View Full Version : Market Engineering and Confidence 'Protection'

Saturday, July 8th, 2006, 05:35 PM
Washington D.C. is concerned about your level of confidence in the stock market (http://www.foxnews.com/story/0,2933,101854,00.html). The bandits in charge are trying to understand investor behavior better so that they can more effectively control that which is at the soul of popular economy: money and markets.

Dr. Robert Shiller, at the Yale International Center for Finance, manages the Stock Market Confidence Index, (http://icf.som.yale.edu/confidence.index)wherein the goal is to study investor attitudes and confidence as they pertain to movements in the stock market. Such studies (http://www.yale.edu/opa/v32.n6/story12.html) may have some value to other interested parties, but in effect they assist the central planners in managing the environment in which its players participate. After all, if they are able to anticipate certain behaviors at key points in time, a plan of action to manipulate and manage markets – or the overall economy – becomes more achievable when time is crucial.

The New York Post recently ran a piece (http://www.nypost.com/business/a_plan_for_a_plunge_business_john_crudel e.htm) on Washington’s tight-lipped Plunge Protection Team, or, the "Working Group," as it is formally known. Essentially, the role of this group is to prevent another 1987 "Black Monday" in the stock market. It was put into law in 1988, as Executive Order 12631 (http://www.archives.gov/federal-register/codification/executive-order/12631.html), by Ronald Reagan. If you read the Executive Order you’ll note that it essentially allows the government to intervene in the stock market – should a crash or foreseeable dip appear to be on the horizon – via legislative law, administrative fiat, or the manipulation of private bodies via coercive tactics on the part of the Federal Reserve, Treasury Department, or the executive office. Section Two of the order states that its purpose and function is to recognize "the goals of enhancing the integrity, efficiency, orderliness, and competitiveness of our Nation's financial markets and maintaining investor confidence."

The Working Group was established in order to identify issues – which studies have vetted out – in regards to the events surrounding the 1987 market crash. Its purpose is to gather recommendations from anointed experts and consider what government actions, under existing laws and regulations, can be undertaken in order to carry out those recommendations. The last step is to "appropriately consult" with private sector bodies and participants in order to seek any possible private solutions. These "private solutions," however, will come from puppet organizations of the corporatist establishment.

The final goal, then, is to "maintain investor confidence" in the market in the case of sudden declines. When a rally immediately follows a downturn, the European press will refer to this as a "PPT Rally." Even the American press has not been shy about discussing plunge protection. This is from a 1997 piece (http://www.washingtonpost.com/wp-srv/business/longterm/blackm/plunge.htm) by the Washington Post:
These quiet meetings of the Working Group are the financial world’s equivalent of the war room. The officials gather regularly to discuss options and review crisis scenarios because they know that the government’s reaction to a crumbling stock market would have a critical impact on investor confidence around the world.

"The government has a real role to play to make a 1987-style sudden market break less likely. That is an issue we all spent a lot of time thinking about and planning for," said a former government official who attended Working Group meetings. "You go through lots of fire drills and scenarios. You make sure you have thought ahead of time of what kind of information you will need and what you have the legal authority to do."

...The Working Group’s main goal, officials say, would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices – and to prevent a panicky run on banks, brokerage firms and mutual funds. Officials worry that if investors all tried to head for the exit at the same time, there wouldn’t be enough room – or in financial terms, liquidity – for them all to get through. In that event, the smoothly running global financial machine would begin to lock up.
Once again, Washington is in cahoots with top Wall Street firms in order to gain the needed leverage over the market should stock market instability become an issue. Rick Ackerman at 321Gold notes (http://www.321gold.com/editorials/ackerman/ackerman103101.html):
However, what we should not rule out is the possibility that some of America’s biggest and savviest financial institutions have pledged their utmost diligence in helping to support and stabilize U.S. financial markets whenever necessary. There are two reasons why this theory is not so farfetched as it might sound. First, the firms could make quite a bit of money at it. And second, they would not have to risk much of their capital to do so.

