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Plunge Protection Team…Unite!

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.

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4 Responses

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  1. J.Bradley says

    I had a similar discussion with a coworker today regarding the stock market and America’s perception of the economy and ergo Obama’s performance….

    Surly – my question is, do you think that Wall Street can purposely run down the market to their advantage based on political propaganda evoked by the Administration? For example shortly after Obama won the election he began threatening restrictions on Wall Street (i.e. trading restrictions, compensation restrictions, etc.) to show he was on the side of the “average Joe”. Clearly not what the executives or traders would want. Free market is what America was built on. We then saw the Dow dive below 8,000 for the first time in 20 years. Enough negative perception was built up against Obama’s administration over the months in the media and Obama began to wane on his decisions and pull back. Sure enough the Dow is over 9,000 for the first time since his election.

  2. SurlyTrader says

    I like the way you are thinking.

    Besides the government, I do not think there is any one wall street firm that can *move* the market. When I use the term move, I mean that it can consistently push the market in one direction. I do believe that through spreading rumors and bad news they can go quite a distance, but I do not believe that any firm can move it dramatically against fundamentals. The negative sentiment from Wall Street and fears over a more socialistic market most likely had a negative effect amongst the general public and all investors which helped to drive the market lower. So in a way, you could say that propaganda from the white house can assist a market in a downward spiral.

    Let’s make something clear though – the restrictions against the banks are non-existent. Citibank and AIG have gotten closer scrutiny because they are indeed on life-support, but many of the other firms were merely backstopped by the government against failure. How would you act as an individual if you *knew* bankruptcy could never happen? If you knew you could never lose your house or your car? That is not a free market, but the actual firms on wall-street are cheering it on. Payout future profits today, take taxpayer money when holes show up, earn your way back to profitability via free money to the government while lending it out at 7%+ to consumers. Great gig.

Continuing the Discussion

  1. Quantitative Easing and Walking on the Edge of a Razor – SurlyTrader linked to this post on August 19, 2009

    […] As you can see the S&P has marched nearly lockstep with the increases in the open market purchases of treasuries (treasuries only being a proxy as they were buying many other financial assets along with a possible PPT purchase of S&P futures). […]

  2. Does the PPT (Plunge Protection Team) Control the Market? – SurlyTrader linked to this post on September 30, 2009

    […] a synopsis to my earlier post, there was an executive order from the president to create the “Working Group on Financial […]

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