Exclusive Book Excerpt CHAPTER 17  SERIAL BUBB

first_imgExclusive Book Excerpt CHAPTER 17  SERIAL BUBBLES The period between Greenspan’s arrival at the Fed in 1987 and the dot-com crash in early 2000 brought a remarkable change in the finances of American households. Bubble finance supplanted the old-fashioned habits of savings and frugality. At the center of this transformation was the soaring value of household investments in stocks and mutual funds, which grew from just under $2 trillion to nearly $13 trillion during this time period. There had never been a wealth gain anywhere close to this magnitude, even during the Roaring Twenties. And there was good reason for this: such massive leaps in wealth defy sustainable economics. During the twelve years of the Greenspan stock market mania, for example, the value of stocks and mutual funds held by households grew at a 17.5 percent compound rate compared to an average nominal GDP growth rate of only 5.7 percent. Obviously, the implication that stock market wealth can grow permanently at three times the rate of national output growth is not plausible. Common sense is enough basis to reject that proposition on its face. But a simple exercise in compound math surely underscores its absurdity. Household investments in stocks and mutual funds had amounted to about 40 percent of GDP in 1987, but had climbed to a record 130 percent by the bubble peak in 2000. Had stock valuations continued to rise at three times the growth of GDP for another twelve years, household stock and mutual fund investments would have reached nearly 500 percent of GDP. Such extremes were never even remotely approached during the Japanese stock mania of 1989 or the Chinese moon shots of 2007. The Greenspan Fed was thus heading down a blind alley, dragging Main Street straight into harm’s way. THE COST OF THE GREENSPAN STOCK BUBBLE: DESTRUCTION OF MAIN STREET THRIFT By the turn of the century, household finances were clearly on an unsustainable path. The Greenspan Fed’s bubble finance deluded Main Street America into believing it was far wealthier than was actually the case, inducing households to radically reduce their savings out of current income. Indeed, the change in savings and spending behavior was so extreme that it is a key hallmark of the financial deformation emanating from the Greenspan Fed. Between 1955 and 1980, the household savings rate fluctuated narrowly in a band between 7.5 percent and 10 percent of disposable personal income. On average, it posted a benchmark of about 8.5 percent over these two and a half decades. Even as late as 1986, the year before Greenspan took over the Fed, the savings rate had clocked in at the bottom of its historic range at 7.6 percent. From the time that the Greenspan Fed embraced its régime of easy money and Wall Street pandering after Black Monday, however, the savings rate of American households dropped below its historic range and headed steadily downhill. By 1993 it slipped to 5.8 percent, followed by an even lower 4.6 percent rate in 1997. It then plunged to a never-before-recorded low of 2.5 percent during the six quarters ending in December 2001. This headlong retreat from the historical norm for household savings could not have occurred at a worse time. By 2001, the first cohort of the giant baby boom generation was just a decade from retirement, and 75 million more boomers were queued up right behind it. The clear and present danger, therefore, was that the bubble wealth stored in 401(k) and mutual fund accounts would prove to be illusory or could not be extended for another decade. In that event, the Greenspan Fed’s drastic error of supplanting the thrift habit of the American people with central bank-manufactured bubble wealth would have grave implications for the long-term future of the American economy. As it happened, the post-2000 collapse of the stock market bubble did not awaken Main Street America to the fact that it had been stranded high and dry by the Fed’s bubble economics. The nation’s monetary central planners refused to let financial reality break through, no matter how deep the hole resulting from the dot-com crash. And, in fact, the hole in household balance sheets was deep. By the end of 2002, the value of household investments in stocks and mutual funds had declined by 42 percent from the $13 trillion dot-com peak, and now stood at only $7.4 trillion. This massive cratering of household wealth should have been a clarion call for drastic revival of thrift, since fully 50 percent of the 1987-2000 Greenspan bubble gain in stock and mutual fund holdings had been vaporized by the market correction. Yet after only a brief, anemic rebound to the 3-4 percent range, the savings rate cratered again, falling to virtually zero by the time of the 2008 financial crisis. The reason was not mysterious. After the dot-com crash the Fed conducted what amounted to an extended Charlie Brown and Lucy gambit with the American public. Time after time, the public was tricked into believing that the Fed’s latest and greatest new financial bubble obviated the need to curtail consumption and begin to save for a fast approaching era of baby boom retirement. Consequently, the fundamental ailment of the American economy as it entered a new century – too much consumption and not enough savings – went unaddressed by the very central bank responsible for this condition. Moreover, the Fed’s indifference with respect to the extended collapse of household savings was a signal to Wall Street that the low-interest-rate party could be extended indefinitely. DO NOT BE TROUBLED: THE SAVINGS FUNCTION HAS BEEN OUTSOURCED TO CHINA The American savings deficit was transparent after the turn of the century, but the Fed flat-out didn’t care. As detailed in chapter 15, Greenspan and his monetary central planners had a glib answer: do not be troubled, they admonished, the Chinese have volunteered to handle America’s savings function on an outsourced basis. So instead of addressing the growing deformations of the American economy after the dot-com crash, the Fed choose to repeat the same failed trick; that is, it once again cranked up the printing presses with the intent of driving down interest rates and thereby reviving speculative carry trades in stocks and other risk assets. Needless to say, it succeeded wildly in this wrong-headed game plan: by pushing interest rates down to the lunatic 1 percent level during 2003-2004, the Fed sent a powerful message to Wall Street that the Greenspan Put was alive and well, and that the carry trades now offered the plumpest spreads in modern history. Under the Fed’s renewed exercise in bubble finance, asset prices could be expected to rumble upward, whereas overnight funding costs would remain at rock bottom. That is exactly what happened and the equity bubble was quickly reborn. After hitting bottom at about 840 in February 2003, the S&P 500 took off like a rocket in response to virtually free (1 percent) money available to fund leveraged speculation. One year later the index was up 36 percent, and from there it continued to steadily rise in response to reported GDP and profit growth, albeit “growth” that would eventually be revealed as largely an artifact of the housing and consumer credit boom which flowed from the very same money-printing policies which were reflating the equity markets. In the event, the S&P 500 crossed its old tech bubble high of 1,485 in May 2007 and finally peaked for a second time at 1,560 in October of that year. Accordingly, in one fell swoop the Fed cancelled the painful lessons that had been absorbed by stock market punters in 2000-2002, juicing the markets sufficiently to cause the S&P 500 to rise by 85 percent during just fifty months. By late 2007, the belief in instant riches from stock market gains was again alive and well on both Wall