Marketplace Scratch Pad

Is the government propping up stocks?

Scott Jagow Jan 4, 2010

This may fall into the category of outlandish conspiracy theory or, given our recent history, no surprise whatsoever. But there’s some chatter about whether the President’s Working Group on Financial Markets — which does exist — started last year’s stock rally and has kept it going. After all, the Working Group has been dubbed by some, the Plunge Protection Team.

Zerohedge lays out the argument, which you can read here. There isn’t anything that smacks of hard evidence, but there are some clues that might point to the government buying stocks:

…it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.” In a Financial Times article in 2002, an unidentified Fed official was quoted as acknowledging that policymakers had considered buying U.S. equities directly, not just futures. The official mentioned that the Fed could “theoretically buy anything to pump money into the system.”

Since the Fed isn’t audited, we don’t know whether any of this is happening.

At Global Research, Mike Whitney cites a quote from George Stephanopolous from Good Morning America, September 17, 2000:

“What I wanted 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 the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem.”

New York Post columnist John Crudele has been on this case for years.

Although there is ample evidence in records I’ve received from Treasury that Paulson convened the President’s Working Group on Financial Markets regularly, it now looks as if this former Goldman Sachs chairman, on his own, had a little secret rescue operation going on…

Paulson regularly spoke with people on Wall Street, and especially at Goldman. And while I’ll never know what those conversations involved, it’s pretty logical to assume they weren’t about dinner parties.

But before you buy this hook, line and sinker, conspiracy theories about the Plunge Protection Team have been written about for some time now. Here’s a Boston Globe article from September, 2008:

For mainstream Wall Street analysts, there are simple explanations for the evidence given in support of the PPT. Robert Heller’s suggestion was just that, a suggestion. George Stephanopoulos didn’t seem to know what he was talking about. And rallies at the end of a large sell-off are simply traders scooping up bargains.

The fundamental fact, skeptics point out, is that such a scheme would be doomed to failure in the sort of dire situations where it would be most needed.

“The market’s too big and too global and affected by too many macro issues for one organization to defend it,” says Art Hogan, chief investment strategist at Jefferies & Co.

But it’s not surprising, say psychologists, economists, and other scholars of human behavior, that belief in the power of something like the PPT swells in a climate of financial turmoil.

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