Fed’s Folly: Fooled by Flawed Futures?

Was it a misunderstanding of their mandate, inexperience, or just plain hubris?

Regardless, it took only 2 days to learn just how ill-considered the Fed’s emergency market rescue plan was: To wit, a fraudulent series of losses led to a major European bank unwinding a huge trade:  Societe Generale Reports EU4.9 Billion Trading Loss.

SG’s $7.1Billion dollar unwinding led to panicked futures selling on Monday and Tuesday.

Hence, we quickly learn what sheer folly and utter irresponsibility it is for the Fed to use its limited ammunition to intervene in equity prices. Their panicky rate cute were not to insure the smooth functioning of the markets, but rather, to guarantee prices.

As we have been saying for the past two days, this is not the Fed’s charge. They are supposed to be maintaining price stability (fighting inflation) and maximizing employment (supporting growth) — NOT guaranteeing stock prices.

I guess the European Central Bank has it easier: Their only charge is to fight inflation: "maintain price stability, safeguarding the value of the euro."

Tuesday’s panicked 75 basis cut will prove to be an historical embarrassment, a blot on the Fed for all its days. Failing to understand what their responsibilities are is bad enough; allowing themselves to be bossed around by Futures traders is inexcusable.

And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete.


Too bad we didn’t know this during yesterday’s Fed debate . . .

Fed to the Rescue (11:20am )


One last point: I still think the Bernanke Fed inherited this mess from Greenspan, and are boxed in trying to resolve it…



Societe Generale Reports EU4.9 Billion Trading Loss
Gregory Viscusi
Bloomberg, Jan. 24 2008

Societe Generale Hit By Fraud, Write-Downs
WSJ, January 24, 2008 9:40 a.m.


Equity Derivatives House of the Year – Société Générale   
RISK, January 2008 | Volume21/No1   

Juicing the economy will come at a cost
Jeanne Sahadi
CNNMoney.com, January 23 2008: 4:51 PM EST

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What's been said:

Discussions found on the web:
  1. zao commented on Jan 24

    SocGen told Bank of France. So the ECB knew and so did the Fed, in all probability. They went ahead anyway. What a bunch of sellouts. This is not the way monetary policy is supposed to be run. If they cut next week as well, it will confirm that we are a Zimbabwe style monetary policy regime.

  2. Marcus Aurelius commented on Jan 24

    There is only one class of people being protected by our “Government of The People”. While we are all taught that there is safety in numbers, we are never taught about the danger in those same numbers. The powers that be should be reading French history.

  3. The Financial Philosopher commented on Jan 24

    I will freely expose my ignorance by asking these questions for possible response from those more knowledgeable than I:

    If the stock market is a leading economic indicator, is it not responsible for the Fed to seriously consider its apparent “warning” signs?

    Is speculation so rampant that the stock market is no longer (or never was) a valuable economic indicator?

    I tend to agree with BR’s sentiment with regard to the disappointing moves by the Fed. It is certainly easier to gain “control” of things by letting them go their own way…

    Thanks for any insight offered by comments…

  4. techy2468 commented on Jan 24


    i disagree with you on this.

    what if we would have had a stock market crash leading to corrections of 15%.

    what if that would have led to meltdown in stock market all over the world.

    i think FED did the right thing by removing panic, i would take inflation any day compared to being without job and in depression.

    FED needs to let the market correct in a orderly fashion, which has been happening since the last 4-5 months, and will continue to happen. but they should make sure that we dont get a crash, which leads to consumers gettting spooked up, and almost a run on banks, putting the whole financial system in jeopardy.

    yes whatever is happening in stock/financial market is total hogwash….its a shame on free market.

    but we cant let 15-20 years of stuff to unwind in a week, and i am hoping FED plays smart and does only 25 pt rate cut next week.

  5. dukeb commented on Jan 24

    I guess it all evened out then. The fraud took down the markets, the Fed leveled them off, then the monoline rescue chat brought the markets back to where they started! LOL. This is seriously hilarious.

  6. John Borchers commented on Jan 24

    Barry the Fed had to do it. The market was almost certain to crash. All the baby boomer’s retirement money would have went up in smoke and it almost certainly would have caused depression.

  7. techy2468 commented on Jan 24

    i would like to add that FED should have led the markets correct upto 6-7% before announcing the rate cut.

    it was quite possible bleeding may have stopped at 6-7%, which would have saved the 75 pt rate cut for future.

    now the market expects another 75 pt next week, i guess right now it sounds like a good time to put straddle-option play. stocks will either go up 10% or go down 15%.

  8. Sami commented on Jan 24

    that is quite a jump to concluded that the SoGen “rouge” trader is responsible for Monday’s meltdown or you just want to make the fed look bad, they are doing a fine job by themselves.

  9. Shane commented on Jan 24

    “i would take inflation any day compared to being without job and in depression.”

    Let’s talk again when inflation is 15% and see how you feel. Inflation only rewards those who are in debt. If you are smart and you’ve save, a recession doesn’t hurt too much b/c you’ve got savings to hold you over. Inflation on the other hand, you can have a job and you can still end up living in a dumpster.

    Inflation . . . the most insidious tax.

  10. michael schumacher commented on Jan 24

    The futures are a joke in the first place. only in our market can you have the entire world selling off and our futures are up. Doesn’t say much for the validity of using it as an excuse when the administration’s is actively engaged in propping up said futures markets almost every night.

    I am convinced that a nuclear bomb could go off (anywhere in the world) and our futures market would be up. Having said that you must be aware that if they can buy them up and present a rosy picture with just about any piece of news you can be assured that they can sell them off just as easily. I am positive that is what happened on Mon-Tues.

    But creating it as a cause and effect make sit sound easier to digest……just like those rogue traders…


  11. Stuart commented on Jan 24

    AND the market is still expecting at least 50 bps next week???? So does this mean, the Fed, feeling duped, will say “Mr. market screw you” and give 25 bps or perhaps even nil… we’ll see, but given what you wrote, there’s more than a decent chance.

  12. fenner commented on Jan 24

    Right you are, Barry. But why is there no mention of the fact that the Fed gov’s are fully invested in the stock market. If that doesn’t color their thinking, I don’t know what else would. Are other world bankers allowed to be fully invested? I find it hard to believe, but I just don’t know. I am not accusing them of deliberately manipulating their own portfolios, but they must certainly be subconsciously predisposed toward aiding themselves.

    Any thoughts?

  13. JTR commented on Jan 24

    As someone said above, America is the next Zimbabwe. Hyper-inlfation is coming within 5 years. Buy gold, while you still can. But be prepared for when the government begins seizing all gold, which it will have to do when the dollar hits zero. I am truly ashamed to be an American.

  14. Helicopter Ben commented on Jan 24

    I’ll be giving out more candy next week.

    You guys are so overthinking this. You are underestimating the stupidity of people…and the psychology of manipulation.

  15. D.H. commented on Jan 24

    If we are realists (rather than members of the bull or bear dogmatic religions), then we need to accept that the Fed is a put on the investment community. It matters not what their job description is in the public arena — aren’t we all believers in the maxim “actions speak louder than words”?

    One of the underlying presuppositions that seems to cause faulty expectations is that the US exhibits either a free market system or is aspiring to do so. As a student of history, I do not believe either are true. The wealthy will always protect one another, and they will manipulate the system to maintain the orderly structure that has benefited them in the past. With all do respect, anyone who does not believe such behavior will continue is a bit naive (or waiting for a messiah).

    The power elite will never support a true free market system because in practice it means chaos or at least letting go of the yoke they so tightly grasp. “Free market” is nothing more than the catch phrase of the day. Anyone who knows economic reality knows that all markets are manipulated by laws and power (including money). Kudlow is a perfect example of why “free market” is nothing more than double speak for “fiscal and legislative aid for investor capitalists.”

    Also note that although the Fed is bailing out speculators, they are ALSO providing a put for all the boomers who are currently or in the near future set to retire (or supplement income) on the worth of their two major assets: house AND EQUITIES. The value of equities play a very real role in consumer sentiment and per capita wealth. Thus, with all due respect, I think focusing on the Fed’s effect on speculators over simplifies the issue.

    Bottom line as a realist: the Fed cut rates and will continue to cut rates with no concern for “moral hazard.” What do these objective facts mean for the market and the economy? The rest is philosophy and the religious faiths of capitalist existentialists …

  16. David Price commented on Jan 24

    Hi Barry, From the talking heads on CNBC to the president we have been told the stock market is the economy. President Bush and the congress need to be the first participants in our national effort on financial literacy. Stop spending, reduce the deficit, and strengthen the dollar.

