Category: Book Quotes of the Day

Wall Street attracts narcissists like ants to honey.

When high demand meets low supply, what happens? The creation of substitutes, often good-looking but not quite the same, like Marilyn Monroe impersonators.

It was a fantastic deal–for Jamie Dimon. The Fed had left Bear no negotiating power. “Buying a house,” Dimon told Congress, “is not the same as buying a house on fire.”

“The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained,” Bernanke calmly assured congress. “In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”

In the Eleventh District, disciplined banking roots run deep. In 1932, when the Fed started providing loans to bankrupt financial institutions, the Dallas bank warned: “Credit is exactly like morphine. Either credit or morphine used habitually leads inevitably to the gutter.”

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.”