I’ll have to admit that coming to work on Tuesday was rough, knowing that the European markets had cratered while America had a session off for MLK day. There was a real sense of panic in the air among NYC finance types. Larry Kudlow at 7:32 Tuesday morning offered this, which pretty much summed up the feeling of Americans:
Take Charge, Central Bankers [Larry Kudlow]
There’s a global stock market tsunami gathering force. It may hit U.S. shores very hard this morning.
Much of this is panic over a U.S. recession threat that has yet to clearly materialize. The world sell-off also vastly overestimates loan and credit problems among international financial institutions.
In any event, world central banks should immediately reduce rates and add liquidity first thing in the morning, no matter what the time-zone.
Fed head Ben Bernanke should have cut rates 50 basis points last week. He should do it first thing this morning. Then cut rates another 50 basis points on January 30.
Importantly, central banks must work together and cut rates together. They must coordinate to avoid major financial consequences. They must show investors, financiers, and business people that they are in charge.
In this deflationary environment, plunging commodities, stocks, and credit-risk-free government bond yields are all signaling central bankers to take charge. That means lower rates and more money creation.
And Bernanke acted. And Congress and the president came together on a $150 billion stimulus package. And the Republican candidates spoke positively about the measure in last night’s debate. But … .
Yesterday America awoke to another story, one out of France, where a rogue trader at the firm Societe Generale had defrauded his employer of roughly $7 billion by hiding trades going back to 2007. Societe Generale discovered the fraud over the weekend and immediately started closing out their positions on Monday when the European markets opened (and quite possibly on the Asian markets that were already open on our Sunday night).
But guess what? Soc Gen never mentioned this to the world. There’s growing evidence that Soc Gen’s actions on Monday are what caused the European stock markets to panic, which caused our markets to panic on Tuesday, which caused our politicians to hammer out the stimulus package. And Soc Gen has admitted why they kept this secret:
The bank said it decided to unwind the positions as quickly as possible before informing investors because other banks could have taken trading positions that would have worsened the impact of the losses.
Great. Soc Gen stays in business at the expense of how many billions of dollars to the rest of the world?
Now we have a new set of questions, including: If our economy really isn’t in as bad of shape as we thought earlier this week, were our corrective actions actually the right steps?
Here’s Reuters coverage (same as the link above). An excerpt:
WASHINGTON (MarketWatch) — 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 French bank, a Fed source said Thursday.
The bank’s scramble to get out of those trades is now presumed to be a factor behind the panic sell-offs that roiled overseas markets on Monday. And those sharp declines in Europe and Asia were cited by Fed watchers as a central concern that moved the Fed to engineer an unprecedented emergency rate cut only one week before their formal meeting.
Some observers, citing Societe Generale’s sensational announcement, say the Fed’s dramatic policy remedy may have been too much too fast. That view may be one reason why the market appears to be paring back expectations of yet another half-point cut.
Fed Chairman Ben Bernanke was watching the markets closely on Monday, a government and trading holiday in the U.S., before convening a video conference call with the policy-making Federal Open Market Committee later that evening. The panel then agreed to cut its benchmark rate by three-quarters of a percentage point to 3.5%, a decision that would be announced on Tuesday morning. See full story.