  17. Florida commented on Jan 24

    Watching that video again today in light of the news out of SocGen, Liesman is even more of a joke. Criticizing you and Santelli for believing in a system of free markets? It’s almost darkly hilarious.

  18. Ross commented on Jan 24

    Hate to reveal my old codger status but I was hired as a ‘customer’s man” when the wire houses were gearing up to handle 20 million share days on the NYSE.

    From my perspective, the markets have become casinos. As we all know, it is good to be the house. If you are a serious investor, buy something denominated in Swiss Franks and wait for the Euro to come apart. Germans don’t take kindly to using their good credit to bail out Spanish real estate speculators. Precious metals complex is ok also when inflation gets out of control, which it will. Foodsfuffs are a good place to hide when protectionism of food supplies becomes a national mandate.

    I don’t care what the Fed does. I have lived long enough to know the outcome and prepare accordingly.

    My $2 worth…

  19. winehouse fan commented on Jan 24

    BR wrote: “Their panicky rate cute were not too insure the smooth functioning of the markets, but rather, to guarantee prices”

    BR, why do you see these as so different?

    Is there a significant difference between “insure the smooth functioning of the markets” and “guarantee prices” in the market?

  20. techy2468 commented on Jan 24

    next week rate cut depends on what else economic data we get.

    if the data is a bit rosy, there may be just 25 pt rate cut or nil.

    if data is bad 50 pt or even 75 pt, administration does not care about future inflation, only the next 12 months.

    both ways it is good for equities.

    but i guess after next week, it may be a good time to enter short positions, specially if market goes up wildly if ther is a 50-75 pt rate cut.

  21. Justin commented on Jan 24

    Don’t worry shorts – the consumer is dead! Who can buy without money? The FED can cut all they want to, it isn’t going to help.

  22. techy2468 commented on Jan 24


    you keep forgetting that america is a nation of debtors….and as always majority rules in a democracy.

    sorry dude, but i still prefer inflation, which can be controlled later, rather than go without job for 12-24 months, it will be too depressing.

    inflation is the only way out of this mess, please do not go to the extreme chanting of “zimbabwe hyper-inflation”, this is USA not zimbabwe.

    if we can inflate, raise wages, debt will shrink…..but how to do it in a orderly fashion is the big issue.

    if we deflate dollar, our debt holders who benefitted so far (china, india etc) will pay the price for keeping america as their markets.

    in other words we will be sharing the pain, just as we have shared the prosperity because of our consumption supported by debt.

  23. Bruce commented on Jan 24

    The fault is chronic overspending by congress…we need a balanced budget amendment….20 years ago..

  24. John commented on Jan 24

    The great Physician’s Rate Cut

    (from Part 3, Chapter 5 of Gulliver’s Travels, visit to Balnibarbi)

    I was complaining of a small fit of the Cholick; upon which my Conductor led me into a Room, where a great Physician resided, who was famous for curing that Disease by contrary Operations from the same Instrument. He had a large Pair of Bellows with a long slender Muzzle of Ivory. This he conveyed eight Inches up the Anus, and drawing in the Wind, he affirmed he could make the Guts as lank as a dried Bladder. But when the Disease was more stubborn and violent, he let in the Muzzle while the Bellows were full of Wind, which he discharged into the Body of the Patient, then withdrew the Instrument to replenish it, clapping his Thumb strongly against the Orifice of the Fundament; and this being repeated three or four Times, the adventitious Wind would rush out, bringing the noxious along with it (like Water put into a Pump), and the Patient recover. I saw him try both Experiments upon a Dog, but could not discern any Effect from the former. After the latter, the Animal was ready to burst, and made so violent a Discharge, as was very offensive to me and my Companions. The Dog died on the Spot, and we left the Doctor endeavouring to recover him by the same Operation.

  25. Karl K commented on Jan 24

    C’mon Barry — here’s your logic: “The Fed’s move is bad bad bad! Look at this SoGen trader!”

    Really, you need to think better.

    One rogue trader. Now if there’s are hundred rogue traders…

    Look, the Fed made its move in accordance with its mission — STABILITY. We were headed to a credit market meltdown. We can’t have that, despite the desire of the shorts to make huge killings quick.

    Let’s wring out the excesses methodically, calmly.

  26. me2 commented on Jan 24

    The thing I am struck by after all this is that nothing has materially changed. Sure the Fed cut 75 bps, NY plans for force the banks to fix MBIA and AMBAC and Bush is going to announce a bailout package.

    But even after that we have flat job creation, a seized up debt market and falling house prices.

    The only thing that happened is that Wall Street went rah, rah for a few days. After the smoke clears we will continue down the same path we were on before, only the Fed has 75 fewer bps to play with and Bush will drive us deeper into debt.

    Another thing that has changed is that I have a lot less faith in the markets.

    CNBC needs to improve its reporting. A lot.

  27. JTR commented on Jan 24

    Justin says: “this is USA not zimbabwe”

    What arrogance. How many times through history have we heard “It will never happen here”. Read some history about 1920’s Germany. Tyranny and poverty are America’s future.

  28. Ross commented on Jan 24

    John, you rascal. Brilliant. I had forgotten that one. Kudos.

  29. michael schumacher commented on Jan 24

    This rogue trading thing seems to be happening everywhere that the banks are leveraged to the hilt in “questionable securities products”.

    Coincidence??? Mais Non

    just like the plane at ‘throw last week that didn’t respond to a call for more power…..funny you know that sort of thing happens when there is NO FUEL LEFT….

    Sounds like Ferrari’s PR’s when a car drops out of a race:

    “we had hydraulic failure”…..
    The kind when the entire engine blows up and can’t power the system any longer….funny that.


  30. JTR commented on Jan 24

    Actually techy2468 posted “this is USA not zimbabwe”, not Justin. sorry.

  31. bluestatedon commented on Jan 24

    Now that the Fed has (once again) shown the true focus of its concern, another intervention is on the way.

    I don’t know much about finance but I know a good deal about politics, and I’m very confident there will be a federal bailout of insurers in this election year. The people who would suffer in the immediate aftermath of a insurer meltdown have far too much influence in the form of campaign contributions to not get their way, and you can be damned sure that the Bush administration in particular will not let the monolines collapse. The fallout resulting from letting AMBAC and MBIA go under would be the final stake in the heart of any GOP hopes for retaining the presidency and any meaningful power in Congress.

    However, there will be significant cooperation with Congressional Democrats on a bailout as well. There’s too much campaign contribution money at stake here, and no politician of any party will want to be seen as contributing to a spectacular financial collapse. Don’t be surprised if Hillary comes out forcefully in favor of a bailout in the next week or so. After all, Manhattan is part of her constituency.

  32. Bruce commented on Jan 24

    Uh,techy, we’ve always had recessions and always will…it is the business cycle…you can postpone it temporarily by making money so cheap ala Greenspan, that the cycles get longer, but the inevitable correction will be that much more severe…

    there will be a correction to wring the excesses out of the extremely cheap money we’ve had under Greenspan…if that is depressing…well, try Prozac.

  33. Helicopter Ben commented on Jan 24

    An ancedote: I’ve been surfing some forums, and the amount of people refi’ing or getting ready to refi is pretty darn high. Rates are quite low. Obviously wont help those upside-down, but looks like a nice chunk of people may be saved…short term, at least.

  34. toady commented on Jan 24

    Barry is wrong b/c he is looking too short term. He’s right in the sense that the FED showed panic and the cut only a week b/f the meeting where it could have been more orderly and cutting now aided a lot of speculators. Roubini has been arguing for FED action like this for a while because people have just begun to loose their homes and jobs (in that order) which will make even more paper on Wall street worthless.

  35. DavidB commented on Jan 24

    Wouldn’t it be very funny and very surreal indeed if uncle Ben were to raise rates at the next meeting? HA!

    Just entertain yourself for a few moments with the thought of what the usual suspects in the financial media(including our host and his truth telling ilk) would do with that one. HA! HA! HA!!

    Enjoy the laugh because it is one of the few true joys you’ll ever get at the expense of the cabal

  36. Terrence Patton commented on Jan 24

    Barry I fervently disagree with your stated position regarding the Fed (kindly answer this missive). My thoughts:
    Let us scotch one foolish and dangerous notion already gaining acceptance. Those who accuse the Fed of acting out of panic in slashing rates 75 basis points on Wednesday do not grasp the seriousness of the situation.
    The move was imperative to prevent a grave financial crisis spiralling into disaster. The threat of a melt-down in the $2.4 trillion market for US municipal bonds had suddenly moved from possible to imminent. No monetary authority could ignore such risks.

