Vantage Point - With KEITH COLLISTER

This week, I want to look at the danger of 'hubris', originally a Greek word that means excessive pride or arrogance.

If we again start with the sub-prime debacle in the United States, we see that a key component of the crisis was the role of the so-called 'Masters of the Universe' - meaning employees of the mortgage divisions of the major United States investment banks such as Lehman and Bear Stearns - who packaged and sold securities which they knew were substandard to less sophisticated investors, believing that as long as they passed the parcel quickly enough, they would never be affected.

The result to date is that before Tuesday's Federal Reserve interest-rate cut, the international credit markets could have been characterised as crippled international stock markets have so far remained fairly buoyant, with the U.S. market rallying strongly after the rate cut.

The concerns about the world, particularly the U.S. economy, have not changed as a result of this cut, however.

creeping crisis

The consequences of the past period of excessive liquidity will be a slow-motion, creeping crisis over the next two or three years.

Likely crisis of confidence, or 'panics' in different financial markets in aggregate may last longer than any of the financial shocks of the past two decades. The credit markets' recent turmoil is inevitably going to show up with a lag in the U.S. economy, and following a further lag, other global economies.

America's central bank interest- rate cut may help to avert a financial crisis in the U.S. and international debt market.

However, housing is likely to continue to implode and we could be at the brink of a run on the U.S. dollar as the international market starts to bet on continuing falling rates in the U.S.

However, for the moment, the bulls still have the upper hand in the international stock markets.

Interest-rate cuts are usually good for equities, the world economy outside the financial sector and U.S. housing is still in good shape, liquidity remains abundant for anything not associated with that deadly word 'credit', corporate balance sheets have low levels of debt and are flush with cash, and profits remain good in my view, this relatively benign stock market situation won't continue forever.

TRADERS

This choppy environment with very high volatility will be an excellent environment for traders not long-term investors.

However, investors will need to think very carefully about which traders they entrust their money to. British trader Nick Leeson, who appeared at an awards ceremony in Jamaica not too long ago to tell his own story of arrogance and stupidity, managed to bring down centuries-old British bank Baring Brothers.

He had the ability to take massive positions 'trading' several times the capital base of the bank while simultaneously acting as his own accountant, putting all his bad 'trades' in an error account.

Baring's, with similar breathtaking arrogance, did not bother to inquire why Leeson needed a constant infusion of new money if he was such a successful trader.

Before he 'broke' Barings, Leeson's trading was accounting for almost all the bank's profits, until his 'profits' were revealed as mere fiction.

This sad tale, which we will cover in more detail in our next column on leverage, has important lessons for local investors.

The top trader in the latest Alliance Stock Wizard competition, with a return of over 80 per cent in three months, wisely chose to describe himself as lucky.

It is arrogance (or much worse) to ascribe oneself the ability to produce high single-digit monthly returns consistently or even worse, double-digit monthly returns on a consistent basis.

Hubris, to use the much prettier greek word, was also a major factor in Jamaica's last financial crisis of the 1990s, when the financial sector titans of the time built massive buildings representing large portions of the asset bases of the companies they controlled, and treated depositors savings as corporate capital.

Key policymakers are not immune from this disease.

The graveyard is full of indispensable men.

Former Federal Reserve chairman Alan Greenspan is criticising the Bush administration for fiscal irresponsibility when his testimony probably helped to sell the Bush tax cut, and many believe the root of today's credit-bubble problems are a result of his lowering interest rates excessively in the early part of this century.

It is also possible to look much closer to home find policymakers with even more breathtaking views of their indispensability.

keithcollister@cwjamaica.com