Street and Main Street. Utilizing the institutionalized channels of stock market levitation outlined in chapter 21, the Fed thus enabled households to recover all of their $5.6 trillion loss on stock and mutual fund holdings from the dot-com crash. Indeed, this benchmark was achieved by late 2006. As even greater unsustainable gains were clocked by the stock averages thereafter, the paper wealth of American households continued to rise to new record levels. By early 2008, the value of household stock and mutual fund holdings reached $14.2 trillion. So, once again, the old-fashioned virtue of thrift was mocked by the prosperity managers at the Fed. The message repeated over and over in the minutes of monthly Fed meetings was that the economy was strong because Americans were again spending everything they earned and all they could borrow. Meanwhile, the Fed would levitate financial markets so that household asset values would keep rising parallel to the growth of household debt. Society’s savings function would be handled by the swelling army of Chinese industrial serfs, whose wardens at the People’s Printing Press of China could not seem to get enough Treasury bonds and Fannie Maes. WHEN ALAN SHRUGGED: 150 MONTHS OF IRRATIONAL EXUBERANCE Needless to say, Lucy moved the football again during the Wall Street financial crisis. By year-end 2008, the household ledgers showed equity and mutual fund holdings had plunged from more than $14 trillion to only $9 trillion. This meant that $5 trillion of stock market wealth had disappeared – for the second time. Moreover, the reflated equity bubble of 2003-2008 had been built on an even shakier foundation of speculation and hopium than had been the dot-com bubble. The S&P 500 went through a violent correction in 2008-2009, breaking through the old Greenspan bottom by early 2009 and eventually plunging to 675 on March 9. The sheer mayhem of central bank manipulation of the stock market was starkly evident at this panic bottom. During the dark hours of early March 2009, the S&P 500 was an incredible 10 percent lower than it had been twelve years earlier at the time of Greenspan’s irrational exuberance speech of December 1996. In hindsight, that famous speech might have better been designated as Alan Shrugged. The Fed was on a destructive path, but refused to even acknowledge it. Consequently, irrational exuberance was the order of the day during the 150 months following the Greenspan speech. Never before in history had the nation’s financial system been pummeled by two gigantic bubbles and two devastating crashes in such a brief interval. That Greenspan’s heir apparent managed to detect the Great Moderation at the midpoint of this cycle of financial violence was only added testimony to the degree to which monetary policy had become unhinged. It was no longer plausible, therefore, to describe the New York Stock Exchange, NASDAQ, and the various venues for equity derivatives as a free market for raising and trading equity capital issues. Instead, they were violently unstable casinos, ineptly stage-managed by a central bank that had now become addicted to the printing press and a timorous vassal to the raw forces of Wall Street speculation. WHEN BERNANKE WENT BERSERK: THIRTEEN WEEKS OF MONEY-PRINTING MADNESS Still, the hapless monetary central planners were not done with their bubble making. Indeed, the Bernanke Fed had not only forgotten the wisdom of Greenspan 1.0, but positively scorned it. Running the printing presses like never before in all of historical time, the Fed did succeed in spotting the football one more time, inflating its third equity bubble in fifteen years. By now the routine was familiar. In a state of feverish panic which made the Greenspan Fed after Black Monday seem like a model of deliberation, the Bernanke Fed expanded its balance sheet at a pace which sober historians someday will describe as simply berserk. As of the week ending September 3, 2008, the Fed’s balance sheet stood at $906 billion, a level it had taken ninety-four years to build up to after it opened its doors for business in October 1914. Now, driven by the panicked demands for relief from Wall Street speculators and their agents in the US Treasury department, the Fed added another $900 billion to its balance sheet in just seven weeks. Ninety-four years of reasonably deliberative history was thus replicated in three fortnights of panic inside the Eccles Building. And still the madness continued. By the week of December 10, just thirteen weeks after the Lehman failure, the Fed’s balance sheet stood at $2.25 trillion. The nation’s central bank had thus expanded its footings by 2.5X in what amounted to the blink of a historical eye. The root of Bernanke’s staggering monetary deformation is that in the years since October 1987 the nation’s central bank has effectively destroyed the free market in interest rates. Once the Fed embraced easy money and prosperity management through the Wall Street-based wealth effects, the character of interest rates changed fundamentally – rates became a bureaucratically administered value emanating from the FOMC, not a market-clearing price representing the true supply and demand for money and debt capital. Owing to the destruction of free market interest rates, a modern Wall Street panic and its aftermath unfolded in a manner which is the very opposite of the principles of sound finance manifested during the great panic that erupted on Wall Street precisely 101 years earlier in October of 1907. The Fed was not then run by a math professor from Princeton, nor did the nation even have a central bank. J. P. MORGAN AND THE PANIC OF 1907: HOW FREE MARKET INTEREST RATES FELLED THE SPECULATORS Wall Street was managed during those tumultuous weeks by the great financier J. P. Morgan. Presiding over the markets from his library in midtown Manhattan, Morgan did not have a printing press, but he did possess the extraordinary financial wisdom garnered during a lifetime of high finance in an era when money was a fixed weight of gold, and interest rates were the price which cleared the free market. In a word, Morgan knew that Wall Street was rotten with speculative excesses which had built up during the previous decade, and that market-clearing interest rates were needed to cleanse the system. Accordingly, during the most heated weeks of the Panic of 1907 the benchmark interest rate of the day – the call money rate – soared by 3 to 5 percentage points on some days, and reached a level of nearly 25 percent at the crisis peak. In this setting, J. P. Morgan presided over a financial triage that saved only the truly solvent, not an indiscriminate Bernanke-style bailout which propped up all the speculative excesses which had triggered the crisis in the first place. Accordingly, as the call money rate soared, margin loans were systematically called, and the punters of the day were felled without mercy. Among the financially departed were copper barons, several highly leveraged railroads, legions of real estate speculators, and numerous poorly funded trust banks. The toll also included thousands of stock market operators who had built fortunes on margin loans. Needless to say, after the smoke cleared from the battleground, the financial follies of the day had been burned out of the system and bullish enthusiasm went into an extended dormancy. The stock market did not regain its September 1906-1907 peaks for another five years, and by then the US economy had grown by nearly 30 percent. BEN BERNANKE AND THE PANIC OF 2008: HOW SOCIALIST INTEREST RATES REWARDED THE SPECULATORS By contrast, the distinguishing hallmark of the September 2008 panic is that the Bernanke Fed shut down the money market instantly, thereby preventing free market interest rates from making their appointed cleansing rounds. Thus, on the Friday before Lehman