…Keep in mind that, under certain conditions, a buy or sell order as small as 20 or 30 contracts can alter the course of the S&Ps over the very short-term. Just imagine what kind of pop Goldman Sachs, Morgan Stanley and Merrill Lynch could create, especially late in the day, if they were to simultaneously enter large buy orders for S&P contracts.
The Secretary of the Treasury, Chairman of the Fed, Chairman of the SEC, and Chairman of the Commodity Futures Trading Commission are known as the "Four Financial Dictators." Their job is to grow and preserve the power of the state to socially and financially engineer society. Indeed, they call upon private interests – such as Wall Street giants – to help carry out a plan of action that will bring great monetary reward to them. The post-September 11, 2001, market, in fact, saw massive intervention in order to preserve the appearance of stability.

As to plunge protection, that could already be the case with General Motors. Shorts on GM have been a bit tripped up lately, and it’s a no-brainer that the government is not going to let GM go down without major intervention. They will be looking at intervention tactics that are more doable or affordable – as opposed to a straight financial bailout.

It is our assertion that the heavy hand of the Working Group has been exposed with respect to manipulating the Dow Jones Industrial Average. Early in May of 2006, Bill Gross – of PIMCO, and considered to be one of the world’s finest bond fund managers – wrote a seminal essay comparing General Motors’ problems to that of the United States’. In his piece, As GM Goes, So Goes the Nation (http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2006/IO+May+2006.htm), Bill Gross conveys three basic problems shared by both GM and Uncle Sam:
Eroding competitiveness compared to global competitors.
Uncompetitive labor costs compared to global competition.
Burdensome future liabilities – healthcare, pensions.To be sure, the Plunge Protection Team took this essay as a slap in the face. After all, everyone knows that America has the world’s most flexible, dynamic, and productive economy – Alan Greenspan and Ben Bernanke have said so many times, hence, it must be true. Mr. Gross, additionally, didn’t exactly endear himself to the Federal Reserve when he accused (http://news.goldseek.com/GoldSeek/1096490222.php) the Bureau of Labor Statistics of being the Federal Reserve’s lap dog willing to hedonically adjust away any signs of inflation as reflected in the Bureau’s Consumer Price Index. So it was time to show the Plunge Protection Team’s hand, take Mr. Gross to the woodshed, and do something good for GM and, therefore, the United States itself.

On May 24, 2006, at the behest of the Working Group (in our opinion), Merrill Lynch came out with a "buy" recommendation (http://marketwatch.com/News/Story/Story.aspx?guid=%7bDA8176C9-28CD-4431-A978-1DEA2E2E4BEF%7d&siteid=mktw&dist=) pertaining to General Motors’ stock. Keep in mind that this recommendation was made fully one month before Tracinda (http://biz.yahoo.com/ap/060630/tracinda_gm_alliance.html?.v=13) recommended that GM explore the idea of forming an alliance with Nissan and Renault. Shamefully enough, Merrill’s rationale hinged upon the premise "…that the automaker's restructuring plans, specifically the number of workers taking buyout packages, are coming along ahead of schedule." This is nothing short of harebrained reasoning serving the demented ends of the Working Group.

It is highly unusual for a restructuring plan that is so far away from accomplishing anything substantial to get such a standing ovation, even from the fraudulent Wall Street analysts. This move by Merrill Lynch is a hoodwink designed to keep the confidence level high among investors speculators, thus keeping under wraps any unwanted drama or uprising from the unsuspecting masses. In fact, if Johnny Beer Drinker could read a balance sheet, he'd bail out of GM's stock immediately. But Johnny Beer Drinker can't read a balance sheet; he may watch CNBC and Jim Cramer (http://en.wikipedia.org/wiki/Jim_Cramer), and if he does, he is a blind fool following a bullish fool who is serving up bad advice to serve his own interests.

Since Merrill Lynch’s pronouncement, GM’s stock has shown market leadership like a four-star general – it was up by 40.1% during the second quarter of 2006, making it the best performing Dow stock for the three-month period ending June 30th. Even on days where the Dow Jones Industrial Average had declined by over 100 points, the "General’s" stock held steady. One day, it was even up by over 4% when the market swooned terribly – and this in spite of the fact that gasoline prices are at $3.00 per gallon. We have little doubt that GM stock is being accumulated by Caribbean-based hedge funds owned and operated by the Federal Reserve – the very same folks who mysteriously emerged as buyers of U.S. Treasury debt (thus, keeping interest rates down) when other buyers began to shy away from that debtaholic Uncle Sam. For now, the General looks unbeatable – as long as "investors" believe the stock is the company.