    As skittish markets showed today, more will undoubtedly be required, and soon. But at least the US authorities are facing up to the predicament that they created in the first place by fixing the price of credit artificially low for year after year, and failing to regulate banks, derivatives, and structured credit with a minimum of common sense.

    “Central banks have lost control,” said George Soros to the chastened elites in Davos today, so humbled from the hubris of last year.

    Not yet, perhaps, but the banks have certainly come a little too close to losing control. Both the European Central Bank and the Bank of England may yet do so, trapped by their inflation orthodoxies and mandates.

    The trigger for the Fed action was the move on Friday by Fitch to strip the US monoline insurer AMBAC of its `AAA’ rating, with the mounting risk that the rating agencies would soon downgrade its bigger peer, MBIA.

    Why does it matter? Because they have guaranteed a large part of that $2.4 trillion bond market.

    If they lose their AAA ratings, all the bonds that they have insured will lose their ratings pari passu. This would force a large number of pension funds and institutions under strict investment rules to sell their bonds, setting off a cascade of sales with no obvious buyers in sight.

    The effect could easily have been – and may still be – a second lethal leg to the credit crisis, with vast losses. This could all too quickly lead to a run of bank failures.

    Do not be fooled by the fall in three-month dollar LIBOR rates. These had not fully returned to normal last week. They reflected the drastic change in expected interest rates, as priced by the futures markets.

    The contracts were already pricing in huge rate cuts within three months. Adjusted for this, LIBOR had not really eased.

    No doubt the Fed had a mix of fears. The “financial accelerator” was moving into a very ugly mode. The ABX index measuring subprime debt – and used as a benchmark for bank write-offs – had begun to plunge again, nearing 13 cents on the dollar for some BBB debt and 26 cents for A grade.

    Even the AAAs were down as low as 60 cents for some vintages. S&P last week raised the expected default level on 2006 subprime debt from 14pc to 19pc. Citicorps said it was raising loss reserves on auto debt and credit cards. The noose was tightening fast.

    If there was any doubt about the gravity of this crisis, it ended on Monday when the entire universe of global equities went into free-fall, with German stocks off 8pc and Japan’s Nikkei suffering the worst two-day fall in seventeen years.

    The Fed action is not to everybody’s taste. Stephen Roach, the head of Morgan Stanley Asia, was blue in the face from righteous wrath in Davos today.

    “Policy-makers are reaching back to the same play book that created this mess in the first place. They’re saying we are there to clean up after bubbles burst first rather than to prevent them. It’s a dangerous, reckless and irresponsible way to run the world’s largest economy.’’

    “We have a market-friendly Fed injecting a lot of liquidity in the system which will set us up for another bubble economy. Excessive monetary accommodation just takes us from bubble to bubble to bubble.”

    I have much sympathy for this view. The Fed has been “asymmetric” for much of the last fifteen years, standing back as asset prices overheat but then interviewing to prevent a proper liquidation to purge the excesses. Indeed, I would go futher, blaming them for actively stoking those bubbles in the first place.

    But the time for tough-love is when the economy is humming along a little too fast, not when it is in the midst of a grave crisis. Calvinist monetary discipline at this point would wreak havoc, and possibly endanger the political stability of several countries (in Europe, if not in the US).

    The best we can hope to do is right the ship slowly, and turn a blind eye to moral hazard for now. It is not pretty. It means a lot of pin-stripe villains and leverage louts in the City will escape their condign punishment.

    But as Fed governor Frederic Mishkin put it recently, we cannot chastise whole societies to keep the moralists content.

    Yes the banks will soon be able to play the carry trade again, borrowing short to lend long. It cleanses the balance sheets.

    Money rains like manna from Heaven. Profits loom again and the new cycle starts.

    That will be the moment for society to settle its scores with the credit clowns. Not now.

  37. waiting_ commented on Jan 24

    the fed cut had more to do with foreign markets than our own. bernanke et al cut to salve the global frenzy which would have surely sucked our markets into the abyss – and if markets over-correct we get a depression here instead of recession. as is now clear (and well-discussed here and elsewhere), decoupling is a myth and we are stuck with the role of arbiter of global economies.

  38. Stuart commented on Jan 24

    Speaking of folly, the NY regulator’s plan of self-funding is every bit as much of a scam as was the self-funded M-LEC Super SIV. You cannot finance your own protection plan which is largely designed to strictly provide protection to yourself and hope to maintain an ounce of integrity. Left pocket paying right pocket. Gimme a break.

  39. kaan commented on Jan 24

    I think FED was largely responsible for the current mess but coming credit collapse at the
    order of trillions forced their hands and their action was a zugzwang.

  40. me2 commented on Jan 24

    I shudder to think that one investor gone awry could cause so much angst. What will happen when something really happens and really needs intervention ?

  41. D.H. commented on Jan 24

    We are living in the middle of an experiment. To date, we have proven that a civilization can function well with a certain amount of leverage. People have been crying Armageddon since credit cards were introduced to the masses. What we learned is that credit cards work fine. Dual income families work fine in our economy (although horribly in our society).

    What troubles me is using a house as an ATM. This is obviously problematic. However, the US cultural passion to consume and create businesses will keep the system going. We will have a recession, but then we will have another growth period. Predicting otherwise is like saying the French will stop making love or the Italians will stop loving food.

    Doom and gloomers refer to the Great Depression like it was yesterday. FYI, most people grew their own food back then and technology was at a level considered nonexistent by someone in college today. Anything is possible (hence the ever growing citations of Black Swan by those who are first realizing this metaphysical fact), but ignoring all the resources we have created since 1930 is exactly that: ignorant.

    And, this is not Zimbabwe. Take a trip there and you will notice that Zimbabwe might as well be on another planet. That’s why they call it the Third World. Anyone who makes those comparisons is ignorant of the MAJOR differences between our two countries, cultures, and economies.

    When Greenspan cut rates to the bone people said we would hyper inflate like Germany after WWI. Then people said we were doomed after 9/11. That never happened. Our society has been fine excluding all the normal negativity that exists in reality. When I drive through poorer sections of town I see people with cell phones who are eating food they bought at a restaurant. Doesn’t seem like we are headed to hell yet …

  42. Pat Gorup commented on Jan 24

    “Hyper-inlfation is coming within 5 years. Buy gold, while you still can. But be prepared for when the government begins seizing all gold, which it will have to do when the dollar hits zero.”

    Some of the other sites that I cruise thru anticipate hyper-inflation in the U.S. by 2010. Compared to today would you like your dollar to have the buying power of $2 in a depression or be essentially worthless in hyper-inflation? It depends. If you’re like the majority of non-saving Americans you could probably care less about hyper-inflation. On the other hand, if you’re retired or about to, a saver, have a 401K or any other resources you don’t want to see them zeroed out. If you think Uncle Sam will eventually re-peg the dollar to gold then confiscate that which is held by all Americans which they have done in the past, don’t buy it. Buy silver instead. If there is a coin shop in your town, they probably peddle silver rounds. Also Canada’s currency is now on par with ours. So, turn some of your resources into Canadian currency. Talk with your bank, I’m sure that they probably have some type of procedure whereby you can get Canadian currency without going to Canada. Now both of these actions are going to cost you. But if you truly feel that the American dollar is headed down the drain which is a shared view of many others, then start switching your current assets and save them from the same fate.

  43. Bearish commented on Jan 24

    Just a “small” correction but the position they unwound wasn’t $7.1B in size – that’s how much they lost. The notional dollar amount must be at least several times that.

  44. Morty commented on Jan 24

    “The fault is chronic overspending by congress…we need a balanced budget amendment….20 years ago..”

    Bruce, and BR, what about the effects of military spending?

  45. michael schumacher commented on Jan 24

    The Fed panicked simply because the futures that SOC GEN was selling down tanked the market. When you unwind that sort of position you will get moves like that. That no one at the ECB bothered to make this public is a travesty of communication that allowed the Fed to act as if they were “saving the market”…..

    Go look it up…..it’s easily available and illustrates that our Fed has no clue on what is going on in this market much less across the street.

    So the world market tanks because SOC. GEN couldn’t come clean and then invented this story with one trader….oh and BTW we’re needing to liquidate this position so if you see some strange shit going on in the market….it’s just us.

    nice work on the communication


  46. Justin commented on Jan 24

    D.H., the tax cuts of 2003 and the easy money of the last several years have created an anomoly in the economic numbers. So your rosey picture is flawed from the start. This down-turn will be as long and drawn out as the upturn has been…corralated to past expansions and past contractions, of course, i.e. meaning that like this upturn, (built on cheap money and tax relief), which has been the longest continual expansion, the downturn will be as the longest continual contraction. imho

  47. jkw commented on Jan 24

    If the Fed had overcut, commodity prices would have risen on the news and the dollar would have fallen. But commodities fell and the dollar stayed more or less at the same level (at least relative to the Euro). Which means that the recession has killed off inflation. The Fed is not acting irresponsibly by cutting rates at this point. They are trying to prevent deflation.

