Plunge Protecting Like Its 1929? : LUSENET : Grassroots Information Coordination Center (GICC) : One Thread

Plunge Protecting Like Its 1929?

Many American's are dumping their mutual funds, financial 'experts' are (once again) using the phrase 'don't panic', and seemingly everyone is hoping that the worst will soon be over. Cue the Plunge Protection Team...

"The Federal Reserve is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. The Federal Reserve, virtually in total control of the nations vital monetary system, is accountable to nobody – and this strange situation, if acknowledged at all, is invariably trumpeted as a virtue" M. Rothbard. The Case Against the Fed

What the PPT does (in theory) Since the Federal Reserve Board is accountable to no one there is very little hard evidence that the PPT exists. Rather, following the formation of the Working Group on Financial Markets the SEC created a 'red book' to help it deal with financial crisis's, and there have been instances when rule changes rig the futures markets. However, whether or not the SEC is ready to change rules to prop up the markets (as they did following 9/11) or futures exchanges are prepared to alleviate the squeeze on some key players are incidental points compared to that of the larger question: does the Fed buy stocks?

The story goes that the PPT (Fed) funnels money through different channels (GS, ML) to buy baskets of Dow stocks and/or S&P/Nas futures. Further, 'unquotable' and 'off the record' insiders insist that the actions of the PPT are sometimes ridiculously obvious – when the markets are collapsing with seemingly no hope of a turnaround, suddenly huge buy orders appear.

Plunge Protecting Success (common): The PPT buys stocks and helps create an illusionary market bottom.

Plunge Protecting Failure (rare): The PPT buys stocks and prices continue to crumble.

Has The PPT Been Buying? Even though the markets have dropped during the last 2 months it is unlikely that the PPT has been overly active. Why? Because the drop has been methodical and orderly. The last thing the PPT wants is to haphazardly buy futures only to be 'hung' in a few weeks time.

With this in mind, what The Team tries to do, in theory, is ensure that panic selling is undertaken in an orderly fashion (as absurd as this contradiction may sound). As such, last Friday's bout of semi-panic selling could have been the wake up call for napping PPT members who last helped orchestrate a bottom in the markets following 9/11.

The 1929 'Protectors' "In the very midst of the collapse five of the country's most influential bankers hurried to the office of J.P. Morgan & Co., and, after a brief conference, gave out word that they believed the foundations of the market to be sound, and the market smash has been caused by technical, rather than fundamental considerations, and that many sound stocks are selling too low." October 24, 1929. New York Times

As the markets crumbled in October 1929 J.P. Morgan and others began to meet in secret quarters and make daily announcements that stocks were cheap and that they were buying. One could argue that J.P. Morgan, the so-called 'lender of the last resort' before the Fed was created, was the ringleader of the 1929 version of the PPT:

"So confident were leading bankers that prices were reaching bottom that they reduced margin requirements for demand loans to brokers from 40 to 25 percent. Members of the banking pool formed last Thursday, when the selling movement reached alarming proportions, again met at the offices of J.P. Morgan & Company, and it was learned that huge buying orders were thrown into the market to absorb selling on the way down and keep the decline orderly." October 30, 1929. New York Times.

Realizing that the stock market fallout lasted through 1932 the investor is reminded of one truism: no team of Plunge Protectors is infallible. For certain, there comes a point when intelligent and powerful would be 'protectors' begin buying stocks based upon the notion that falling stock prices represent an unacceptable risk to the financial system -- not necessarily because current market prices reflect immediate 'undervaluation'. It is at such a point when the delusion takes full hold – or when the protectors become active investors in falling stock markets.

"Neither assets nor earnings, large as the earnings have been in many instances, warrant the market valuations of hundreds of stock issues. There has been an inflation not free from the charge of criminality, and which has been brought about by misrepresentation, and in many instances dishonest salesmanship. Many corporations have responded to the hysteria and inflationary spirit, and have increased their stocks issues without reason and without justification, expecting to unload them, as unfortunately has been done, upon a credulous, hysterical, if not intoxicated public. It was inevitable that a day of reckoning would come… …brokers and some bankers and credit organizations have joined in the credit "joy ride" of speculation. They and others must beware lest the catastrophe continue and the limits of the graveyard require enlargement." Senator King, October 25, 1929, New York Times

The above quote sums up the dangers the PPT faces when they decide it is time to stop stock prices from falling. Indeed, there comes a point when saving a stock market for the sake of saving the stock market is the wrong choice to make. Rather, the more prudent alternative for protectors is to sometimes allow supposedly free markets to fall free of intervention, and to force stockholders who hold nothing more than blind faith to exit ungraciously. After all, the PPT's mandate is to help create an illusionary market bottom – the illusion only becomes real if others join in and buy.

Conclusion If the Dow crashes the PPT will try to brace the fall. If they are successful life will go on and a new near term bear market 'bottom' will be formed. However, if they fail the PPT will have only have prolonged, in Senator King's words, 'the inevitable'.

Will the PPT be buried alive? To be continued...

"Plunge Protectors must beware lest the catastrophe continue and the limits of the graveyard require enlargement."

-- Martin (, July 22, 2002

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