Sunday, December 16, 2007
Reference: Home loan crisis won't just go away, Bangkok Post, December 17, 2007
The Bangkok Post commentary says that a run on banks caused by false rumors of bad loans can be solved with a temporary injection of liquidity but one caused by a true news about bad loans cannot (Home loan crisis won't just go away, Bangkok Post, December 17, 2007) and concludes that the 1998 LTCM crisis was solved by a temporary injection of liquidity because it was caused by a false rumor of bad loans but the 2007 mortgage crisis cannot be solved in that manner because it was caused by a true information about bad mortgages. This analogy is false because the 1998 Long Term Capital Management financial crisis was caused by true information about a loan default by Russia and not by false rumors about bad loans. As a footnote, one should also consider that financial markets respond only to changes in the forecast of future cash flows and not to past events. No event in the future can be either completely true or completely false because the future is not known with certainty.