failed, the overnight Libor rate – the closest thing to a true money market interest rate – stood at 2.1 percent and was in the range that had prevailed for most of the previous summer. The Lehman news caused it to spike to 6.2 percent on Tuesday, a mere flicker by the standards of J. P. Morgan’s day. Nevertheless, this modest upwelling of open market interest rates set off alarm bells on Wall Street, and soon the cronies of capitalism were demanding a huge dose of socialist intervention to flatten interest rates. Mr. Market’s initial attempt to ignite the cleansing flame of rising rates was doused on the spot by the Fed’s emergency lending fire hoses. Interest rates quickly fell back. Rates then spiked a second time to 6.5 percent on September 30 when the first TARP vote failed, but thereafter they were literally flattened by the Fed’s flood of liquidity. Overnight Libor thus subsided to 2 percent by October 10, then to under 1 percent by the end of the month, and finally to 15 basis points – a comic simulacrum of a price for money – by the end of December 2008. Nearly four years later, Libor still remained at that exact level, a lifeless victim of the Fed’s foolish tidal wave of fiat money. It goes without saying that speculators in J. P. Morgan’s time did not come out of hiding for several years after the grim reaper of free market interest rates had passed through the canyons of Wall Street. By contrast, it took only about a hundred stock market trading sessions under the free money régime of the Bernanke Fed until speculators concluded that the “all clear” had been sounded. Indeed, observing the abject way the Fed bowed to the demands of Wall Street in the days after Lehman, speculators concluded that the nation’s twelve-person monetary politburo, holed up night and day in the Eccles Building, feared another hissy fit on Wall Street more than anything else. And for good reason. Never before had overnight wholesale money been literally free, nor had a central bank ever promised that it would remain free for the indefinite future. CHARLIE BROWN LUNGES AGAIN: THE FED’S THIRD STOCK MARKET BUBBLE With the free market interest rate mechanism deeply impaired if not destroyed, and downside risk virtually eliminated from the price of equities and other risk assets, the stock market bounded upward by 50 percent from its post-crisis bottom by March 2010. It didn’t matter that the Main Street economy was still underwater. At that point, real GDP was still 3 percent below its 2007 cyclical peak, while payroll employment was off by 7 million jobs and industrial production was lower by 10 percent. So it was evident that Wall Street was not pricing a conventional economic recovery. Instead, Wall Street was pricing in a brimming confidence that it could compel the Fed to continue supplying monetary juice for the indefinite future. The punters were not mistaken. By early 2012 the S&P index reached 1,300 and was therefore up by nearly 100 percent from its March 9, 2009, reaction low. Once again, stock prices seemed to be growing to the sky. But also, once again, not really. The S&P 500 index had first crossed the 1,300 level thirteen years earlier in March 1999. Charlie Brown was now lunging at the football for the third time. The Fed’s data for household balance sheets nailed the story. By year-end 2011, when the Fed was well along inflating its third equity bubble, the figure for household stock and mutual fund holdings stood at $12.7 trillion. That was uncannily identical to the $12.7 trillion level posted in December 1999. So three equity bubbles notwithstanding, Main Street America had spent a decade going nowhere, even as it was violently whipsawed along the way. Still, the idea of instant riches was kept alive by the Fed’s continuous attempts to levitate the stock market. Moreover, the Fed’s press releases and other smoke signals now added an especially nasty twist to its bubble syndrome; namely, that Charlie Brown would be forced to lunge at the Fed’s third equity bubble, whether he wanted to or not, because the nation’s central bank made it perfectly clear that it intended to eliminate all the alternatives. In fact, by promising to keep nominal interest rates on low-risk money market funds at zero for six years, from December 2008 until mid-2015, Bubbles Ben Bernanke threatened to confiscate the real wealth of Main Street America unless it cooperated and chased after high-risk asset classes. Nor would this confiscation be trivial. The CPI will have averaged 2.5 percent per year during the Fed’s “era of ZIRP (zero-interest-rate policy)” while no-risk and liquid money market funds will have yielded essentially zero after taxes. The math implies a 15 percent reduction in real wealth during Bernanke’s six-year experiment in savings destruction. It is not surprising at all, therefore, that the bubble-vision financial news networks are able to find an endless string of money managers who expect the stock market to go up because “the Fed is forcing you to buy equities.” They will be proven right – until the third bust materializes from the Fed-sponsored speculations now under way. Whatever the longevity of the Fed’s third equity bubble, it cannot be gainsaid that the historical thrift habits of the American middle class have been kept dormant for another decade. Even after a devastating housing crash and another equity market meltdown, the household savings rate rebounded only tepidly, and stood at just 3.5 percent near year-end 2012. Consequently, after a decade in which American households saved out of current income in a niggardly manner, and chased the illusion of instant riches from financial speculation instead, they are deeper in the hole than ever before. The violent inflation and crash of the Greenspan stock market bubble in 2000-2002 proved to be not a warning bell, but just the catalyst for another dose of monetary heroin, which under the Bernanke Fed became an addiction. HOW THE $11 TRILLION HOUSING BUBBLE BLOATED MAIN STREET CONSUMPTION The greatest housing bubble in history obscured this underlying impoverishment for a time. Indeed, when the Fed slashed interest rates down to 1 percent by June 2003, thereby igniting a ferocious housing price escalation, Greenspan, Bernanke, and the rest of the monetary politburo professed not to notice the bubble. Nor did they acknowledge that it was compounding the problem of low savings. Someday historians will surely wonder how it was that the Fed herded the nation’s aging population to nearly a zero savings rate by 2007, when it was evident that the soaring gains on household real estate were artificial and unsustainable. According to the national balance sheet data that the Fed itself publishes every quarter in the “Flow of Funds” report, the market value of household real estate actually surged from $11.8 trillion at the end of 1999 to $20.2 trillion at the end of 2004. Only a willfully oblivious central bank could have viewed a 75 percent increase in the value of real estate holdings in just five years as anything except a dangerous deformation. After all, these soaring home prices did not represent a snap back from a deep housing depression. The value of household real estate had been rising for decades and, in the more recent past, had already clocked in at a robust 5.3 percent annually during the long 1987-1999 span of the first Greenspan stock market bubble. In the end, the national balance sheet entry for household real estate experienced the same Lucy and Charlie Brown syndrome as did equities. Housing asset values kept climbing until they peaked at $23.2 trillion in 2006. The bubble makers at the Fed duly published that number in early 2007, but could they possibly have believed that the value of household real estate in the United States had risen by $11.4 trillion in just seven years? Or that this