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DEREGULATION REDUX 

the rescue, cutting interest rates and pumping in liquidity, thus providing a floor for

equity prices.” The “Greenspan put” was analysts’ shorthand for investors’ faith that
the Fed would keep the capital markets functioning no matter what. The Fed’s policy
was clear: to restrain growth of an asset bubble, it would take only small steps, such as
warning investors some asset prices might fall; but after a bubble burst, it would use
all the tools available to stabilize the markets. Greenspan argued that intentionally
bursting a bubble would heavily damage the economy. “Instead of trying to contain a
putative bubble by drastic actions with largely unpredictable consequences,” he said
in , when housing prices were ballooning, “we chose . . . to focus on policies ‘to
mitigate the fallout when it occurs and, hopefully, ease the transition to the next
expansion.’” 
This asymmetric policy—allowing unrestrained growth, then working hard to
cushion the impact of a bust—raised the question of “moral hazard”: did the policy
encourage investors and financial institutions to gamble because their upside was un-
limited while the full power and influence of the Fed protected their downside (at
least against catastrophic losses)? Greenspan himself warned about this in a 
speech, noting that higher asset prices were “in part the indirect result of investors
accepting lower compensation for risk” and cautioning that “newly abundant liquid-
ity can readily disappear.” Yet the only real action would be an upward march of the

federal funds rate that had begun in the summer of , although, as he pointed out
in the same  speech, this had little effect.
And the markets were undeterred. “We had convinced ourselves that we were in a
less risky world,” former Federal Reserve governor and National Economic Council
director under President George W. Bush Lawrence Lindsey told the Commission.
“And how should any rational investor respond to a less risky world? They should lay
on more risk.” 

THE WAGES OF FINANCE:
“WELL, THIS ONE’S DOING IT, SO HOW CAN I NOT DO IT?”
As figure . demonstrates, for almost half a century after the Great Depression, pay
inside the financial industry and out was roughly equal. Beginning in , they di-
verged. By , financial sector compensation was more than  greater than in
other businesses—a considerably larger gap than before the Great Depression.
Until , the New York Stock Exchange, a private self-regulatory organization,

required members to operate as partnerships. Peter J. Solomon, a former Lehman
Brothers partner, testified before the FCIC that this profoundly affected the invest-
ment bank’s culture. Before the change, he and the other partners had sat in a single
room at headquarters, not to socialize but to “overhear, interact, and monitor” each
other. They were all on the hook together. “Since they were personally liable as part-

ners, they took risk very seriously,” Solomon said. Brian Leach, formerly an execu-
tive at Morgan Stanley, described to FCIC staff Morgan Stanley’s compensation
practices before it issued stock and became a public corporation: “When I first