Month: March 2020

But the day after, October 20, 1987, marked a more significant point in Wall Street history. The FOMC slashed the fed funds rate by half a percentage point to just under 7 percent.

Then the mother of all storks delivered the “Greenspan Put” with the release of this one-sentence: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

As Pavlov was to dogs, the Fed was to market players. They would come to understand and embrace the commitment Greenspan had made by putting a floor under losses. Investors could pile into risk, confident the market now offered a built-in “put” option. (A put is a contract that allows the owner to profit if the price of an underlying security declines.

This was shocking to me. When Wall Street begs to regulated, beware. People in New York kept using the term “uncharted territory” when discussing CDOs. It made me think of an ancient map with the inscription on the edge, “Here be the monsters.”

“These people gang up academically on naysayers,” he told me. “If it’s not in their models, they shut it out.” Any challenge from outside was rejected.

The big surprise: in his dissertation Greenspan addressed housing bubbles. “There is no perpetual motion machine which generated an ever-rising path for the prices of homes,” he wrote. It’s too bad he didn’t believe his own words.

Their absurd collective blunder prompted Geoffrey Howe, chancellor of the exchequer, to observe that an economist was like a “man who knows 364 ways of making love, but doesn’t know any women.”

When a District Bank president has overstayed his or her welcome, he or she will not be fired but will perhaps receive an employment offer from a university or corporation too enticing to be refused. Wink, wink. A different kind of politics.

It’s a myth that the Federal Reserve is nonprofit. It earns billions of dollars per year through various financial functions; after expenses, most of the profits go straight to the Treasury.

Few buyers realized that the agencies had also helped create the MBS or CDO and stood to gain from its sale. The fine print said “these ratings are just opinions and investors shouldn’t rely on them.” People figured the disclaimers were there to make lawyers happy. After all, it was S&P, Moody’s, and Fitch; they sold trust.

The collateral backing mortgages was stretched precariously thin; one in ten households had zero to negative home equity.

By 2008, the derivatives market had quintupled to $531 trillion, up from $106 trillion in 2002.