represented anything other than a vast accident waiting to happen? In the event, the accident did happen and it was a doozy – the largest financial catastrophe in American history in terms of the breadth and depth of losses on Main Street. Household real estate values plunged for five consecutive years to just $18.0 trillion at the end 2011. So another $5 trillion bubble had vanished. In all, the Fed’s serial bubble making during the years after the dot-com peak kept Main Street distracted by hype and hopium, even as overall net worth stagnated. After the flashy bubbles in equities and real estate were liquidated, the gain in total household assets barely kept up with inflation, while the household debt burden doubled over the twelve-year period. Accordingly, the net worth of American households rose by just 2.5 percent in constant dollars during the entire first decade of the 21st century, yet even that miserly figure obscured the reality that the median household net worth actually declined by 27 percent in real terms, from $106,000 to $77,000. Since the after-inflation net worth of the top 10 percent of households actually rose by 17 percent, all other households experienced steep declines. This perverse skew can be laid directly on the doorstep of the Fed. The net worth of the bottom 90 percent of households is heavily concentrated in residential property. In its wisdom, the nation’s central bank encouraged households to massively increase their mortgage debt, but then proved incapable of preventing the collapse of the resulting housing asset bubble. In the crunch resulting from a 35 percent housing price decline versus mortgage debt obligations which remained contractually fixed, the net worth of Main Street households was hammered like never before. LIVING HIGH ON THE HOG: $1.3 TRILLION PER YEAR IN BORROWED CONSUMPTION If a decade of real wealth setback was the only adverse effect of the Fed’s incessant juicing of Wall Street speculators, it might be argued that only limited harm has been done and baby boomers would be destined for a far more frugal retirement than they now imagine. In fact, however, irremediable damage has been done to the very foundation of the American economy because a two-decade-long holiday from a normal savings rate has come at a steep price. Specifically, the excess consumption enabled by subnormal household savings resulted in year after year of recorded GDP growth that amounted to little more than theft from future generations. Compared to the historic benchmark savings rate of 8.5 percent, the actual rate of 3 percent registered over much of the last decade means that nearly 6 percent of the nation’s disposable personal income, or about $600 billion per year, has been released for extra consumption expenditures. Unfortunately, Professor Friedman’s floating money contraption blocked the negative offsets that would normally boomerang back to an economy living too high on the hog. The classic effect of a savings drought under a régime of honest money is that interest rates soar. In the first instance, investment in productive assets is sharply suppressed, but eventually consumption falls and the savings rate rises in response to an increased reward for deferred gratification. Thus, free lunch economics tended to have a short-dated shelf life, at least until Camp David. But under the dollar’s “exorbitant privilege” conferred by the post-1971 T-bill standard, most of this excess consumption has been funded by means of borrowing from abroad, mainly from mercantilist central banks and their domestic financial wards and servitors. To date, the nation’s cumulative domestic savings shortfall has been covered by $8 trillion of such foreign borrowings, thereby obviating the ill effects that would otherwise impact domestic interest rates and investment. Those rising debts to the rest of the world will weigh heavily on American households when one day the Fed’s con job on the price of government debt comes to an end. Its financial repression policies have crushed yields, but only because speculators believe that the Fed and other central banks will keep buying enough Treasuries on the margin to keep the price propped-up far above market-clearing levels. When that confidence breaks, speculators and foreign central banks too will begin to sell and then to desperately stampede toward the exit as bond prices plummet and dollar interest rates soar. In turn, the excess consumption of heavily indebted American households will drop with a thud in response to a surging interest due bill. The magnitude of the collapse will not only be startling, but will dramatically expose the phony GDP growth of the Greenspan-Bernanke era. During the Eisenhower-Martin golden age of 1954-1965, for example, personal consumption expenditures averaged about 62.5 percent of GDP. This trend level was indicative of what might be expected in a reasonably healthy, steadily growing, noninflationary economy. After traditional financial discipline was abandoned by Richard Nixon in August 1971, the consumption share rose steadily and reached about 65 percent of GDP by 1986. When the Greenspan money-printing era commenced in earnest, however, the personal consumption share of GDP headed resolutely upward and never looked back. By 1993, it stood at 67.3 percent and then rose above 69 percent after the turn of the century, finally hitting 71 percent of GDP at the peak of the credit bubble in 2007. Moreover, during the subsequent fiscal “stimulus” régime, under which household spending has been heavily medicated by massive deficit-financed transfer payments and tax cuts, the consumption share of national income has risen even further. In fact, it reached an all-time high of 71.5 percent in 2010, a figure which far exceeds that for every other major nation on the planet. The nation’s bloated consumption ratio is among the principle deformations which now afflict the American economy. Its sheer magnitude is stunning. At the current level of 71.5 percent, the consumption share of GDP is 9 percentage points higher than the 62.5 percent ratio which prevailed during the 1954-1965 golden era. At the GDP level recorded in 2010, this upward shift amounts to $1.3 trillion of extra annual consumption. Self-evidently, when this unsustainable ratio unwinds, the drag on GDP growth will be a harsh echo of the munificent boost which was realized on the way up. Yet the actual story is even worse. While private residential construction is recorded in the GDP accounts as “investment” rather than consumption, the housing services actually provided by owner-occupied units amount to consumption no less than do purchases of sneakers or pizza; the GDP accounts just pretend that households “invest” in shelter and then “rent” it back to themselves. So during the great housing boom new home square footage rose from an average of 1,400 to 2,400, spending on interior appointments soared, and McMansions sprang up on suburban tracts across the land. “Residential fixed investment” thus became more opulent, but it should never be confused with investment in productive business assets. The true extent of the deformation brought on by the Greenspan bubble, therefore, can be more accurately measured by the sum of personal consumption expenditure (PCE) plus owner-occupied housing investment. The figures for peak-to-peak growth between the Greenspan bubble peaks of 1999 and 2007 leave no doubt that the US economy was being warped by a consumption spree of epic proportions. During that eight-year period, the nation’s nominal GDP expanded by 50 percent, or $4.7 trillion. Yet $3.9 trillion, or fully 82 percent, of the entire gain in reported GDP was attributable to the increase in personal consumption plus residential investment. By contrast, the benchmark standard for these two sources of consumption spending during