In reading about recent events, I share the bewilderment of the central character of The Gods Must be Crazy. In this 1980 movie comedy, the central character, N!xau, embarks on an odyssey filled with adventure when he leaves his primitive native village in order to remove a coke bottle that has destroyed the tranquility of the village. That is, the village elders recognize that the coke bottle has unleashed selfish motivations among the natives who argue over the right of possessing this “treasured object.” To restore traditional tranquility the village elders, order the central character to take the coke bottle to the “end of the earth” in order to remove its evil influence. The audience is amused by N!xau reaction to the assortment of characters, customs, and artifacts of the civilized world.

 

Why do N!xau and I seem lost and think that that the Financial “Gods” have gone crazy?

 

Although I have worked on Wall Street since 1969, I feel that I have left the “sanity” village of Wall Street. I am now stumbling around somewhere in the desert. In essence, all the conventions that I have patiently learned for some 40 years seem to have been thrown out the window. In essence, I am absolutely bewildered by the financial decisions of the major players in our government and business community.

 

Why Would the Federal Reserve Continue to Cut Interest Rates?

 

The willingness of the Federal Reserve to add “fuel to the fire” seems most unsettling. That is, the Chairman of the Federal Reserve testified before Congress in his semiannual appearance that his easing policies might be generating significant inflationary pressures and undermining confidence in the United States financial credibility. In a nutshell, further Federal Reserve easing could literally being “pushing a string.”

 

The prevalent world concerns about the outlook for the United States economy are expressed in the following: Gold, oil, and the Eurodollar are trading at historically high trading ranges. In fact, the desire for tangible assets has led to the sharp rise of many commodities such as copper, coffee, wheat, and cocoa. So far, this year, natural gas prices are up 26%, coal is up 56%, platinum is up 41%, wheat is up 32% and cocoa is up 38%. Moreover, despite Federal Funds dropping from 5.25% to 3%, economic activity projections continue to decline. Housing prices and housing activity remained mired. Business investments are declining.  Consumer spending has slowed significantly in large part due to their onerous carrying charges, some 14% of disposable net income, for home mortgages and credit card debt.

 

Why would Federal Regulators eliminate the limits on the amount of loans and securities that FNMA and Freddie Mac can own?

 

FNMA and Freddie Mac have sustained record losses because of the declining value of their holdings of current investments, mortgages, and derivative products. Thus, one should be suspicious that encouraging these “toxic baskets” to increase their principal exposures seems counter productive. That is, if an institution faces on-going losses from the declining value of their assets it seems foolhardy to encourage further speculation.

 

Why would Citigroup let one person speculate recklessly given their mammoth write-downs?

 

Despite write downs of $20 billion dollars in 2007, and losing $100 million dollars on 15 separate trading days, Citigroup has failed to implement legitimate trading monitors and controls. Moreover, despite Ben Bernanke’s comments that the Federal Reserve is carefully monitoring the commercial banks, both the Federal Reserve and Citigroup are treating a “rogue” trader with “benign neglect.” Those who do not study history are bound to repeat its mistakes!

 

One Citigroup trader, Andrew Hall, made such huge bets last year that he accounted for 10% of the total net income of Citigroup. Mr. Hall who operates out of a former dairy farm in Westport, Connecticut made outsized bets that oil and natural gas prices would sky rocket. His deportment reflects hubris that even the Greeks detested. That is, he has ploughed over $100 million into the purchases of the riskiest part of the art market; that is, the art market of living painters and sculptors. Interestingly enough, hubris—exaggerated self pride, arrogance or overbearing pride—was considered the greatest sin of the ancient Greek world. My forty-year Wall Street experience is that “letting anybody trade unfettered is a “one-way ticket to disaster.” No trader has ever made profits continuously. In fact, Mr. Hall lost money from 1991-1993.

 

An anonymous source within Citigroup said that they were treating Mr. Hall with “benign neglect.” When Mr. Hall starts losing money, I hope that the entire board of directors of Citigroup “walks the plank.”

 

Frankly, given that Citigroup had close to $20 billion of write-downs in 2007, a cynic would ask whether that their unlimited backing of Mr. Hall will not eventually turn into a nightmare. I would argue that “certainly Citigroup” has gone crazy to allow one person out of 300,000 employees to deploy so much capital. Moreover, Mr. Hall’s recent indications that he is considering forming his own firm confirm my concerns that Citigroup is going down a “Lose-Lose” strategy. On one side, Mr. Hall could literally “blow up” and on the other side, Mr. Hall could just “take a walk.” Stated differently, Citigroup has lost billions of dollars because they have failed to impose legitimate risk-control mechanisms. Their admitted losses of more than $100 million dollars on fifteen separate days reflect a “broken system.” 

Why would foreign central banks continue to hold U.S. dollars in general, and United States long term debt in particular?

 

The short answer is that they will not for long continue to absorb our $800 billion trade deficit tacitly. Furthermore, the thought that “we can be tough with foreign sovereign funds” who want to invest in United States companies and real estate is counter-intuitive. Who ever heard of a debtor imposing terms on a creditor?