Did the Feds Screw Up? Again?

by Florida's #1 Mortgage Planner on January 25, 2008

Bernanke Praying His Mistakes Don't Haunt Him In my post over at Agent Genius, Have Bernanke and Buddies Gone Bonkers?, I talked about the Fed screwing up and looking to appease the stock markets more than really worrying about the economy in general.  Bernanke, in a MarketWatch article yesterday, admitted they screwed up, acting based on the failure to do a complete analysis of the situation.

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.

You would think that the Fed would dig deep into why the markets moved dramatically lower worldwide, even though we (the US) were on vacation, before the Fed made a drastic, potentially fatal, action.

If the weakness in overseas stocks spilled over into the U.S. market, the wealth outlook for U.S. households would have darkened because of already dropping home prices, economists said.

What?  I guess the continued devaluation of the dollar is increasing our wealth.  The decrease in my buying power in the other countries I fly to must be my imagination.  Yeah, that’s it, I am imagining my wealth disappearing every time the Fed acts like this.

SocGen did, however, inform regulators at the Bank of France as early as Sunday, a full day the U.S. decision on the big rate cut, according to a letter that the bank’s chairman, Daniel Bouton, wrote to investors. The Financial Times reported that SocGen got permission from the central bank to postpone its announcement to allow it to unwind trades on Monday.

Why the Fed, which usually keeps in contact with the world’s central bankers, wasn’t aware of this when Bernanke held his emergency policy meeting remains an unanswered question that might dog officials in coming days.

So, there you have it.  Had the Fed done their job, they would have realized why the markets were tanking worldwide and could have stated so Tuesday instead of hitting the panic button.  Or did they really want to drop the rates now, and then again next week? 

I don’t know about you, but I have now lost what little confidence in the Fed I had left, and you know what that means (read the underlined print).  And apparently I am not the only one…

Longer-term, if the Fed was spooked into making an emergency rate cut this week on the back of what was just technical selling, it could further undermine market confidence in Bernanke.

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

I couldn’t have said it better.

Leave a Comment