the golden era of 1954-1965 averaged just 67 percent of national income. Household consumption spending during the Greenspan bubble era was thus extended so far out on the limb that it defied all historical experience. And this deformation was enabled by a parabolic rise of debt. Not surprisingly, the Fed exhibited no cognizance whatsoever of the role of debt in fueling the nation’s consumption spree. Indeed, during the same 1999-2007 period total credit market debt outstanding doubled, rising from $25 trillion to $50 trillion, but the minutes of FOMC meetings during that era have almost nothing to say about this stunning eruption of borrowing by households, business, and governments alike. This was the elephant in the room and it was also growing at an elephantine pace. During this same seven-year interval, nominal GDP grew by only $4.5 trillion, meaning that total debt on the nation’s balance sheet had grown five times faster than national income. While the FOMC apparently never noticed this freakish development, there is no doubt that it was this debt explosion which fueled the Greenspan consumption bubble. THE FED’S THIRD MONEY-PRINTING PANIC AND THE $25 TRILLION DEBT ERUPTION So during the span between the end of 1999 and the final quarter of 2007, the deformations and contradictions of Greenspan bubble finance reached their apogee. Above all else, this meant that the central events of the period were not what they were cracked up to be. The Fed claimed to be engineering a fulsome cyclical recovery and rising national prosperity, and the stock market and real estate sector pretended to be pricing it in. In fact, these trends were really all about the $25 trillion in new debt the Fed pumped into the American economy after launching its third money printing panic in December 2000. Its hand-over-fist buying of government debt was unconscionable, especially given the fact that there was no crisis whatsoever in the Main Street economy. Yet in the four years ending in December 2004 the Fed bought $200 billion of the public debt, causing its balance sheet to expand at a blistering 8 percent annual rate. Needless to say, the data make a mockery of the Fed’s claim that all of this wild money printing was necessary because the economy needed a supersized jolt of monetary stimulus, including an aberrationally low 1 percent interest rate, to avoid tumbling into the drink. In fact, the “recession” of 2001 was so faint that in later versions of the data it was essentially “revised” out of the government’s own statistical record. The official data now show that real GDP dipped by only microscopic amounts. Real output fell by just 0.3 percent in the first quarter of 2001, rebounded to a positive 0.6 percent during the second quarter, slipped again by 0.3 percent in the third quarter, and then expanded every quarter thereafter through the end of 2007. Even more to the point, real consumption spending never faltered, growing at nearly a 3 percent rate during the alleged “recession” year ending in December 2001, and by higher rates thereafter. As the data now make clear, the entirety of the 2001-2002 downturn consisted of temporary inventory liquidation in response to 9/11. While there was also a mild slowdown from the red-hot pace of fixed business investment that accompanied the tech stock bubble, this was actually the smoking-gun proof that it was not a weak economy which motivated the Fed’s third round of aggressive money printing: business capital spending never fell below the boom-time level it had reached at the top of the tech frenzy in 1999. The Fed’s panicked reaction to conditions during 2000-2001 was from the same playbook that Greenspan had used in October 1987 and September 1998. Once again the driving force was Wall Street’s demands for monetary juice and Greenspan’s misguided embrace of the “wealth effect” as a tool of central bank policy. This time the Fed generated the aforementioned $25 trillion debt bubble, which ignited leveraged speculation on both Wall Street and Main Street as never before. The resulting rapidly inflating housing and equity bubbles, in turn, stimulated temporary and artificial increases in output and employment, which then induced speculators to bid asset prices even higher. Meanwhile, the FOMC kept the printing presses running at full tilt, insisting that rapidly rising housing and stock prices merely reflected the healthy economic expansion that its own policies were fostering. Answering a question on CNBC in July 2005, Bernanke blindly and willfully gave the housing bubble talk short shrift: “Well, unquestionably housing prices are going up quite a bit, but I would note that the fundamentals are very strong – a growing economy, jobs, incomes . . . much of what has happened [with home prices] was supported by the strength of the economy.” What was heralded as a brilliant exercise in business-cycle management by the Greenspan Fed was actually a whirl of monetary delusion. The American economy was not experiencing a linear business cycle expansion, as the charts of Wall Street stock touts proclaimed; it was actually gestating twin $5 trillion housing and equity bubbles which were warping and deforming the very foundation of the Main Street economy. THE GREENSPAN PUT AND THE UNHINGING OF CREDIT GROWTH The combination of the Greenspan Put and 1 percent interest rates unleashed frightful forces of speculation – economic impulses that in a healthy monetary system are held in check by market-clearing interest rates and the fear of loss posed by the inherent risk in pyramids of financial leverage. Indeed, in the now lost world of sound money, debt financing was mainly available for long-lived capital projects with high enough risk-adjusted returns to attract the community’s savings. By contrast, with virtually no cost of carry and the perception that the Fed had put a one-way escalator under asset prices, the free market became a veritable devil’s workshop – credit for speculative endeavors came pouring out of both conventional fractional reserve banks, as well as from every nook and cranny of the vast shadow banking system. Soon this explosion of speculative credit would prove that the monetarists’ preoccupation with the key historic ingredient of money supply – bank reserves – had been made obsolete by Camp David, too. Under the T-bill standard the only real limit on credit creation was financial capital, not the cash reserves of chartered banks. Moreover, the amount of capital needed per dollar of new credit was a function of what speculative markets would tolerate. Banks and Wall Street broker-dealers were under regulatory capital minimums, of course, but these were so loophole ridden as to be meaningless. So, if capital was not a limiting factor in the vast unregulated shadow banking world, then new extensions of collateralized debt could soar as the value of collateral, ranging from residential real estate to copper futures contracts, raced upward. The reason lenders funded rising asset prices at commensurately higher loan advance levels (i.e., did not set aside more capital to cover potential credit losses) was that they believed the central bank had their back. In effect, the market monetized the Greenspan Put, thereby erasing the need for genuine lender capital. Obviously, the more heated the various financial bubbles became, the more the financial markets monetized the Greenspan Put. In effect, the market substituted the central bank’s promises to prop up asset prices for real balance sheet capital. The daisy chains of rehypothecation – that is, pledging an asset that was already pledged – gathered momentum. Homeowners, for example, pledged their houses to mortgage lenders; the mortgages held by lenders were pledged to securitized trusts; the bonds issued by securitized trusts were pledged to CDO conduits; the CDO obligations