collapse in the housing market, LTCM collapsed because Russia unexpectedly defaulted on the national debt.

In an age of increasing economic integration, however, these problems are not confined to the United States. Russia’s actions affected the American economy ten years ago. Today, Europe must cope with the effects of the American housing collapse. In a statement from the ECB, Jose Manuel Gonzalez-Paramo said,

“Clearly, underlying the international transmission mechanism is the fact that interbank markets are linked across countries by the activity and funding needs of banks doing cross border business on a large geographical scale…”

Yes, clearly we are linked. This trend will only continue.