Every time people ask “What's the government going to do about this?” I'm sure Thomas Jefferson rolls over in his grave.

We can see many ways in which the government is taking control of markets. People seem relieved in the short run, but in the long run consistent intervention is very damaging to free markets. We've seen socialism at work in other countries and the result is consistently mis-allocation of capital and low productivity. It also provides no protection from corruption.

But there may also be ways they're intervening in markets that we don’t see. My trader friend John watches the “tape” very closely and tells me the phenomenon of well-bid index futures and heavy stocks continues. We know Middle Eastern investors are recycling oil dollars back into U.S. assets - at least for now. They may be simply buying futures for asset allocation, but John tells me its much more than that.

For example, Tuesday morning in Europe when UBS (UBS) announced it would write down $19 billion and Deutsche Bank (DB) made similar pronouncements, both stocks were down big and the market was indicated much lower. That was the same day Lehman Brothers (LEH) was supposed to sell $3 billion in preferred stock to raise much needed capital. Imagine Lehman trying to get that deal done in such a messy tape.

Then all of a sudden those stocks began to turn. Along with the market, they closed higher on the day. Futures steadily rose all morning and methodically ended at the highs of the day. U.S. stocks saw one of the biggest rallies of the year. LEH not only got its deal done, but the stock rose so much the firm decided to grant another $1 billion in stock to its most loyal and secret investors.

It's all highly convenient things turned out this way. The markets went from potential disaster based on fundamentals to a rip-roaring rally just when the government and banks needed it. It's also highly suspicious.

Wall-Streeters and the media have called those who claim the government intervenes in the stock market ridiculous. They'd better. If it were ever found out that Washington does intervene in the market, all remaining confidence in the integrity of markets would be lost.

But the pundits don't do a very good job of debunking all the ancillary evidence of such intervention. Their main argument is that there's no way to hide stock market buying by the government. That argument is very flimsy; there are many ways to hide it.

How about all these “loans” the Federal Reserve is making to dealers. There could easily be an arrangement that looks like a simple loan but in fact indemnifies the dealer from losses on any assets purchased with the proceeds of the loan. Just look at the deal the Fed made with JPMorgan (JPM) in buying Bear Stearns (BSC).

The Fed said it was taking control of $30 billion of a BSC portfolio, but not buying those assets, as currently the 1913 Federal Reserve act doesn't permit such an action. However, the Fed is the the residual claimant, so it's apparent it effectively has equity even if it won't admit it. Overall, the Fed appears to be using any legal or structural manifestations necessary to accomplish what it wants to do despite what the Federal Reserve Act actually permits it to do.

These are strange times indeed. Ron Paul did a good job of explaining it all in yesterday's hearing. I just wish Mr. Paul would ask a few direct questions of Mr. Bernanke like "does any aspect of the Federal government intervene directly or indirectly in the stock market," to get him on the record.

If the stock market doesn’t act quite naturally to you, there may be good reason for it. But the important point is that free markets are going away, bit by bit. Be prepared for a much different world if that continues. And don't think your vote is going to protect it because people who are in debt with no where to turn aren't going to vote with you.