were pledged to CDO-squared conduits; and so on. The pyramids of credit grew rapidly. In effect, the Greenspan Put supplanted the scarcity of capital that would otherwise have put a brake on speculative lending in the free market. Accordingly, the liabilities (debt) of the shadow banking system, including repo, asset-backed securities, money market funds, commercial paper, and GSE mortgage pools exploded during the Greenspan bubble era, rising from $2 trillion in 1987 to a peak of $21 trillion by September 2008. In short, the unregulated, unreserved shadow banking system generated credit growth at an astounding 12 percent compound annual rate for 21 years running. This was the real evil of the Greenspan/Bernanke Put because it permitted the multiplication of debt without growth of savings and the dramatic bidding-up of asset prices without growth of income. When asset prices finally broke during the BlackBerry panic, however, confidence in the Greenspan/Bernanke Put quickly evaporated in the face of the ensuing selling panic. And with vastly insufficient capital under the nation’s pyramid of debt, collateral was called in and bubble-era credit was violently liquidated. Yet, while speculator confidence in the Greenspan Put lasted, there had been virtually no constraints on the growth of credit market debt throughout the Main Street economy. Thus, in the second year of the Fed’s post-dot-com money-printing panic, credit market debt outstanding grew by $2.5 trillion. This was an 8.6 percent increase and more than six times the growth of national income in the year ending December 2002. From there, the nation’s balance sheet entry for total debt outstanding just kept expanding by larger amounts and by a greater percentage each and every year through the final peak in 2007. During 2004, for example, as the housing bubble heated up and the stock averages continued to climb, annual debt growth reached $3.2 trillion, thereby clocking in at a 9.2 percent annual rate. Indeed, by the end of the cycle, the debt bubble literally turned parabolic: credit market debt outstanding surged by $4.7 trillion in 2007, or at a 10.3 percent annual rate. Evidence that an explosive financial deformation had now reached a breaking point lies in the fact that nominal income grew by only $670 billion in the year ending December 2007. Debt was now expanding at seven times the rate of income growth in the American economy. Still, in the minutes of its last meeting of the year on December 7, the Fed mustered only the absurdly anodyne observation that “debt in the domestic nonfinancial sector was estimated to be increasing somewhat more slowly in the fourth quarter than in the third quarter.” THE POSSE OF DEBT-BUBBLE DENIERS WHO INHABITED THE ECCLES BUILDING By that point in time, the nation’s leverage ratio had reached a “Defcon 1” status. At 3.6 times national income, the leverage ratio was so far above its historical chart lines that it threatened to vault off the top of the page. Yet the Fed did not take the slightest notice because it had no fear of debt. Indeed, the inhabitants of the Eccles Building espied prosperity across the land when they were only seeing the feedback loop from their own ceaseless money printing. As will be seen in chapter 29, Bernanke was an outright Keynesian who believed that debt is the eternal elixir of economic life. At the same time, Greenspan had held the profoundly mistaken view that rapidly rising debt was evidence of an outpouring of financial innovation, not the rank speculation that it had signaled throughout financial history. Likewise, most of the business economists who served on the Fed during the Greenspan bubble years followed the maestro’s lead and simply toted up what the nation’s billowing debt had bought during the most recent reporting period; that is, so many housing starts, coal shipments, retail sales, job gains, and the like. They never asked whether the underlying trend was sustainable, clinging instead to an illusion of prosperity derived from the positive numbers being chucked out of the government’s statistical mills. These reports were heralded as evidence that the Fed had engineered a perfectly balanced “Goldilocks economy” of low inflation and steady real growth. In fact, the government data mills measured only economic gossamer floating on the profoundly unstable and destructive debt bubble which was building down below. The preposterous Fred Mishkin headed the posse of debt-bubble deniers who dominated the Fed’s supporting cast. Prior to joining the Fed in 2006, he had conducted a major study for the government of Iceland which concluded that its banking system was sound and that the only bubbles in Iceland were those welling up from its famous hot geysers. Yes, the balance sheet footings of Iceland’s banking system were ten times larger than its GDP. Somehow Mishkin found this to be a source of competitive advantage, not a freakish economic accident waiting to happen. So Mishkin had already demonstrated perfect 20/20 bubble blindness before he was appointed to the Fed and, as vice chairman, did not allow his talents to lie fallow. From that perch of authority he could be seen continuously on the financial news networks assuring viewers that the American economy was stronger than ever before. Indeed, when the housing bubble was already showing large cracks, he assured his FOMC colleagues during its December 2006 meeting that there would be “no big spillovers” from a downturn in housing. Moreover, just twelve months before the onset of the worst recession since the 1930s, Mishkin revealed himself (December 2006) to be as blind to the fundamentals of the American economy as he had been to those of Iceland. “There is a slight concern about a little weakness,” he averred, “but the right word is I guess a ‘smidgeon,’ not a whole lot.” This stunning misperception was not about the difficulties of forecasting the foggy future. Instead, it reflected the fact that the monetary central planners on the Fed were mesmerized by their own doctrine. For obvious reasons, they could not even begin to acknowledge that their chosen instruments of prosperity management – low interest rates, stuffing the primary bond dealers with fresh cash via constant Treasury bond purchases, and the Greenspan Put – would inherently unleash a Wall Street-driven tidal wave of credit expansion and leveraged speculation. Accordingly, as the debt-bloated and speculation-driven American economy approached its inexorable crash landing, most of the FOMC supporting cast echoed Mishkin’s insensible denial that trouble was at hand. Thus, in July 2007 and a few weeks before Wall Street’s first mini-crash in August, Governor Kevin Warsh uncorked an observation that ranks among the most foolish blather ever uttered by a high financial official: “We don’t see any immediate systemic risk issues. . . . The most important providers of market discipline are the large, global commercial and investment banks.” [Emphasis mine] Even before the September 2008 Wall Street meltdown, it took a confirmed Kool-Aid drinker to believe that the “investment banks” were a source of “market discipline,” and Warsh had deeply imbibed. Before joining the monetary politburo at age thirty-five, he had spent seven years as a junior Morgan Stanley associate, presumably helping to fuel the financial bubbles. Thereupon, he soldiered four years in the Bush White House writing memos that celebrated the resulting simulacrum of prosperity. The conspiracy minded could thus find support for their theories in the case of Governor Kevin Warsh. The evidence was unassailable that he had been sent to Washington straight from the Wall Street boot camp. Yet three months later, Warsh’s investment banker talking points were given scholarly sanction by Governor Randall Kroszner, erstwhile professor of economics at