HOW GREENSPAN CAN STOP A CRASH- John Crudele : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Interesting rationale for a "PPT"...

NOW that Alan Greenspan has gotten the stock market to stop going up, can he keep it from continuing to go down? That's the problem with the game that the Federal Reserve chairman has been playing. With wage increases slim this entire decade, Greenspan knew the U.S. needed the wealth being generated by the stock market to survive.

But when investors got irrationally exuberant -- to use the Fed chairman's own words -- and started to believe that the sky was the limit on stocks, Greenspan decided to throw some water on the fire. And he's likely to keep dousing the flames of market speculation through the next few months with interest-rate hikes.

The first question is: Can the Federal Reserve keep the stock market at just the right level -- not too high or too low -- without giving investors permission to go to either extreme again?

The second question is: How exactly can Greenspan fine-tune something like the stock market?

The Dow Jones industrial average fell another 230 points on Friday, and the truth is there really wasn't any reason for that drop. The Dow is now more than 14 percent lower than at the beginning of this year, and it is down nearly 16 percent from its January high.

By standard measures on Wall Street, the market entered a correction phase when it retreated more than 10 percent from its high. It will officially become a bear market when it hits the 20 percent level.

At the current rate of decline, that will probably happen in the next few weeks. Market technicians believe the next true support level will come when the Dow gets down to the 9,400 level, which would be around a 20 percent decline.

If the Dow breaks through that level, there is no telling where the slide will end.

Back to my questions.

Can the Fed get the stock market to just the right levels? The answer is nobody knows. The Central Bank is not supposed to be messing with the stock market in either good times or bad. Its job is to feed liquidity into the banking system or take it away so that the economy can have non-inflationary growth.

But Greenspan has taken a keen interest in the stock market's performance because Wall Street's success has been almost entirely responsible for what the economy is doing and how inflation is acting.

So the Fed has had to revise its authority and become a monitor of stock prices -- a brand-new role. And nobody knows how good it will be at that job.

Second question: How can Alan Greenspan fine-tune the market?

At least two ways come to mind. First, he could flood the banks with money. This'll lead to a lot of borrowing. People would take most of the money the banks release in the form of new loans and buy things. That would keep the economy rolling. And unless they become totally pessimistic about the stock market's chances, these borrowers would also throw more money at Wall Street.

The Fed inadvertently used this plan last fall when the stock market was last in trouble. It put lots of extra liquidity into the banking system because it was concerned about the Y2K crisis. And while Y2K problems never materialized, the secondary effect of the Fed's effort was that stock prices rose.

There's a problem with this strategy.

The Fed can't abandon its job as an inflation fighter. If it adds money to the banking system just to protect the American stock market, then the bond markets could panic.

Greenspan might be trading off a stock market collapse for one in the bond market. And once bonds crumple and rates rise, then stocks will come down anyway.

There is one other solution.

The Fed and the U.S. Treasury could rig the stock market.

If stock prices continue to decline, the government could go in and start purchasing stocks. More specifically, it could purchase Standard & Poor's 500 futures contracts. This is the quickest way to stabilize a declining market.

The government isn't really allowed to do things like this. Markets are supposed to be free to move up and down on their own. And Washington won't be able to publicly admit that it has taken such action.

But I suspect nobody would complain.

-- Chuck (, February 28, 2000


If stock prices continue to decline, the government could go in and start purchasing stocks. More specifically, it could purchase Standard & Poor's 500 futures contracts. This is the quickest way to stabilize a declining market. The government isn't really allowed to do things like this. Markets are supposed to be free...

Yea, but Bubba's buddies can do it. They have all that drug money to launder and, heck, the DJ just as good a laundry as any.

-- Y2kObserver (, February 28, 2000.

John Crudele is a very astute financial writer. He has got to be putting us on that he just discovered the plunge protection team. This has been discussed numerous times at the Kitco site and here. Some can spot it easily when it happens such as when the average jumps 50 points in 4 minutes. He said the Government isn't really allowed to do things like this. Does this mean that it is not being done to stabilize the market? If they were doing it, would they tell us? He may have a reason to be writing about this now. Is he trying to wake up the general public? I believe it is happening. I have often wondered if they buy to raise the market, if there is a similar mechanism to sell to lower the market? If not, how much money remains in the fund to help avoid a future crash? This may not work in reverse as you can buy shares at $5 per share higher than the last trade to inflate the last price but you can not buy shares at $5 per share lower than the last trade to make prices appear to be falling.

If this is happening and is illegal, where are the auditors or the Inspector General? Would Clinton or Big Al attempt to stop this activity if it is happening?

-- Moe (Moe@3stooges.gom), February 28, 2000.

According to Gary North, the Monetary Control Act of 1980 allows the Federal Reserve to purchase instruments other than government securities, effectively enabling them to act as buyer of last resort. (I have not been able to find the full text of the act to confirm this.) So it might not be illegal for the Fed to prop up the stock market. Whether such intervention is appropriate is another matter.

-- David L (, February 28, 2000.

I would think that the worst problem would be the impact on the perception of investors. While it might be not too difficult to make minor manipulations (at the day's end of a crucial downswing, for example), it would be a bottomless pit to try to stop any fundamental drop in market support. And stopping a major crash would be more important than using gentle nudges to keep things on trackl, if manipulation were a matter of policy.

I'm sure the system workings are much more complex than we will ever be privvy to.

-- Chuck (, February 28, 2000.

Chuck--You use the right word -- privy-- The Fed could buy futures again but I don't think there's enough $$$$ to stop the slide----

-- Up R. Down (Letmehelp@Going.down), February 29, 2000.

---whaddya mean "not enough money"? "Money" nowadays is created with a few keystrokes and mouse clicks. That's all it takes. And if it's "only" in the market, it never shows up to become hyper inflati0onary, that's why you can keep seeing this plunge protection team stop any crash. They aren't going to allow the president or the big bankers to look bad, or to lose real money, won't happen. When you have the ability-which the Fed does-to create money out of thin air, you can keep bubbledotcom up as long as you want, or at least until massive real profit taking takes place, and they can avoid that by making it apparently UNprofitable to "take profits".

-- maybe (, February 29, 2000.

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