I was listening to NPR this morning and they had one of their usual small surveys in which they went around and asked people on the street how they felt about the economy. The last woman surveyed said, “I think everything is getting better”. When asked why she felt everything is getting better she replied, “Because the stock market is going up”. I am not going to attack this woman for her ignorance, but I will suggest that a vast majority of Americans feel better when the stock market goes up. It’s a confidence booster.
Now I will present the conspiracy that, when uttered, causes everyone to jump up and down and scream “Nonsense!”. The Working Group on Financial Markets (dubbed the Plunge Protection Team or PPT by the Washington Post in 1997) was created by executive order 12631 and signed by Ronald Reagan on March 18, 1988 (the spring after Black Monday). We can all just imagine the conversation that occurred during this meeting, “What the hell are we going to do to stop that Black Monday crap from happening again?! That was a real mess!”. So when trying to figure out the broad decree given to the working group, let’s look at the executive order itself:
“Sec. 2. Purposes and Functions. (a) Recognizing the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets and maintaining investor confidence, the Working Group shall identify and consider:
(1) the major issues raised by the numerous studies on the events in the financial markets surrounding October 19, 1987, and any of those recommendations that have the potential to achieve the goals noted above; and……
(c) To the extent permitted by law and subject to the availability of funds therefor, the Department of the Treasury shall provide the Working Group with such administrative and support services as may be necessary for the performance of its functions.”
The way I read this order is that the Treasury will fund the group to the best of its ability to do whatever is needed to prevent another October 19, 1987 and “maintain investor confidence“. The former Federal Reserve Governor Robert Heller states the possibility bluntly for the Wall Street Journal on October 27, 1989:
“An appropriate institution should be charged with the job of preventing chaos in the market: the Federal Reserve….The Fed already buys and sells foreign exchange to prevent disorderly conditions in foreign exchange markets. The Fed has assumed a similar responsibility in the market for government securities. The stock market is the only major market without a marketmaker of unchallenged liquidity or a buyer of last resort.” … “The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.”
It is my belief that the fed and treasury have worked together to support the stock market during this tumultuous time. I believe that their hands were tied with the post Lehman collapse and they were unable to do anything when we were in the abyss of pain earlier this year through March. I think they came in with full force after the bottom was reached in March by being the marginal buyer to nudge the market upward. That makes it a rigged game.
I am not suggesting that the government is the only support keeping the market up. Unfortunately human nature drives individuals to jump on board when they feel like they are missing the ride. On big down days in the equity markets retail investors pull money out of equity in their 401k’s and on up days they put money in. Opposite of what they should do. I believe that the government has sparked renewed faith in the market by buying futures contracts in bulk. I just hope that we actually do see a fundamental economic recovery in 2010, otherwise we are going to see a repeat performance of the crashes in the past.