    The Fed knows how to fight inflation. If inflation starts to be a problem, the Fed can fix it. However, deflation cannot be fixed by the tools available to the Fed. They have to fight the possibility of deflation, because by the time you can actually measure deflation it is too late. That is why the comfort zone for inflation is 2-3% instead of 0-1%. You want to have a consistent, measurable level of inflation so that you can ensure that the economy does not enter a deflationary cycle.

  48. D.H. commented on Jan 24


    I paint no rosy picture. I have been making a killing with puts since the middle of last year. I am just pointing out that the doom and gloomers over simplify everything (the same as the permabulls like Kudlow). Stephen Roach is not a realist, he is religious and a market moralist. Too bad that money and morals don’t mix very well …

    There is no law of the universe that says a period of prosperity must be met with an equal period of depression. Read a book about market history (Bull! is a great one). I have said countless times on this board and on my website that we are headed for a recession that will help unwind the excesses from housing and private equity, but to assume that the wheels fall off the car is a major jump in logic. We are a fully industrialized society (C.f. 1930) and the world is still in transition to becoming fully industrialized as well. This alone supports a long term (i.e., longer than our lifespan) economic growth trend with MANY up and down cycles along the way.

    Make no mistake, I think we are in a recession and I think the employment market will hurt the US economy (which will in turn hurt our suppliers). However, the unemployment rate is not going to 99% like the employment rate is not going to 100%.

    FYI: the tax cuts were insignificant compared to the income generated by jobs, flipping houses, and using homes as an ATM. The excesses (yoy data on spending for the past 3 years) will disappear, but ALL SPENDING will not disappear.

    Going sideways for a long time accomplishes the same thing as an instant crash. Our system is setup to support sideways (the Fed put) since we learned about crashes in the Great Depression. This is not a rosy picture, it is simply the way things are (which happen to be ugly IMO, yet still not negative enough for you).

  49. Pat Gorup commented on Jan 24

    “But at least the US authorities are facing up to the predicament that they created in the first place by fixing the price of credit artificially low for year after year, and failing to regulate banks, derivatives, and structured credit with a minimum of common sense.” **this would be the cause**

    “The threat of a melt-down in the $2.4 trillion market for US municipal bonds had suddenly moved from possible to imminent. No monetary authority could ignore such risks.” **this would be the effect**

    “If they lose their AAA ratings, all the bonds that they have insured will lose their ratings pari passu. This would force a large number of pension funds and institutions under strict investment rules to sell their bonds, setting off a cascade of sales with no obvious buyers in sight.” **this would be the outcome**

    “But the time for tough-love is when the economy is humming along a little too fast, not when it is in the midst of a grave crisis. Calvinist monetary discipline at this point would wreak havoc, and possibly endanger the political stability of several countries (in Europe, if not in the US).” **this would be an excuse to postpone the punishment**

    “The best we can hope to do is right the ship slowly, and turn a blind eye to moral hazard for now. But as Fed governor Frederic Mishkin put it recently, we cannot chastise whole societies to keep the moralists content. That will be the moment for society to settle its scores with the credit clowns. Not now.” **did it ever occur to you that the “credit clowns” who are insatiably greedy escape punishment time after time, by manipulating the FED into covering over the mess that they have created in the “best interests of the public”?**

    Please, it’s always tomorrow. As the old adage goes, “tomorrow is promised to no man”.

  50. Sandy Belkin commented on Jan 24

    I am not a professional investor, but i am aware of the saying, “Dont fight the Fed”

    Yes, the Fed panicked, gave into political considerations, and has its head in the sand. However, what’s new

    Sandy Belkin

  51. me2 commented on Jan 24

    The thing that everyone is missing is that all this is happening with interest rates at historical lows. We can’t keep interest rates at nothing forever for a number of reasons, including that nobody is ever going to have any savings, inflation is going to get out of control, the US dollar is falling and the US is running a deficit.
    We are in a credit crisis. Its only a matter of time before interest rates reflect that.
    If you want to see a stock market correction, wait until interest rates hit 8 or 10%.

  52. mhm commented on Jan 24

    “Is speculation so rampant that the stock market is no longer (or never was) a valuable economic indicator?”

    My thoughts: the stock market is a valuable economic indicator when considering sectors. Broad market indexes or those based on disparate companies doesn’t tell much, at least to me.

    But right now speculation is so widespread that the market is not a valid economic indicator. It’ll be valid again once speculation abates a little bit.

  53. internet-anon commented on Jan 24

    Reading SG’s reaction/explanation of the loss is classic corporate Orwellian doublespeak….

    Monsieur was ever so smart, using his “intimate and perverse” knowledge to hide everything….

    I call shenanigans…your internal controls failed, you’re idiots.

  54. Lord commented on Jan 24

    I think you have this one backwards. The Fed called their bet and upped them one. It’s not nice to play against the Fed.

  55. Pat Gorup commented on Jan 24

    “If the Fed had overcut, commodity prices would have risen on the news and the dollar would have fallen.”

    I just checked and oil is up $1.70, gold is up $26 and silver is up .40. The dollar is down .62 and might close at its lowest rate this year. The dollar is waiting for an ECB rate cut. If it does not come, look out below!

    “The Fed is not acting irresponsibly by cutting rates at this point. They are trying to prevent deflation.”

    At the expense of inflation.

    “The Fed knows how to fight inflation. If inflation starts to be a problem, the Fed can fix it.”

    Really? Inflation in the US economy is elevated at multi-decade highs. US producer prices were up +6.3% last year, and US consumer prices up +4.1%, the highest in 17-years, compared with +2.5% for 2006. Gasoline costs were up 37%, and food prices were up 9.3% last year.

    “They have to fight the possibility of deflation, because by the time you can actually measure deflation it is too late.”

    The same could be said about inflation.

    “That is why the comfort zone for inflation is 2-3% instead of 0-1%.”

    If that’s their comfort zone and given the numbers above why are they cutting rates and in effect inflating the economy? Because they, like most of their American brethren do not know how to save.

  56. Lord commented on Jan 24

    I think you have this one backwards. The Fed called their bet and upped them one. It’s not nice to play against the Fed.

  57. Terrence Patton commented on Jan 24

    Pat Gorup,

    I not only agree, yet sympathize with your comments. Nevertheless, why punish the masses at the expense of the criminal few? Do you remember Washington/New York officials reply to the predictable bank collapses in the early 30’s? A chilling combination of smugness and morality resulting in a world depression. Let us never forget that. What would you have the Fed do? Perhaps let the markets crash, then cut might be an option. Take preventive actions – which they did. Don’t do anything at all and let the chips fall where they may? Bad idea. Your response, thanks.

  58. larry commented on Jan 24

    I just read a posting on another site decrying the regulation that will come out of this mess, and predicting the law of unintended consequences will basically doom us. We will see more of this creap from derivative “players” over the next few months. After Soc Gen, sub-prime, cds, cdo, the destruction of hundreds of billions of capital, etc., just what do these clowns think will happen? You need regulation to insure risk management or our worldwide financial system will collapse, particularly after this fiasco. Furthermore, as a debtor nation, this would be especially harmful to the US.

  59. Toro commented on Jan 24

    “Tuesday’s panicked 75 basis cut will prove to be an historical embarrassment, a blot on the Fed for all its days.

    And, having been rewarded for their past tantrums, the market will now be screaming for another 75 bps next week. As Rick Santelli appropriately observed, the Pavlonian training is now complete.”

    Which is why the Fed may stand pat or only go 0.25% on Tuesday. Either way, equity markets will be disappointed.


  60. Greg0658 commented on Jan 24

    DH thanks for the hope
    Pat G thanks for the tough love
    everybody else – this site is a great content source – thanks all

  61. zao commented on Jan 24

    What would Greenspan do? NOT CUT 75 SEEMS TO BE THE ANSWER.

    Tuesday’s rate cut has prompted some to wonder how Alan Greenspan would have acted, and some have pointed to an excerpt from the March 20, 2001 Federal Open Market Committee meeting as guidance.

    Economic data was middling at the time, although it would be later determined that a recession began that month. But in the seven trading days prior to the meeting, the Dow had fallen 900 points, or 8%, boosting expectations the Fed would cut the funds rate 0.75 percentage points.

