Thursday, February 28, 2013

With Ben Bernanke, Who Needs Conspiracy Theories?

Populist economic writer John Mauldin is contemptuous of conspiracy theorists. He writes, (bold mine)
I find the belief that there is a “Plunge Protection Team” simply bizarre. You know, the guys who are supposed to control the stock market? The “Working Group on Financial Markets”? If there is one somewhere, deep in the bowels of government, they are the most incompetent conspirators ever assembled. And no one has come forth and spilled the beans in a memoir after 25 years? Puh-leeze!
A conspiracy theory, according to, purports to explain an important social, political, or economic event as being caused or covered up by a covert group or organization.

On the other hand, the “Plunge Protection Team” (PPT) or otherwise known as the “Working Group on Financial markets” was created by ex US President Ronald Reagan via Executive Order 12631 which according to, “was used to express the opinion that the Working Group was being used to prop up the markets during downturn”. 

Of course, technically speaking the EO 12631 didn’t explicitly say direct control.

One of the main the stated purpose of the group according to the Federal Register 
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  

(2) the actions, including governmental actions under existing laws and regulations (such as policy coordination and contingency planning), that are appropriate to carry out these recommendations.

(bold added)

In short, the US government can justify her actions to “carry out” “any of those recommendations that have the potential to achieve the goals” through opaque legal semantics.

So contra Mr. Mauldin, by edict, the Working Group on Financial Markets, a.k.a  PPT, is a legally constituted entity which therefore exists, unless a new edict has been made to repeal them.

As to whether or not this group represents “a conspiracy theory” is another matter.

And it would likewise be equally misguided to look into “the deep in the bowels of government” for attempts to control the stock and or financial markets. All one needs is to open one's eyes.


The above chart exhibits the tight correlation between the Fed’s balance sheet and the S&P 500 as I earlier pointed out

Have Fed policies not caused or contributed to the rising stock markets?

Last July, the New York Fed even bragged about how Fed policies has had “an outsized impact on equities relative to other asset classes” that has boosted returns by 50% as I earlier posted here.

Let us read directly from the incumbent Fed Chair Ben Bernanke, first when he still was in the academia: (bold mine)
There's no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.
So Mr. Bernanke believes then that supporting the stock market has been a requirement for “smart” central bankers.

From Bernanke’s 2010 Jackson Hole speech on the Portfolio Balance channel (bold mine)
I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short-term interest rates have reached zero, the Federal Reserve's purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public. Specifically, the Fed's strategy relies on the presumption that different financial assets are not perfect substitutes in investors' portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets…
So current policy has been meant to cause, if not influence, the “quantity and mix of financial assets held by the public.” Mr. Bernanke’s belief then has now been actualized through ZIRP and QE policies.

Two days ago Ben Bernanke on the wealth effect at the semi annual monetary policy report to the Congress (bold mine)
Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC's 2 percent objective. Notably, keeping longer-term interest rates low has helped spark recovery in the housing market and led to increased sales and production of automobiles and other durable goods. By raising employment and household wealth--for example, through higher home prices--these developments have in turn supported consumer sentiment and spending.
In short, whether the stock and/or housing markets both of which constitutes household wealth, FED policies have been designed to control or to influence prices in support of these sectors.

Central bankers all over the world, in fact, has mimicked or assimilated the Greenspan-Bernanke doctrine.

In May of 2012 the Bank of Japan reportedly bought record amounts of ETFs. Central banks from Israel, South Korea and Czech Republic have jumped also into the stock market buying bandwagon. Whether as investment or as policy, government intervention on stock markets or financial markets serves to support them. 

Is this a conspiracy theory? Apparently not. Because such policies have become explicit (and not covert), from which again, the intent has been to cause or attempt to control prices of financial markets—as the stock and the housing markets—supposedly to promote the wealth effect theory. (In reality the wealth effect theory is a camouflage to advance the interests of welfare warfare state and the banking cartel whose relationship is underwritten by the US Federal Reserve)

In short, we don’t need conspiracy theories, the continued enforcement of Bernanke’s creed has been enough to tell those who are willing to listen that financial markets including the stock markets are being administered, managed or manipulated for political and secondarily economic objectives.

Wealth effect policies are, in reality, unsustainable asset bubble inflation policies.

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