When examining General Motors’ March 31, 2006 balance sheet, what comes to mind is not a proud general, but a bloated inmate of a debtor’s prison. It is boggling that any financial analyst would recommend purchasing the common stock of a company with the following financial profile:
General Motors’ automotive operations have a combined working capital position of deficit $15.4 billion.
GM has total debt and liabilities approaching half-a-trillion dollars.
GM’s total liabilities to equity ratio is 29 to 1. There once was a day when financial analysts sounded the alarm bells when this ratio exceeded 4 to 1.
Arguably, GM has a deficit net worth of $18.2 billion. Such a sobering conclusion can be deduced simply by disallowing intangible assets such as goodwill and deferred tax assets.It is interesting to note that GM’s market capitalization was recently at $12.4 billion, which is smaller than that of Harley-Davidson, about equivalent to the market cap of Hershey Co., and in comparison, Toyota’s stands at $194.7 billion. With such a weak balance sheet, GM will not survive a recession. Hence, bankruptcy is a possibility – even if the aforementioned alliance with Nissan and Renault is consummated. GM’s banks understand this and have required that General Motors provide additional collateral (http://www.cfo.com/article.cfm/7079928/c_7080089) in order to keep open a $5.6 billion operating line of credit. On the heels of this move by the banks, Standard & Poor's and Moody's cut GM's senior unsecured debt rating even deeper into junk territory. For the banks’ collateral-call and the debt downgradings to occur shortly after such a high-profile recommendation to buy GM stock, Merrill Lynch’s top executives should be embarrassed.

Ah, but the top dogs at Merrill Lynch have no shame and will sleep well. They know that most Americans don’t pay attention to the corporate bond market nor the backroom dealings of bankers. It is the Dow Jones Industrial Average that grabs the attention of Americans. By keeping the Dow up, the Plunge Protection Team – as assisted by Merrill Lynch – understands that it is making a key contribution to the insanely expensive game of "bread and circuses (http://lewrockwell.com/decoster/decoster111.html)" Uncle Sam is playing with its citizens. Consequently, the Federal Reserve will conjure up as much fiat money as possible in order to intervene in, and prop up, the stock market so as to keep our collective confidence elevated – and, in the mind of these Keynesians, the economy will be peachy. Ultimately, and Bill Gross not withstanding, why is GM stock a selected target of the Plunge Protection Team? As GM’s CEO Charles E. Wilson famously stated in 1953: "…because for years I thought what was good for the country was good for General Motors and vice versa."

Accordingly, like everything else involving Leviathan’s very visible hand, initial interventionist schemes meant to stave off isolated crises cascade into multiple occurrences of intrusion. The urge for power is uncontrollable and leads to the central planners applying a broader range of arbitrary powers. According to an article in Financial Sense (http://www.financialsense.com/fsu/editorials/mchugh/2006/0306.html):
Our suspicion has been that the "Working Group" established by law in 1988 to buy markets should declines get out of control has become far more interventionist than was originally intended under the law. This group has since been dubbed the Plunge Protection Team. There are no minutes of meetings, no recorded phone conversations, no reports of activities, no announcements of intentions. It is a secret group including the Chairman of the Federal Reserve, the Secretary of the Treasury, the Head of the SEC, and their surrogates which include some of the large Wall Street firms. The original objective was to prevent disastrous market crashes. Lately it seems, they buy markets when they decide markets need to be bought, including equity markets. Their main resource is the money the Fed prints. The money is injected into markets via the New York Fed’s Repo desk, which easily showed up in the M-3 numbers, warning intervention was nigh.
In the end, the market manipulation scenario is a win-win situation for the crisis control mentality of Washington D.C., and, it’s a huge moneymaker for the Wall Street Corporatocracy that seeks to separate you from your money while filling their own pockets. Thus with the current environment of asset bubbles popping, oncoming inflation, and Federal Reserve money supply manipulations, the Plunge Protection Team will be called upon to work lots of overtime.

Karen De Coster, CPA, has an MA in Economics, and is an accounting and finance professional in Detroit. See her website and blog at www.karendecoster.com (http://www.karendecoster.com/). Send her mail (rothbardiancpa@yahoo.com). Eric Englund has an MBA from Boise State and works in the risk management field. He is the publisher of The Hyperinflation Survival Guide (http://www.amazon.com/exec/obidos/tg/detail/-/0974118001/lewrockwell/) by Dr. Gerald Swanson. You are invited to visit his website (http://www.hyperinflation.net/). Send him mail (eric2562@msn.com).


