Lessons From LTCM: The Risk of Rising Rates

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Based on the comments, it appears I scared a few people with The Looming Crisis: Who Is Swimming Naked?. My article warned, "A financial crisis will likely follow the Fed's ’higher for longer’ interest rate campaign." Here is more on financial crises to calm any worries you may have. This article summarizes two interest rate-related crises, Long Term Capital Management (LTCM) and the lesser-known financial crisis of 1966.

I aim to convey two important lessons. Both events illustrate how excessive leverage and financial-system interdependences are dangerous when interest rates are rising. Second, they stress the importance of the Fed's reaction. A Fed that reacts quickly to a budding crisis can quickly mitigate it. The regional bank crisis in March serves as recent evidence. But a crisis will blossom if the Fed is slow to react, as we saw in 2008.

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Before moving on, it's worth providing context for the recent series of rate hikes. Unless this time is different, another crisis is coming.

rate hiking