Akkam’s Razor

Strangely enough, it appears that the extreme reactions in the overnight trades in Europe and Asia were not due to their fears over our (legitimately) precarious economy, but rather the moves of a single trader at Societe Generale SA was responsible for a $7 billion dollar loss [WSJ via Marc Andreson]:

Early details, including accounts from executives at the French bank, paint a picture of an ordinary trader (Jérôme Kerviel) who used extraordinary means to game the bank’s own system and hide massive unauthorized trades on stock indexes. Even as bank executives were scrambling to deal with the trail of destruction, they were at a loss to describe his motivations. Société Générale executives said that the early investigation indicated the trader didn’t earn a dime on his actions. They also said he appeared to be acting alone.

It appears that the US Fed was unaware of this.  Barry Ritholtz points out the further complications for the Federal Reserve:

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.

I suppose the good news is that everyone is paying attention to the problems, even if it is for the wrong reasons.

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