Those who share the “crash” mentality have often derided the notion of sustainability in this fiat, or unbacked monetary system. They insist that both doom and gloom are imminent. They cite the fact that every experiment with fiat money has failed and that empires crumbled in each instance. I suggest that none of the prior systems had the technology in use today. Even the very notion of money is radically different. Today over 92% of everything we call money is electronic. When the Roman Empire debased its money, the masses who controlled the actual debased coins alternately aggregated and dumped them, creating an ebb and flow similar to rocking a boat. As each wave occurred, the swings were wider until the water came over the side. Alas, if only the Romans had the Plunge Protection Team. They could have stopped the rocking with appropriate counter measures.
The science of monetary policy has created a system of chattel slavery unlike any ever witnessed. Those in charge of this wildly profitable system have found a way to effectively harness the efforts of the populace with what we have dubbed the electronic chain. By converting the bulk of money to electronic form, they have eliminated the element of surprise that often caused the widespread panic inherent in a rocking boat. Prior to the Federal Reserve Act of 1913, pools were formed by prominent capitalists. The Government was rarely involved, not withstanding the 1869 gold panic offset by Treasury selling. J.P. Morgan himself organized a private pool to stem the Bank Panic of 1907. In 1929, Richard Whitney, acting head of the New York Stock Exchange, created demand by buying large blocks of stock for a pool which bolstered prices and restored confidence. Like the Morgan pool of 1907, both lacked the substance to be successful. The modern survivor to Morgan’s famous pool is the “Working Group on Financial Markets.” Created by Executive Order 12631, this action was largely the result of the crash of 1987 where a total collapse of the markets was narrowly averted with concerted action.
This formal government entity is charged with “enhancing the orderliness of our Nation’s financial markets and maintaining investor confidence.” The first reference to this faction appeared in an article printed in the Washington Post, by Brett Fromson. Many stories have circulated of massive buying at precise moments to revive an otherwise sagging market. Unlike informal arrangements cobbled together at the onset of a panic, these efforts were massive by standards of reason. In the private pools it often took more money than the participants were willing to commit. These efforts necessarily failed. Many prominent economists cited this “lack of resources” as the only reason for failure. The problems of limited resources are now gone. The Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the Securities and Exchange Commission, and the Chairman of the Commodity Futures Trading Commission, have all picked a designee to act in concert with government and private parties, to prevent investor panics. The order also directs that, “The heads of Executive departments, agencies, and independent instrumentalities shall, to the extent permitted by law, provide the Working Group all such information as it may require for the purpose of carrying out this Order.” And further, it says, “To the extent permitted by law and subject to the availability of funds thereof, 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”. With this one order, the entire financial system has been placed in the hands of six people, six people with a practically unlimited supply of money. By law, only the President can authorize a shutdown of U.S. financial markets. No doubt such an event would shake investor confidence.
So this team sees to it that this is unnecessary. Have they had an effect? There have been many instances since 1988, when the Major Market Index futures contracts were heavily bought, at just the right moment by a few major firms. This unusual buying boosted the Dow and rallied the markets. The heavy buying of this one MMI contract, raised the price. The underlying securities were then at a discount to the index. This prompted regular market traders to buy up the individual stocks that made up the index. These folks are not members of the “Working Group”. I doubt if they ever even knew that they were part of a larger effort. These traders simply earn a living on the difference between the cash and futures prices in stocks, gold, silver, currencies, oil and bonds. They are just doing what comes naturally, and in the process they contribute to the solution. This indirect action shields the Plunge Protection Team from direct intervention. If the Fed were directly buying futures contracts, there would be a record of the transactions. However, when the PPT causes regular market participants to act for a profit, official fingerprints are obscured. The resources of these traders are bolstered by the money the Fed creates and loans to them. The money enters the markets through the New York Federal Open Market Committee, or FOMC. In the past, these increases were very visible in the M-3 numbers. This past year, the Fed announced that it would no longer report the M-3 number after March 2006! Without M-3, it is impossible to see the extra funds that enter the money markets. This makes it nearly impossible to follow their actions. The biggest apparent worries facing the Plunge Protection Team right now seems to be the twin behemoths: the Hedge Funds and the Derivative markets. Recent activity by the team resulted in the bailout of two giant hedge funds, Amaranth Advisers and Vega Asset Management. Our new secretary of the U.S. Treasury, Henry Paulson, is no stranger to a market meltdown. Many technical indicators are warning of a significant potential decline. Paulson, who built a $700 million fortune at Goldman Sachs, is reinvigorating the Plunge Protection Team.
He suggests that the group has lost cohesion during the banner years being enjoyed by Wall Street. Under his watch, the PPT will amass new powers and a renewed sense of purpose. It will have a high tech command post at the U.S. Treasury building that will track global events and act as a base of operations in the next crisis. The members will resume meeting every six weeks to compare strategies and outline objectives. Mr. Paulson has recently asked the team to examine and explore “systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis.” “We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?” asked Paulson. I am certain he will see to it that we do. The SEC, CFTC and the U.S. Treasury, monitor the cash positions of all the major stock and commodity brokerages and large traders. Most certainly, the Treasury Secretary is privy to those numbers. However, Mr. Paulson is not the only one preparing for trouble. The SEC has proposed a reduction in margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15%. That means that a hedge fund or institutional trader need only put up 15 cents for every dollar in assets that they buy. Currently the level is between 25 and 50%. A great many hedge funds moved to the London exchanges and the SEC wants to lure them back by making lending operations easier here. It strikes us as odd that they would actually allow this extra leverage just as the stock indexes hit an all-time high. With daily derivatives transactions of $3 trillion in currency alone, and over 9,000 hedge funds in operation, the PPT certainly has its game plan laid out.