This Weekend’s Contemplation

From the WSJ:

Does anyone on Wall Street remember Irving Fisher? Rosy prognostications from the securities industry's top dogs certainly bring the Yale economist to mind. In early October of 1929, Mr. Fisher confidently predicted stocks "reached what looks like a permanently high plateau." The market, of course, promptly crashed.

Mr. Fisher's mistake stemmed from his biases. Because he was fully invested in stocks himself, he was blinded to the risks of one of the greatest speculative bubbles in history. Despite the lessons of history, this natural instinct of human behavior has repeated itself often -- most recently in the millennial tech-stock bubble.

Today's credit boom could end with a similar thump. Yet some of Wall Street's titans appear unusually confident in predicting that this time things will be different. For example, on Wednesday, Merrill Lynch boss Stanley O'Neal stated that the turmoil of the subprime-mortgage market is "well contained" and "there have been no clear signs it's spilling over" into other markets.

It's easy to see why Mr. O'Neal would hope that to be the case. Merrill is a big player in the mortgage and other fixed-income markets, and has invested its capital in many buyouts. But a spike in interest rates for riskier borrowers over the past week suggests there has been substantial spillage from the latest burp in the subprime market.

Goldman Sachs chief Lloyd Blankfein sounded a more-cautionary note about LBO debt markets on Wednesday, but still declared that buyouts aren't "going out of style." He, too, had better hope so. Goldman is backing the LBOs of First Data and TXU. They will be the biggest tests yet of the financing markets after investors sent a $3.6 billion financing for Ahold's U.S. Foodservice packing on Tuesday.

Given their privileged seats in the capital markets, Messrs. O'Neal and Blankfein may have a good handle on what's happening in the credit markets. Before losing his family's fortune on Black Tuesday, Irving Fisher thought he did, too.