Apr 14, 2008

Jim Rogers on bailing out the financial system

Q: You have been quoted as saying you don't think bailouts of troubled companies are a good idea. Is that still your view?

A: Yes, it is. If the government had not bailed out the hedge fund Long-Term Capital Management in 1998, I don't think we would have some of the problems we have now. Investment banks have been going bankrupt for hundreds of years. It is not the first time something like Bear Stearns has happened and the world has always survived.

If you had a few investment bankers go broke in 1998 or after the dot-com bust -- or if they lost hundreds of millions of dollars -- they probably would have had a different approach to their balance sheets. But since relatively few people got hurt with Long-Term Capital Management, in a few months everybody had forgotten the lessons that should have been learned about leverage or crazy products or crazy approaches. The government has been intervening to save all its friends for a decade or so rather than letting the market work properly.

Q: But isn't it so that a Bear Stearns bankruptcy would have devastated the financial system?

A: If the system is so fragile that the fifth-largest investment bank can bring it all down, then you better go ahead and have the problems now. What if three or five years from now it is the largest investment bank that fails or the largest five or six banks that fail? Then there will be a disaster.

Q: As an investor, you often allude to the importance of understanding history.

A: History will teach you that, first, we have seen all of this before, whether it's bubbles or panics or collapses. And yet, somehow, the world adapts.

~ Jim Rogers, "Light-Years Ahead of the Crowd," Barron's, April 14, 2008

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