the University of Chicago Business School. During his ten years in that bastion of free market theory, he might have learned something about sound money, and perhaps have spread the word during his tenure at the Council of Economic Advisors between 2001 and 2003. But it didn’t happen that way. Instead, after fully embracing the economic triumphalism of the “deficits don’t matter” Bush White House, Kroszner was rewarded with an appointment to the Fed, perhaps to help ensure that the Bush deficits would be financed with central bank bond buying, as needed. To this end, Kroszner left no doubt that the Fed’s six-year-long money-printing spree had not put even a scratch on the purportedly solid foundation of the nation’s banking system. Thus, in September 2007 – after Countrywide Financial had cratered, 125 mortgage companies had already imploded, and a crucial money market indicator called the Libor-OIS spread had soared during the August mini-panic – Professor Kroszner opined that all was well: “Effective banking supervision has helped foster a banking system . . . that today is safe, sound and well-capitalized . . . US commercial banks are strongly capitalized, reflecting years of robust profits.” [Emphasis mine] During the year which followed this unaccountable utterance, the US banking system recorded more than $100 billion in losses. Kroszner’s “years of robust profits” were effectively wiped out, owing to the fact that Wall Street had been booking phantom gains from underwriting and from trading loans, securities, and derivatives which were the progeny of the Fed’s bubble finance. So, if the monetary planners in the Eccles Building did not have a clue that the financial system was built on a house of cards even at the eleventh hour in the fall of 2007, it is not surprising that they had no clue as the bubbles evolved each step along the way. THE GREAT MODERATION: A DELUSION FOR THE AGES The monetary politburo was blind to the vast deformations it was unleashing on the American economy. In the aftermath of the dot-com crash the Fed was just plain petrified of another stock market hissy fit. As indicated, it therefore launched an orgy of interest rate reductions that had no parallel in monetary history, and was profoundly irrational in light of the massive bubbles it was bound to produce. Thus, in November 2000 the Federal fund rate had stood at 6.5 percent. That was not unreasonable – given the prevailing 2-3 percent inflation and the desperate need to revive the faltering domestic savings rate. As has been seen, however, the FOMC frantically hacked away with non-stop interest rate cuts of 25 and 50 basis points over the next 30 months until after 17 separate cuts the funds rate reached a rock bottom 1.0 percent in June 2003. In a flight of desperate interest rate cutting, the Fed had thus gone all-in with its “wealth effects” theory of prosperity management. In due course the stock market did have a rebound back into the bubble zone but the route to this dubious, short-lived success wreaked mayhem upon Main Street all along the way. It caused a fixed asset investment boom, but only for domestic real estate – since the grim reaper of the “China price” warded investors away from anything related to the production of tradable goods. It caused a Main Street consumption boom, but mainly from mortgage equity withdrawal, or MEW – not income honestly earned. It also spurred a huge increase in retail sales of durable goods, but on the margin the source of increased supply was almost entirely East Asia. It generated a surging demand for consumer services ranging from real estate brokerage to yoga classes and personal shoppers, but the demand for these services was mainly financed from transient sources like home ATM borrowings and stock market gains, rather than a permanent increase in real incomes and capacity to spend. Needless to say, as the effects of the Fed’s poisonously low interest rates twisted and turned through the Main Street economy, they did cause the standard measures of economic activity to tick upward, thereby perpetuating the illusion of economic recovery and growth. Meeting after meeting, year upon year, the FOMC minutes noted the improved indicators while congratulating itself for the policy astuteness that had purportedly fostered these pleasing macroeconomic results. The extent of its blind hubris was starkly evident when the leader of these prosperity howlers famously delivered a speech in February 2004 modestly titled “The Great Moderation.” In this statement the future Fed chairman, who would preside over the most brutal drop in employment and output since the 1930s, noted the “remarkable decline in the variability of both output and inflation” over the prior two decades. Not surprisingly, Bernanke insisted that “improved performance of macroeconomic policies, particularly monetary policy,” should be given the credit for this purported golden age of steady, unending growth. In fact, goods inflation had been pinned down to the global economy’s floorboard by the currency-pegging central banks of East Asia and the tens of millions of rural serfs who flooded out of the rice paddies and into the export factories of East China after 1990. By contrast, asset-price inflation had gotten more cyclically violent than at any time since 1929. That seminal fact of life would have been obvious to Bernanke, had he bothered to think about the implications of the two bruising stock market crashes (1987 and 2000) which had occurred precisely during the period of the Great Moderation. Keynesian models recognize debt only when it shows up as current-period spending rather than as a permanent entry on the balance sheet, perhaps owing to the fact that Keynesian models do not even have a balance sheet. Peering through these Keynesian blinders, therefore, Bernanke blotted out a huge chunk of worrisome macroeconomic reality in divining his Great Moderation. Even more importantly, the “moderation” in the business cycle alleged by Bernanke was an utter illusion. It resulted from the arithmetic of GDP computation under conditions of massive credit growth. Specifically, the $25 trillion credit bubble that the Fed was busy inflating flowed right into GDP. It showed up as incremental aggregate demand, mainly in the form of personal consumption expenditures, but also in the investment accounts for residential and commercial real estate. But this was credit-money growth, not honest organic expansion. Had the GDP reports been constructed by double-entry bookkeepers, they would have offset some or all of these debt-fueled spending gains with a debit for future credit losses and busted investments. At the end of the day, the Great Moderation, like the Roman Empire, depended upon the spending power of exogenously obtained loot. In this case, it came from the freshly minted credit arising from the Wall Street machinery of leverage and speculation that the Fed so assiduously attended and enabled. — — CHAPTER 18 THE GREAT DEFORMATION OF CAPITAL MARKETS How Wall Street Got Huge The collapse of three separate $5 trillion financial bubbles in less than a decade attested to the deeply impaired condition of the nation’s capital markets. Yet the spectacular round-trips of the S&P 500 and Case-Shiller housing price index were not the only progeny of the Fed’s bubble finance. There was actually an even greater deformation lurking beneath these wild rides; namely, the aberrant journey of the giant government bond market which forms the foundation of Wall Street and drives the financial rhythms by which it operates. During the 1970s the financial system, in the aftermath of Camp David, endured the near-destruction of the government bond market. But then for the following thirty years it was favored with continuously rising bond prices constituting not only the greatest uninterrupted