The Best of the Exchange: The PPT, Credit Card Abuse and Taking Our Lumps
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(Editors Note: Some of the following posts have been modified slightly from their original form.)
Toddo's: Plunge Protection Team Now Official was the most talked about article on The Exchange this week, a hot topic you think? Minyans Denise, John, Mike, Tony, and many more debated the topic of government intervention in the financial markets.
This order was issued as a result of the findings surrounding the investigation of the causes of the crash of 1987. (53 FR 9421, 3CFR, 1988 Comp., p 559.)
So there you have it... the origination of the Working Group on Financial Markets... Plus the members of the working group.
Not conspiracy theory, it has been policy for some time. So much for Open Markets, eh?
Next you will say they conspire to hold precious metal prices in check against inflation and choose the candidates we vote for.
Is this real?
I can understand the need to have a team in place to help the market should another 9/11 occur, or a market crash like '87. But the government using our tax dollars to manipulate the market on a regular basis because its down a few hundred points? That's very anti-capitalism and very anti-free market.
Hopefully this isn't true, but sadly, I bet it is.
When the Fed was created, there were real structural issues in the banking system that it could and did address. Physical currency transportation and regional liquidity were big market disruptive problems that increased transaction costs...
High-speed communication and rapid transport have made that function obsolete. Intra-bank clearing could and for the most part is handled entirely automatically by computers which do not need to manipulate interest rates or even the money supply to accomplish this task ("credit" must only be extended for minutes or hours prior to reconciliation).
It's clear looking back that the Fed realized once they solved the issues which brought them into existence they could not only alleviate liquidity issues, they could "control" the economy to a degree and thus the Franken-economy was born.
Now academics can run wild and they are trying to create a recession-free nirvana which is absurd on its face, but without this function the Fed would have no purpose.
As for the PPT specifically, what I see in the future (and stocks in general) is that the PPT no longer needs to act very often to achieve the desired result. The market is "conditioned" to expect PPT as a result it acts "as if" it were there.
With automated trading - as today's 100+point in about 10 second pop demonstrates, it only takes a few well margined players to make this market move in the short term - then everyone piles in without considering whether it is the front or back side of the hidden hand they are seeing.
They will NOT be able to stop the depression/rececession, but as a result of delaying the "big one" and learning from prior recessions, the perception of risk has been diminished to near zero.
I wonder if we're all spending too much time looking for a smoking gun in FOIA requests of meeting minutes, documentation, etc. when there's the chance they don't use a gun at all.
Look back to LTCM. The Fed got the brokers and banks together in a room to try to figure out how to handle that thing. So I imagine the index future purchases (The big, red "Buy it Now" button) could actually be done by a privateer, but only after he got a wink and a nod from someone floating around between the Treasury at 15th St. and the Fed Board.
So I personally believe that it's a bit more complicated than finding meeting minutes to see how they work/what kinds of tools they use. Be that as it may, it's still market Interference
There's a plethora of things that can be done regarding money *supply*, but my question is this: Now that the cash is out there (supply), what does everyone do with it (velocity)? It looks more and more like the answer is 'not much.' If banks don't lend money and people don't spend money, adding more money to the system won't fix anything - it just sits there.
You're right that the "perception" to manipulate can be more powerful than the ability to do so. I just don't perceive them being able to do much at all.
In response to Professor Depew's Five Things You Need to Know on Wednesday, Minyans William, James and others weighed in, while Pep mediated.
If the consumer is using his credit card to pay for staples, it suggests to me:
1) Consumers still haven't learned the lesson of living within their means...and therefore there is likely much more pain to come.
2) Using a credit facility to 'make payroll' is one of the hallmarks of a very sick business that has a very high chance of going under.
I'm not at all sold on this argument.
I use the plastic for everything, staples, non-staples, revolving line of credit. The balance is paid monthly and rewards collected.
Physical cash is more expensive for my financial institutions to process. I choose to boost their margins by dealing almost entirely in electronic transactions.
How do you factor the migration to a cashless society?
While Pep had the final say:
It's the combination of lower retail sales, expanding credit card balances and increasing delinquencies that point to consumer stress. Balances paid in full each month would not show up as credit card balance expansion since the balance is erased monthly.
After reading Professor Fleckenstein's piece on How to Cure a Debt Hangover, Minyan Paul concurred and added his thoughts.
I agree that we would be better off taking our lumps and working off these excesses - but who are we kidding? Americans cannot stand for even an inkling of difficult times and belt-tightening. So we will get more government bailouts, "economic stimulus", and all the borrowing to pay for it - which means the Fed and other central banks around the world will continue to print and print and print like there is no tomorrow.
Someday, there will be a day of reckoning, but I think it is more likely that the credit/derivative merry-go-round keeps on spinning through this rough patch, and on into the foreseeable future.
We appreciate all the comments on The Exchange and look forward to the Best Of Next Week!
Have a great weekend Minyans!
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