    Mr. Greenspan told his colleagues that day: “It is important that the Federal Reserve not follow a flawed strategy. I fear that with a reduction of 75 basis points or even 100 basis points today, which as you know a number of people are suggesting, stock prices could still fall, leading too many observers to conclude that monetary policy is ineffective. This is a potentially dangerous view in my mind especially among the broad array of those who do not participate in the equity markets. If we do 50 basis points and stock prices fall further, as they well might today, it is the central bankers who may be perceived as intellectually inadequate, not policy itself. This is far less dangerous to the economy!”

    He was right. The Fed cut by half a point and stocks promptly fell; the Dow sank 238 points that day and another 331 over the next two days. “Rate-Cut Disappointment Sparks a Late Selloff,” was a headline in The Wall Street Journal the day after the move. “”I have no use for Greenspan and his merry band of fools,” one caller told a mutual fund company as he shifted all his savings to a money market fund.

    Stocks returned to their pre-March 20 level a few weeks later before succumbing that summer to a weakening economy, and finally the Sept. 11 terrorist attacks. The Fed cut steadily that year, including three 0.5-point intermeeting moves.

  62. scorpio commented on Jan 24

    Pavlov trained his dog, just like Cramer and Kudlow training Bernanke. in my dreams i see Cramer walking down the street, wearing a dog-fur collar to protect his show and credibility from the elements. made from Bernanke’s hide.

  63. BB commented on Jan 24


    conforming loan limits being raised for 1 year. From $417,000 to $625,500. This is interesting…

  64. Steve Barry commented on Jan 24

    The fed should not set interest rates…the concept is good in theory, but will never work better than having the free market do it. What do you think of that free market Larry?

    As for fiscal policy…print up 150 Billion and tell people to spend it. And this will help us create wealth?

  65. Joe commented on Jan 24


    Change your panties, the ones you are wearing are soaked…

  66. Peter Davis commented on Jan 24

    In all, I agree that the Fed’s move smacks both of panic and its true motives for the last 20 years: propping up the U.S. asset bubble. I don’t agree with some of the comments that have argued that this cut was necessary to prevent a meltdown of the municipal bond market. This – and the entire credit market problems – is not a liquidity problem; it is a solvency and a confidence problem.

    Quite simply, many of these institutions are at risk of insolvency as the result of terrible loan practices, excessive leverage and risky derivative structures. Regardless of how cheap money is, these institutions are going to find it extremely difficult to get loans if their creditors have no confidence of getting their money back. And considering the continued opacity of the shadow banking system, in which counterparties simply do not know enough about each others’ exposures, the confidence necessary to unfreeze the credit markets is unlikely to return any time soon.

    Cutting rates is a blunt instrument tool. What is needed is a much more innovative and aggressive approach towards addressing the risk of systemic financial crisis. I’m not an economist, but I am a realist. And reality tells me that in a country run by politicians who would much rather talk than do, I have little faith in any government-led intervention.

    One more point: the folks at Elliott Wave (www.elliottwave.com) have written for some time how the Fed Funds rate always follows the rate of the freely-traded 90-day T-Bill. They’ve even posted a chart that illustrates just that. With the 90-day trading over 100 bps below the current Fed Funds rate of 3.50%, you can bet your bottom dollar, there’s more coming.

  67. Norman commented on Jan 24

    BR: Forget about the trader in France, that’s peanuts compared to what is going on.

    The market is setting the 13 week T-Bill rate at 2.27% with Fed Funds at 3.50% going to 3.00% next week and still not low enough. This tells us how worried everyone is, not just a French bank or two, as the world is plunging into the highest rated paper in the world.

    Also, remember since those derviatives are basically a zero-sum game lots of folks out there are $5B richer. The money just went from one coffer to another, some would say back to its rightful owners (I wish it was me!).

  68. Peter Davis commented on Jan 24

    In responses to Ross’ post that the markets have become casinos, I disagree. For someone who’s been involved in the markets for a long time, it may seem this way, but I believe that the same patterns of hope, greed, fear and panic that have manifested themselves for years and years continue to do so today.

    What has changed is the structure of the markets. The explosion of computerized trading and the introduction of new markets has, in my opinion, created periods of tremendous volatility. While some of the methods and strategies which have worked in the past may no longer be profitable, I believe that is simply due to the constantly fluid nature of the markets.

    The complexity of the markets has certainly increased exponentially, but the underlying forces driving it – human psychology – remain the same. As Richard Dennis once said: “Markets change. People don’t.”

  69. ECONOMISTA NON GRATA commented on Jan 24

    Come on guys, there’s way too much whining in these comments.

    Welcome to reality. The privilege of the rich is to have the ability to buy influence. Why else would I want to be rich? Don’t all of you want to be rich? Oh! I see….. You want to be rich and fair…. That’s a NO-CAN-DO buddy!

    What we have here today is not anyone’s fault, it is everyone’s fault. The prisoner’s dilemma collectively got hold of all of us. Consumers, Corporations and Government. We have been living beyond our means and it’s time to pay the piper.

    This is one party where I’m not going to pick up the tab. That, I can assure you of and you can rate that assurance AAA.


  70. zao commented on Jan 24

    Fed Official admits they did not know about SocGen loss before rate cut. Translation – “we screwed up. Don’t expect a rate cut on Tuesday.” Do you think the market takes the hint?

  71. jkw commented on Jan 24

    I just checked and oil is up $1.70, gold is up $26 and silver is up .40. The dollar is down .62 and might close at its lowest rate this year.

    Gold and silver are mostly worthless and irrelevant. Look at agricultural and energy commodities. Both have been falling for the past month and continued down after the Fed cut. Inflation is best forecast by the agricultural and energy futures (unless you just want to look at core inflation).

    This week, the dollar has moved within its expected volatility envelope. It is up about 1% since the end of last week (when US markets were last open before the Fed cut), but is staying within the range it has traded in since mid-November. The dollar is not falling relative to the Euro, it is merely fluctuating in value. A falling dollar requires a range breakout.

    Really? Inflation in the US economy is elevated at multi-decade highs. US producer prices were up +6.3% last year, and US consumer prices up +4.1%, the highest in 17-years, compared with +2.5% for 2006. Gasoline costs were up 37%, and food prices were up 9.3% last year.

    Again, look at what the futures contracts did last year. You are looking at what inflation was, not what it is or what it will be. The futures contracts for most agricultural products just about doubled last year. And in the past month, they have dropped about 10%. Inflation has been killed, although it will take another 6 months before these price drops make it into the CPI. The agricultural commodities are still below what they were last Friday. Oil dropped most of this week and then recovered today, but is still below last weeks closing price. These are not the price patterns you would get if the Fed were pumping up inflation.

  72. M1EK commented on Jan 24

    D.H., if you’re going to keep citing the Great Depression, it might help if you understood the conditions more – most Americans did NOT “grow their own food” then – there certainly were a much larger percentage of people involved in agriculture, but it didn’t remotely approach 50%.

    Farm residents in 1930 put at 21% here.

  73. Don commented on Jan 24

    Y’all quit beating up on my beloved stock markets. They can’t help their manic-depressed behavior.

    Think of them like a collateralized debt obligation–putting a bunch of BBB paper together does not make AAA, good as US treasury, paper, no matter how good the financial alchemist.

    According to Spinoza–my favorite dead philosopher–hope and euphoria are just the flip side of panic and fear, all of which are inadequate emotions to which we humans remain enslaved so long as we reject God, or pure logic and rationality. Were he alive today (he lived in the 1600’s), I think he would have looked at this market for blips on a computer screen that in turn represent slivers of illusory income streams, and point out the folly of trying to impart any rationality to it whatsoever.

    How could it possibly be rational when so many of its participants are in bondage to their emotions? Collectively, the stock market is the essence of irrationality, and it can’t help it. Leave it alone…

  74. ef commented on Jan 24

    Nice robust system of checks and balances… Not!

    Great system — “And he did it in a way that meant he removed all trace of what he was doing.”

    New kind of terrorism? Economic terrorism. Stock market terrorism. — “losses were blamed for bringing the world’s financial markets to their knees this week by triggering the global collapse in stocks.”

    Pending dismissal? Not arrested? — “Mr Kerviel has been suspended pending dismissal..”

    Trial run? Because he could? Management culture? — “don’t know the person and his motives”

    An accident is “bad luck”. This was not an accident. It was ineptitude or apathy. Poor security, failure to know your systems, maintain them, improve them, is bad leadership. — “This is just bad luck…

  75. Auto Mechanic Guy commented on Jan 24

    They didn’t know about the Soc Gen thing…for real? So everything is global but the rumor mill…not.

    Tricky Trichet is even trickier than we thought.