market rally in financial history, but also the greatest deformation. It instilled in Wall Street the utterly false lesson that fortunes can be made in the carry trade, an illusion that is possible only when the Treasury bond price keeps rising, rising, and rising. Yet under a régime of sound money it is not possible for public debt to appreciate for long stretches of time, and most certainly not for thirty years. THE GLORIOUS REIGN OF THE BRITISH CONSOL: GOVERNMENT BONDS IN THE ERA OF SOUND MONEY This truth is illustrated by the glorious reign of the 3 percent British consol, a perpetual bond of the British government. First issued in 1757, it remained in circulation until 1888. Other than temporary wartime fluctuations, the price of the 3 percent consol did not change for 131 years. Accordingly, no punter got rich riding the consol on leverage, yet no saver lost his shirt by owning it for its yield. The consol was a sound public bond denominated and payable in sound money. After August 1971, by contrast, the US Treasury bond became the “anticonsol”; that is, the poker chip of speculators, not the solid redoubt of savers. The thing to do was to short it during the 1970s when the Great Inflation crushed its value; own it during the 1980s and 1990s when disinflation lifted its price; and rent it after December 2000 when well-telegraphed bond-buying campaigns by the central bank made holding the bond a front runner’s dream. The crucial difference between the stable era of the consol and the volatile era of the anti-consol, of course, is the monetary standard. The gold content of the pound sterling did not change for 131 years; in fact, not for 212 years. By contrast, for the last forty years the dollar has had no content at all, aside from the whim of the FOMC. Needless to say, what is implicated here is far more than “fun facts” about the classical gold standard. The era of the anti-consol demonstrates that capital markets eventually lose their capacity to honestly price securities under a régime of unsound money; they end up dancing to the tune of the central bank; that is, pricing the trading value of financial assets based on expected central bank interventions, not the intrinsic value of their cash flows, rights, and risks. This profound deformation of capital markets during the last forty years shaped the evolution of present-day Wall Street. These financial institutions had a near-death experience during the Great Inflation, when the value of stock and bond inventories was pummeled and activity rates in brokerage, underwriting, and mergers and acquisitions (M&A) advisory withered. But Wall Street was born again when Paul Volcker broke the back of wage and commodity inflation, thereby triggering the thirty-year ascent of the Treasury bond. During this long upward march, Wall Street progressively learned that the Fed was operating much more than a disinflation cycle that would run its course. Instead, it had set in motion an asset inflation scheme that it would nurture and backstop at all hazards. The thing to do, therefore, was to accumulate financial assets, fund them with short-term debt, and harvest the positive spread. More or less continuously over thirty years, bond prices rose and the cost of carry in the wholesale money markets fell. At length, this fundamental yield curve arbitrage, along with a plethora of variations on that trade, generated stupendous profits. Some profits filtered down to the bottom line of Wall Street profit and loss statements (P&Ls), but much of the windfall was corseted in the salary and bonus accounts of the major Wall Street houses. In either case, the signal was unmistakable: the Fed’s deformation of the financial markets was turning Wall Street balance sheets into money machines: the bigger the balance sheet, the better the money. WHEN WALL STREET TRADING DESKS AWOKE IN SPECULATORS’ HEAVEN The crucial first step in fostering the carry trade bonanza was bringing money market interest rates down to ground level after they had erupted into double digits during the Great Inflation. At the peak of the Volcker monetary crunch in mid-1981, open market commercial paper rates reached 16 percent before receding to a 6-8 percent range during the following decade and a half. In this period the Fed steadily reduced the trend levels of short-term rates, but usually with a decent regard for the state of the business cycle and the rate of progress on disinflation. An inflection point was reached at the time of the dot-com bust, however, and this cautionary approach was abruptly jettisoned. Indeed, soon after the Fed commenced its manic interest rate-cutting campaign in December 2000, Wall Street trading desks thought they had died and gone to speculator’s heaven. The interest rate on AA-rated financial commercial paper, the benchmark for Wall Street wholesale funding, then stood at 6.5 percent. By the end of the following year, unsecured financial paper rates had dropped to 4 percent and then to 2 percent by the end of 2002 and eventually to 1 percent by the spring of 2003. Moreover, repo financing, which was secured by collateral, dropped even more sharply. In the face of an 85 percent plunge in Wall Street’s cost of production – that is, the cost of funding its assets – there was hardly an asset class imaginable that did not generate gushers of positive cash flow. When financed with this 1 percent wholesale money, the much bigger yields of Treasuries, corporates, GSEs, real estate loans, junk bonds, and junk mortgages all produced fat profit spreads. Indeed, given standard leverage in excess of 90 percent on most of these asset classes, the huge “spread” gifted to Wall Street by the Fed was equivalent to handing dealers their very own printing press. HOW FIVE WALL STREET “INVESTMENT BANKS” GREW 200X It thus happened that the Keynesian prosperity managers at the Fed took aim at levitating the GDP, but instead unleashed the assembled genius of Wall Street in hot pursuit of balance sheet growth at all hazards. The most spectacular case was the five so-called investment banking houses – Goldman, Morgan Stanley, Merrill Lynch, Lehman, and Bear Stearns. On the eve of the 2008 crisis, these five Wall Street houses had combined balance sheet footings of $5 trillion, meaning that their girth exceeded the GDP of Japan at the time. As recently as 1998, however, the combined balance sheet of these firms or their predecessors was only $1 trillion. And back in 1980, before these “investment banking” houses were reborn as hedge funds, their footings had totaled only a few ten billions. The five behemoths thus started their thirty-year ride on the rising bond market when they were less than 1 percent of the size where they ended. As previously indicated, there was a good reason for this historic modesty. The old-time Wall Street businesses of securities underwriting, merger advisory, and stock brokerage didn’t require much capital; they made money providing value-added financial services, not by scalping the yield curve and trading swaps. Furthermore, the devastation of financial markets by the Great Inflation so sharply diminished demand for investment banking services that Wall Street had been virtually drawn and quartered. Two-thirds of all firms doing business in August 1971 had been carried off the field or merged by the time Chairman Volcker had finished his bleeding cure. So, when the market hit its July 1982 bottom, Wall Street didn’t have much of a balance sheet or much of a business. What remained was born again during the next thirty years, but in an entirely new financial body. Salomon Brothers was the prototype, and by 1985 it was the undisputed king of Wall Street, enjoying a prosperity not seen among financial houses since 1929. Perhaps that’s why there was a berth forlast_img

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