Monday, July 10th, 2006, 09:12 PM
Here is a metaphor to this situation, and if possible, please explain to me how this can be:

If my wallet is empty, and my bank account is in the negatives, how can I pay bills, make donations to charity and continue to buy things as I normally would?

How is it possible that a bank is able to load out 100 times the amount it has, example a bank can loan out $100 for each $.01 deposited of "physical" (read: actual, as in something that exists)... This is to mean that the money you get from the bank is not real (aka it exists as credit) which isn't physical in any way, and does not exist except for numbers on a computer screen? How is it that a bank is able to give you something that does not exist, and expect you to pay it back with what does exist? How is it that if you cannot pay back this non-existant thing, that the bank is about to take the real physical things from you?

Monday, July 10th, 2006, 11:16 PM
@Tripredacus: A normal bank cannot create money out of thin air. They can only offer you credit either by drawing from their own reserves or by giving you the money other clients have stashed away at the bank. The interest paid over the latter procedure is one of the sources of income for a bank. Banks also make money by playing the stock market with what you have on, for example, your savings account. They can do this because not all their clients will withdraw all their money at once.

Tuesday, July 11th, 2006, 12:16 AM
is "fractional-reserve (http://en.wikipedia.org/wiki/The_fractional_reserve_banking_system_sc am)" banking inherently fraudulent
and dependent on government coercion for existence?

Tuesday, July 11th, 2006, 10:09 AM
is "fractional-reserve (http://en.wikipedia.org/wiki/The_fractional_reserve_banking_system_sc am)" banking inherently fraudulent
and dependent on government coercion for existence?

I don't think it is inherently fraudulent, at least not more than other forms of finance capitalism. It is, however, sensitive to fraud and manipulation, and therefore needs regulation and supervision.

Tuesday, July 11th, 2006, 07:16 PM
How is it that a bank is able to give you something that does not exist,
and expect you to pay it back with what does exist?

How is it that if you cannot pay back this non-existant thing,
that the bank is about to take the real physical things from you?

@Tripredacus: A normal bank cannot create money out of thin air.

is "fractional-reserve (http://en.wikipedia.org/wiki/The_fractional_reserve_banking_system_sc am)" banking inherently fraudulent
and dependent on government coercion for existence?

I don't think it is inherently fraudulent,
at least not more than other forms of finance capitalism.
utilising "fractional-reserve (http://en.wikipedia.org/wiki/The_fractional_reserve_banking_system_sc am)",
banks do seem to "create money out of thin air (http://en.wikipedia.org/wiki/Deposit_creation_multiplier#Deposit_crea tion_multiplier)",

which the banks may loan to customers
for the purchase of physical objects

- which may be seized by the bank,
if the customer fails to repay the loan.

Wednesday, July 12th, 2006, 12:10 AM
This is "fractional-reserve banking", as defined by your wikipedia article:

In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks retaining only a fraction of their clients' deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder in loans to generate income.

This didn't strike me as fraudulent or creating money. However, your second link shows I was too optimistic about the actual effects of such policies:

For example, let's assume that a primary deposit of $1000 is made into bank A. If the cash reserve ratio is 12%, then $120 must be kept on hand by the bank and $880 is available to be lent to someone else (called the excess reserve). Now if bank A uses its $880 in excess reserve by lending it out, and that is deposited in bank B, it represents a primary deposit to the second bank. Bank B must keep 12% of $880 on hand but can lend out $774.40. If that $774.40 is eventually deposited in bank C, the third bank must keep $92.93 on hand but can lend out $681.47. The process continues until there is no excess reserve left (For simplicity we will ignore safety reserves.). By adding all the derivative deposits we can calculate the amount of money created.

When I said a normal bank can't create money, I was thinking about actually pressing bills and coins. These policies create a paradox where the total amount of "electronic" money appears to increase, but the amount of "physical" money remains the same (unless the national bank presses more, of course). It creates illusory capital and somewhat resembles the pyramid schemes, where one loan is used to repay another loan. I agree this is problematic.