  76. JohnR commented on Jan 24

    I agree with your Barry. There is not a millimeter of separation from the Federal Reserve Bank (supposedly a public institution worried about rising unemployment and rising inflation) and oligopoly private financial system. The U.S. private financial system (intertwined retail banks, brokerages, investment firms, and real estate funds) that it might as well become one central bank.

    The next step is to nationalize these large private U.S. banks–which are now down to maybe six of any size–and be done with it.
    If China’s sovereign fund ends up controlling Citibank for example, we already have a nationalized U.S. bank controlled by a foreign (and possibly hostile) government.

    Why allow these hack bankers to squeeze the consumer, misinvest funds, take outrageous salaries and bonuses, and then, owing to the incompetence and greed, pass the ‘lemons’ onto the State for a bail out.

    As Walter Reuther the U.S. auto union leader once said, “the great American free enterprise system is neither free nor enterprising.”

  77. D.H. commented on Jan 24


    Thanks for the Google University stat. I am happy to stand corrected given that I took a break from work to contribute …

    Do note: I am not talking about how many Farm Residents there were, I am talking about how people still grew some of their own food in their backyard. I apologize for the generalization, if you have evidence that our society today looks eerily similar to that of the Great Depression, please feel free to provide a citation. I will be happy to learn something new. My grandfather was old when he explained it to me. Maybe he had a memory lapse regarding the poor people with cable TV, cellphones, and McDonald’s.

    But if you want to split hairs about the exact number of people who grew some of their own food, you can have the whole hair. I am confident that my point (i.e., industrial and technological resources have come a long way since 1930) is common knowledge. And I am only discussing the Depression because I am trying to distinguish it for all the people who think it is reemerging this year. I would much rather hear opinions (including yours) about what investments will be winners in this environment. The rest is only worth 0.02 …

  78. sk commented on Jan 24

    Since the Fed says repeatedly that it is guided by information and that it regards oil longer term futures, S&P futures, treasuries prices, Fed Fund futures on a day to day or even a month to month basis as accurate information ( cf many Fed statements, speeches ) then they are going to be gamed by the traders ( just the word traders should cue them, but if not they should read up about how Enron traders gamed the newly deregulation electricity market in Cali ) or fall victim to accidental, “black swan” event, which is what the SG fiasco is.

    The naive fools – and if they compound it by continuing on the part of further rates this coming Wed. – to demonstrate that they weren’t fooled – as they probably will, then we will all suffer even further.

    Got Euro ? Or Swiss Franc, Aussie $, Swedish , Norwegian kroner or ag commodities or gold or silver ?


  79. DaveW commented on Jan 24

    I have enjoyed so many interesting comments on this blog and fear exposing my own ignorance but my perspective may be useful to someone. I am a “doom & gloomer” from way back, so beware, but not from any financial knowledge or incite but as a student of sustainability. Simply put we have a system that’s growth depends on over consumption in a limited world. It simply has to end eventually but no one knows when or how. The signs do not look good these days – the engine is getting older (baby boomers, infrastructure) and the replacements are a bit spoiled and weak, the load is much greater (social security, taxes, climate change, security, energy, health …), the system is unstable and the reserves (savings) have been used up (or even negative as we are borrowed to the hilt from our enemies). We placate our national debt by measuring it in terms of % of our theoretical output. This output is an ever increasing number even though our jobs have shifted to lower value services and manufacturing goes elsewhere. Even as our consumer spending is shifted to borrowed money and a lot of industrial investment is out of this country it continues to rise. From my very limited vantage point we are sinking and reality is being manipulated.

    One real data point: in the land of oil & Ag (Oklahoma) a man bought a truck recently on credit that after driving /owning the truck for 30 days was informed that the financing did not go through and was asked to return the vehicle (rather strange). If buying a truck on credit in the oil patch in the middle of an energy boom is difficult then think how easy refinancing houses in a real estate crash is going to be. This is probably what the Fed is worried about but not because some Okie can’t buy a truck but because a global financial system is in crisis and we are the world’s financial back bone (heaven help us).

    Blaming anyone in particular is of little value as we probably all contributed in some way to this mess and changing things for the better will only prolong the bust (although orderly would be better than a crash). So even though I am a little more pessimistic than usual about the near term I am more hopeful than ever that a new day will dawn where a simpler more sustainable culture will arise and where the stock market actually does its job of distributing financial resources to deserving efforts rather than getting rich off transactions or market direction bets(my simpleton view).

    Good blog – Engineer want-a-be farmer Dave

  80. jj commented on Jan 24

    Here’s a rough estimate on the size of “Evil” Kerviel’s positions:

    60,000 DAX futures and
    400,000 Eurostoxx50 futures

    You have to slosh around hundreds of millions of euros every day in mtm to keep this going

  81. ac commented on Jan 24

    We are probably at the end of the Fed rate cuts, I can see 1 or 2 more cuts, but 300bp will be the lowest it will go. I suspect rate rises are due for later in 08.
    1.The Financial system is getting better as credit tightens
    2.Alot of the excess in the markets have been thrown gotten out. Granted we still have a bunch more to go through, but getting this much out has been important
    3.Inertia doesn’t suggest recession, it takes time.

    Lets understand guys, this expansion is very similiar to the 80’s. Between 1983-86, credit expanded wildly and the economy recovered as the economy fully recovered from the recession. Between 87-89, financial problems began due to the credit excesses called the ‘SnL’ crisis. Economic growth sans the robust 1988, was sluggish. The economy showed strong signs of recession since mid-89 as defense spending starting declining and the decadal manufacturing recession began over all sectors.

    Similiarly, residential investment peeked in 1986 and declined for 3 years to 1989. Starting to sound similiar?

    1.Basically, credit is still way to available and has only been tightening for a year now. It takes YEARS for credit tightening to make its way through to impact businesses and consumers
    2.Defense spending and decadal manufacturing recessions are still 18 months before contraction begins.
    3.Business spending still is 18-30 months before major contraction interest rates rise into 2009.
    4.Consumers, while have peaked this decade, still have available credit to borrow to continue spending.

    That means no recession to 2009-10. Though, residential investment and the housing bust seem to indicate it could be a doozy. I don’t see a bottom to housing to about 2010-11.

  82. michael schumacher commented on Jan 24

    To further the above comment on what we are supposed to believe happened at SG.

    THere is no firm in the WORLD that would not know it had that amount of exposure hanging out to dry each and every day.

    No way in hell……This is yet another spun story to protect the lack of risk management in a system that prides itself on self-regulation.

    Fuck me and the rest of us because if that is true then why don’t we just get Fannie and Freddie to bury all these bad losses (as someone taps my shoulder) in it’s own books.

    Oh yea…they just did that…

    God help us all……..who have more than 15-20 years left in our lives.


  83. brazilian outsider commented on Jan 24


    I told you guys not to panic, because everything was cheap. Did you guys buy Brazilian equities? Local stock exchange up like 6% today.

    Anyway, I’m not so optimistic coming next weeks. Maybe a bailout on insurers could put my hopes back up, but the rogue trader history is PATHETIC. They all had us fooled, and the FED knew it. I’m really glad that the media is not ignoring it and now going after the FED for the irresponsible action.

    FED is gonna keep rates unchanged next week and stocks are set for doom. Dow at 11.000 I might think of buying again.

    Barry, do not let them get away with it! The FED has to pay for this pathetic move.

    BTW: Bill Gross is king, he was the first to say that the FED move was a sad testament and it indeed was.

  84. Pat Gorup commented on Jan 24

    To Terrence Patton

    Okay you asked, sorry for the delay.

    “Nevertheless, why punish the masses at the expense of the criminal few?”
    The masses also participated in one form of fashion or another through credit, stock and house appreciation didn’t they?

    “A chilling combination of smugness and morality resulting in a world depression.”
    Deflation is often associated with The Great Depression which of course was a terrible circumstance to have lived through. It should be noted that normal cycles of deflation don’t always correspond with periods of poor economic growth historically. I think that deflation is being misconstrued with temporarily falling prices (like in housing) when in fact the definition is a sustained fall in general prices (i.e. wages, consumable goods and services). When was the last time you experienced lower prices for food, oil changes or doctor’s visits?

    “What would you have the Fed do?”
    The Fed existed before the 1920’s which led up to The Great Depression. At the time there was widespread use of purchases of businesses and factories using credit and the use of home mortgages for credit purchases of automobiles, furniture and stocks. Does this sound familiar?

    Given their historical record would you trust the FED to do the right thing because they have your best interests in mind and are competent? The credit, housing and stock markets will not crash, they’ll just deflate. Will it hurt? Absolutely. But if the government keeps intervening it will only make things worse for a longer time.

