"Risk-taking is a necessary condition for wealth creation." Thus spake Alan Greenspan, justifying the Federal Reserve's role in the rescue of Long-Term Capital Management, the beleaguered hedge fund. Fair enough. But who should be taking the risks and creating the wealth? Surely not central banks themselves. Yet that, unbelievably, is the latest skeleton to come rolling out of LTCM's closet. The Bank of Italy has sheepishly admitted to having handed over $250m of its foreign exchange reserves to LTCM - $100m as an investment, $150m by way of a loan.
The bank claims the investment provided valuable market intelligence. That stretches credulity. Cynics would note instead that LTCM was betting heavily on the convergence of Italian bond yields towards those of Germany, a development the bank doubtless welcomed.
But even if it were true, at what price? By putting money into a highly speculative vehicle, whose activities affected the operation of Italy's own markets, the central bank has forfeited its moral authority. How then can it act efficiently as a central bank or regulator? If Italians were to conclude that they had been offered carte blanche to take risks, it would ill behove the Bank of Italy to tell them otherwise.