Fed's Folly: Fooled by Flawed Futures?

Thursday, January 24, 2008 | 10:15 AM

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 )

Fed_fight

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


>

Sources:

Societe Generale Reports EU4.9 Billion Trading Loss
Gregory Viscusi
Bloomberg, Jan. 24 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=a8GBEB7UuuXc&

Societe Generale Hit By Fraud, Write-Downs
NICOLAS PARASIE
WSJ, January 24, 2008 9:40 a.m.
http://online.wsj.com/article/SB120115814649013033.html

Related:

Equity Derivatives House of the Year - Société Générale   
RISK, January 2008 | Volume21/No1   
http://www.risk.net/public/showPage.html?page=685494

Juicing the economy will come at a cost
Jeanne Sahadi
CNNMoney.com, January 23 2008: 4:51 PM EST
http://money.cnn.com/2008/01/23/news/economy/cost_of_stimulus/?postversion=2008012316

Thursday, January 24, 2008 | 10:15 AM | Permalink | Comments (106) | TrackBack (2)
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Listed below are links to weblogs that reference Fed's Folly: Fooled by Flawed Futures?:

» Fed: We didn't know about SocGen trades from The Big Picture
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... [Read More]

Tracked on Jan 24, 2008 6:07:47 PM

» Read it here first: Fed Responding to Stocks? from The Big Picture
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... [Read More]

Tracked on Jan 25, 2008 7:26:39 AM

Comments

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.

Posted by: zao | Jan 24, 2008 10:23:39 AM

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