  85. The Big Picture commented on Jan 24

    Fed: We didn’t know about SocGen trades

    As we suspected earlier today: The Federal Reserve was not aware that Societe Generale was unwinding trades in Europe on Monday that had been amassed by a rogue trader at the firm, a Fed source said Thursday. The unwinding presumably didn’t help turmoi…

  86. J.R. commented on Jan 24

    Hmmm… maybe I’m naive, but suspect the impact on stock price is something of a side effect. My sense is that Bernanke is trying very hard to avoid a meltdown now (and for the next month or three) for the purpose of giving banks and financials a better chance to work through their questionable assets and free up some liquidity. I just don’t quite buy this idea that it’s all about the market. It is at this moment, but only as a proxy for investor confidence. He has to keep the market on an even keel or else companies and people will lock up their cash even tighter, turning a possible recession into a depression. Financial instruments will get marked to a non-existent market, and ‘poof’ there goes another several hundred billion dollars of shareholder equity, and several institutions collapsing, when a more stable environment would allow many/most of the at-risk companies to squeak by. If every person and institution in the US were not hoarding cash right now, I suspect rates would be much higher. But heck, I gotta run, time to refinance my (fixed rate) mortgage!

  87. Ryan commented on Jan 24

    D.H. and a few others said that the United States is not Zimbabwe and that’s entirely correct. However, Merrill Lynch is forecasting a nationwide 30% decline in housing prices. Considering that most of people’s net worth is in their homes, I don’t know if ANY economy in the history of the world could survive that. A 30% nationwide decline in housing prices would make the dot-com crash look like a picnic on a sunny day. With the fed reacting quickly, I think the probability of outright Depression has fallen somewhat but that does not chance the fact that there are SERIOUS problems in the economy and the 1929 scenario cannot be ruled out.

  88. bt commented on Jan 24

    Assuming the Fed cut to prop up stock prices, and assuming major indexes add another percent or two between here and fed meeting, should the Fed stay steady?

    Fed can’t afford to do that because rate cuts of 50 to 75 bps are already built into expectations (fed fund futures?). Like it or not (and I don’t like it), fact is Fed won’t do anything to upset the stock market.

    Reminds me of the sick patient who needs his steady dose of steroids just to show a pulse. Sad that the Fed has brought us to this.

    If only they refused to bail out LTCM and banks that lent margin for LTCM’s fail proof schemes, the world’s speculators would have been forced to take their lumps and take a saner approach to RISK. Instead, Fed now gets to manage RISK while the REWARD is completely assigned to the reckless speculators.

  89. bt commented on Jan 24

    Looks like a bug in the script. All text is automatically rendered in bold.

    Perhaps a sign that the bears have grown bold ;-)

  90. Shane commented on Jan 24


    In trying to re-educate people about the systematic problems we have in this country it is useful to define some terms.

    Inflation, contrary to popular belief is an increase in the MONEY SUPPLY, not increase in prices (M3 . . .funny how they no longer produce M3). Rising prices are the RESULT of inflation, not inflation itself.

    Don’t believe me . . . go look it up in a 1983 Webster’s dictionary. For some quirky reason (maybe so the masses can’t understand the problem), sometime in the late 80s, early 90s, dictionaries changed the term to say an increase in prices—absolutely false.

    When the monetary supply is increased . . . either through fractional reserve banking, the FED injecting liquidity into the market, or through lowering interest rates (causing more banks to borrow) . . . it does not inject itself into the economic system symmetrically. It will flow to the path of least resistance (sorry as an electrical engineer, I like using circuits). What is the path of least resistance?? Well, it’s most likely going to be the current “boom” area.

    Let’s give an example. If stocks are through natural growth going up at 10% YOY, and real estate, bonds, commodities are lagging at 2% natural growth, an injection of money will most likely go to the stock market. This of course in turn pushes stock prices higher and higher. Eventually, it blows off and the market crashes. This is precisely what happened from 01-05, but in housing. Housing already in a boom phase, got knocked into another gear by an injection of money supply through low interest rates. Why was anyone with a pulse getting a loan, not just b/c of loose standards, but b/c money was so insanely cheap, thus promoting price increases.

    This is why the deflation argument is completely wrong. Let’s say you have an average true inflation, M3, at ~9% a year over the past 8 years. Over 8 years you’ve had an 99% increase in inflation. Let’s say then for the next 2 years we have M3 destruction at 10%. After 2 years of M3 destruction you will still be up 63% over 10 years, yielding about 5% inflation over 10 years.

    Also contrary to popular belief, the effects of inflation (price increase) are asymmetrically. You can have inflation effects in stocks, real estate, and commodities.

    Inflation effects in wages and commodities are the LAST thing to happen. Funny, no one complains when inflation effects go into stocks, or real estate. But boy do people get bend out of shape when inflation effects show up in commodities, and they get even more bent out of shape when it happens in wages (remember price/wage controls of the 70s). Inflation effects in housing took about 4 years . . . yet it will take prob. 10 years of wage increases to finally get back to the same ratio before 4 years of inflation effects in housing. Eventually the effects of inflated stocks/houses will have an impact on commodities/wages, but it takes time before that happens.

    Yes we are now a debtor nation . . . how did we get to this point (50+ years ago we were the leading CREDITOR nation in the world). We are the leading debtor nation b/c over the past 50 years (especially the last 30) we have pursued a monetary policy which punishes savers and rewards debtors (inflation).

    Yes inflation causes CURRENT debt to shrink . . . but it also causes people to take out MORE FUTURE DEBT. What incentive does a society have to stay out of debt when it will just be “inflated away”?

    So we are trying to solve the problem of inflation (or the effects of it) by inflating. Completely circular!

    We’ve had M3 growth at about 6% from ’03-05 and then growing up to 15% in ’07. Why haven’t we seen 6-15% rise in the CPI. It is not symmetrical. Some of that money gets shipped overseas to foreign banks, some to iraq, some to illegals and south american countries. You want to see inflation . . . look at the dollar down ~13% YOY.

    So we have M3 GROWTH (not destruction) of 15% in ’07 and we lower interest rates, thus spurring more M3 growth???

    As far as sharing the pain and as we all shared the prosperity . . . that’s utter nonsense. Not everyone benefited from higher stock prices, or higher real estate, and not everyone will suffer from higher commodity prices (tell that to futures traders, like me, and mining companies).

    You’re right we’re not Zimbabwe . . . but we don’t have to be for this to get REAL UGLY (70s anyone). I won’t be surprised to see the game go on. The world still supports our system b/c it works for them right now.

    Whether it goes on now doesn’t really matter b/c it is doomed to fail. It is an inherent flaw in our monetary policy, and at some point it will fall.

    Whether that’s today or 30 years from now is anyone’s guess, but fail it will unless we change the system.

    p.s. I thank my lucky stars that we do not live in a democracy/mobocracy (not yet anyways,but getting closer all the time), it’s called a Republic (learn some US history)—rule by law, the Founder’s specifically didn’t want a democracy b/c it tramples on the rights of the minority.

  91. Pat Gorup commented on Jan 24

    jkw said; “Gold and silver are mostly worthless and irrelevant.”

    An investor who arbitrarily dismisses an entire asset class is not accessing all of their options.

    jkw said; “Again, look at what the futures contracts did last year. You are looking at what inflation was, not what it is or what it will be.”

    For my answer to this, please refer to Shane’s post above. No need to be redundant.

  92. Aaron commented on Jan 24

    In reality there are very few people who are blaming Greenspan for this when as you say, he deserves plenty of blame. Bernanke cannot possibly please everyone at this point.

  93. Winston Munn commented on Jan 24

    Shane and Pat Gorup,

    You are both missing an important aspect of inflation and the current problem.

    Debt acts just like money-stock except in episodes of insolvency. Hyperinflation has already occured – $10 Trillion in U.S. national debt has been monetized throughout the world. The Fed has not been forced to buy all those treasuries – the world has bought them. The hyperinflation has been dispersed among all those foreign countries who monetized our debts.

    If we have not had to monetize our debts here, then what is the source of U.S. inflation? Very simply it is debt – but not the debt we are accustomed to seeing. It is debt whose only underlying asset is more debt and declining-valued assets.

    Shane is right about the flow – but this flow has not been a capital flow but a flow of leverage. Debt chasing the returns needed to service the debt.

    The collapse of this pyramid would be a deflationary holocaust – not hyperinflation. And the catalyst for the collapse would be insolvency.

    The only threat for hyperinflation would be if the world as one stopped buying U.S. treasuries, forcing the Fed to monetize that debt here in the good old U.S.A.

