The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Should the Government Support the Stock Market?

Two major nations are well known for the government’s direct support of the stock market by buying ETFs or investment funds. The US support actions are not publicized.

Last years efforts by China to halt the stock market crash may have been learned from the US Federal Reserve. Robert Heller, former Governor of the Federal Reserve, said in a 1989 WSJ interview.

“The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole. — The stock market is certainly not too big for the Fed to handle.”

His idea of buying index futures to support the stock market was implemented with the creation of the ‘President’s Working Group on the Financial Markets’ in 1988, after the 1987 crash. We call that Group the ‘PPT’ (plunge protection team).

Heller was appointed to the Federal Reserve in 1986 by President Reagan. He was in favor of giving investment banking powers to commercial banks, allowing U.S. banks to accept foreign currency deposits and the elimination of interstate banking barriers. These changes were, in part, instrumental in enabling the last financial crisis.

Do you want confirmation that this PPT exists? Here is a commentary by a well-known, national TV personality, George Stephanopoulos, a former Clinton administration adviser on ABC Good Morning America ( September 17, 2001):

“Well, what I just want to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets…perhaps most important, there’s been–the Fed in 1989 created what is called a “PLUNGE PROTECTION TEAM”, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges, and there–they have been meeting informally so far, and they have kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have, in the past, acted more formally.”

Perhaps you may think that a TV commentator is not that reliable. Analyst Mark Lundgren found these relevant quotes. A former member of the PPT said this of markets today:

“Governments impose price on markets; there is no price discovery anymore.”

– Dr Pippa Malmgren in a MATTERHORN INTERVIEW.  Dr Malmgren is a US financial advisor and policy expert based in London and has been a member of the U.S. President’s Working Group on Financial Markets (a.k.a. the “Plunge Protection Team”).

Here is a quote from a former Fed governor, Kevin M. Warsh, made to the Stanford University Institute for Economic Policy Research, 25 Jan 2012.

“Now that I am out of government, I can tell you what I really believe.

– Central banks are now so heavily influencing asset prices that investors are unable to ascertain market values.  This influence is especially evident, with the Fed’s purchase of government bonds, which has made it impossible for investors to use bond prices to learn anything about markets.

Obviously, governmental and central bank interventions make it much more difficult for smart investors to decipher market forces because non-market forces are overpowering them. Now it pays to pay more attention to the “agenda” of Washington and others, rather than investment inflows.