    That is not a genuine concern.

  94. bold be gone commented on Jan 24

    Please sentence, don’t be bold.

  95. x commented on Jan 24

    bold is gone?

  96. Shane commented on Jan 24

    You’ve got some good points, but . . .

    “The collapse of this pyramid would be a deflationary holocaust – not hyperinflation. And the catalyst for the collapse would be insolvency.”

    You named it, it is a pyramid . . . it is UNSUSTAINABLE in the long run.

    “The only threat for hyperinflation would be if the world as one stopped buying U.S. treasuries, forcing the Fed to monetize that debt here in the good old U.S.A.

    That is not a genuine concern.”

    Ah maybe right this moment it’s not. However, China has threatened to get off the dollar peg, it has moved more of it’s funds into gold. The world can change very quickly. Why should the US put itself in a position where if the world turns, we are toast.

    At some point the world will wake up and realize we have sold them all our inflation, it will come home to roost!

    I’m also quite sure that Britain felt the same way we do at the beginning of the 20th century. The Great Depression was in good part was caused by the U.S. trying to prop up Britain’s faltering economic system (by lowering our interest rates in the 20s). Some similarities between us and China.

    Britain was the undisputed world power . . . oh how 30 years made a big difference.

    You’re solution (and the US governments too) to the problem is to postpone the day of reckoning. By doing so, it only makes the eventual collapse that much worse.

    You cannot solve the problem of inflation with more inflation! Cut off the spigot!

    Yes we might have TEMPORARY declines in prices. This can actually be VERY GOOD. Look at the housing market, declining prices can be very good, it allows people priced out to get into the market. It balances out the imbalances.

    CPI deflation is not as bad and the media makes it out to be. Before the FED, we had deflation and inflation . . . sometimes -1%, sometimes +3%. But over the long run the CPI was flat! (for almost 100 years!!!) Compare that to the CPI after the FED. The dollar today is worth ~.08 cents of 1913!!

    So this fear of deflation is absolute trash!

  97. Todd commented on Jan 24

    Being that this blog is called The Big Picture, I want to say that my view of the big picture is that the Fed caved into the pressure (which comes at no surprise) and they are simply kicking this disastrous can a little further on down the road. Eventually, the shit is going to hit the fan and Bernanke’s delaying it will not just make it worse but will also make it all the more inevitable.

    DH wrote, and I agree completely with the following: “We are a fully industrialized society (C.f. 1930) and the world is still in transition to becoming fully industrialized as well. This alone supports a long term (i.e., longer than our lifespan) economic growth trend with MANY up and down cycles along the way.”

    The REAL problem in what I see as the big picture is inflation and not depression because of the above said global economic growth, and while I think hyperinflation a la Zimbabwe is quite an exaggeration, I do believe inflation like we saw in the 1970’s is quite possible and indeed quite scary. The irresponsibility of Fed policy to bring rates down to below 3%, as the market fully expects next week, in the face of a collapsing dollar, soaring commodities and soaring budget deficits is breathtaking to me.

    Big picture last 6 years in commodities:

    Crude oil from $25 to $100/barrel.
    Gold from $270 to $900

    The Goldman Sachs Commodity Index has gone from 170 in Jan 2002 to 597 today, up some 350% in 6 years. More importantly though, inflation in the GSCI in the last year has rapidly accelerated !! In Jan 2007, the GSCI was 420 and moved in one year to as high as 625, with today’s close at 597. So, in just one year that’s 50% accleration.

    The spectre of the late 70’s awaits us where inflation spirals to double digits, combined with a collapsing dollar, collapsing bond prices and collapsing equity prices. At the same time, we will have staggering national debt and politicians that lack the courage to make the painful policy changes in domestic and foreign policy to positively impact these disastrous national fundamentals.

    Unfortunately, I really am starting to view this as more of a probability than a possibility. I won’t declare it yet an inevitablility, but I’m not all that far from that view.

    And, that’s my big picture view. Call me the anti-Kudlow. But hey Larry, I’m not a pessimist; rather, I’m a realist.

  98. Terrence Patton commented on Jan 24

    To Pat Gorup:

    Thanks for your enlightened reply. My point is that the Fed was obsessed with inflation going deep in to 1931. They didn’t cut, they didn’t do jack. There was a general shadenfreud with respect to players and institutions getting their comeupances and a deluded dogmatic morality governing their decisions that prevented them from cutting. Yet, you bring up persuasive points. I’m getting confused!!

  99. D.H. commented on Jan 24

    We are already following in Britain’s footsteps (who followed those of the great Iberian, who followed the Romans, who followed the Greeks, who followed …). The Brits seem to be doing fine. I like Britain. I also like Spain and Portugal, Italy, and Greece. Seems like things have a way of working out OK …

  100. Winston Munn commented on Jan 25

    Shane wrote, “So this fear of deflation is absolute trash!”

    Please don’t place me in the camp of Fed supporters – if so, you misunderstand my position. I am adamently opposed to the monetary system we use – I just don’t know how to solve the problem without a virtual collapse, though.

    The inflation/deflation debate is certainly timely and interesting. I do not argue with your position that there has been significant inflation – as you point out.

    What I see is based on forward events – I hate to call it risk as I am not inclined to say deflation is a risk. Hard to explain this, but deflation is what I see as the end result of our situation, but a non-catastrophic bout with deflation would actually be beneficial – needed, in fact.

    Let me point out where the inflation argument breaks down – at the lender.
    The Fed can lower its target rate, but it cannot force banks to change lending standards. Sure, there is a lot of cheap money available, but unless you are AAA rated, the banks are unwilling to lend it.

    Why? The securitization process has come unwound. The loans cannot be peddled to the highest bidder. Banks must hold these loans, and they aren’t going make risky loans with t-h-e-i-r money.

    Banks who aren’t in trouble are flush with cash, but they are unwilling to lend, yet they are paying interest on this money so they have to have a return, and they do what they must, stick it into treasuries, driving treasury prices up and yields down.

    With no borrowing going on, credit contracts over time – as the economy is 100% dependent upon credit expansion for it to expand, the economy contracts.

    Banks hoarding cash, unwilling to lend, tight lending stardards, falling home prices, super low bond yields – how can that be construed as an inflationary scenario?

    Pockets of atypical inflation are still in place, no doubt, but time will pop those expectations, as well.

    And finally, if you believe that ultra low rates always lead to inflation, consider Japan and their decade long bout with deflation – and before the deflation set in, asset values had skyrocketed, especially real estate.

    I do grant this about the debate – if the Fed does prevent deflation, then what follows will be inflation; however, I do not think the Fed can stop this party from winding to a close.

    Thanks for the dialogue and discussion.

  101. Pat Gorup commented on Jan 25


    The FED couldn’t cut in 1930 because the dollar was pegged to gold. Hey but they fixed that in 1971. Aren’t we better off now? lol

    Winston, I have to agree with Shane as we see it the same way. I guess in the long run we’ll find out who was right. I actually hope its you because I’m a saver and my assets will have greater purchasing power in a recession. But because I think that inflation is the greater threat I only invest in the most liquid of assets (metals and currency). No stocks or bonds. Good night all.

  102. Fred commented on Jan 25

    Ross above seems to hint at this:

    Lone Soc Gen rogue trader lost $7-8 Bill – bull f***ing shit! Perhaps he lost something, but I say the bank lost most of it like all the others of late. Makes a nice scape goat though, perhaps even a willing one who will be famous.

  103. doc commented on Jan 25

    Money Market Mutual Fund Assets
    January 24, 2008


    etail: Assets of retail money market funds increased by $12.09 billion to $1.196 trillion. Taxable money market fund assets in the retail category increased by $13.06 billion to $906.85 billion, and tax-exempt fund assets decreased by $975 million to $289.49 billion.

    Institutional: Assets of institutional money market funds increased by $52.33 billion to $2.055 trillion. Among institutional funds, taxable money market fund assets increased by $52.16 billion to $1.873 trillion, and tax-exempt fund assets increased by $177 million to $182.36 billion.

  104. The Big Picture commented on Jan 25

    Read it here first: Fed Responding to Stocks?

    Read it here first: the latest meme making the rounds is whether Tuesday’s emergency Fed action was a Rogue rate Cut. In other words, is the Fed too sensitive to falling equity prices? From today’s WSJ:Federal Reserve Chairman Ben Bernanke faces a perc…

  105. Tom commented on Jan 26

    If BEN shoots his wad, he’ll only have blanks remaining and then really be up s**t creek without a paddle.

  106. Tom commented on Jan 26

    Pay me now or pay me later:

    Recession now or Depression in 2010.

Read this next.

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