Back some 15 or so years ago, when I started suggesting that the stock market was being rigged, I’m sure everyone thought I was crazy.
The logic behind that opinion didn’t matter. I explained that a former Federal Reserve governor recommended in 1989 that such a thing be done. And I explained how Ronald Reagan had formed a committee called the President’s Working Group on Financial Markets that could take care of such things.
And I even said that, in my humble opinion, this was good because the market is a dangerous animal when it gets loose of its senses and decides to plummet for no reason. That was clear during the crash of 1987 and the near crash of ’89.
I also mentioned that this remedy for market crashes should be used sparingly. The Fed guy who proposed this, Robert Heller, said as much.
So I had to laugh when I discovered that the Fed’s rigging of the stock market is now discussed openly on the Public Broadcasting Service.
The issue of the Fed’s rigging of stocks came up on Wealthtrack, a Dec. 20 PBS show hosted by Consuelo Mack. The show was supposed to be a look back on the Fed, which is celebrating its 100th birthday, but it veered off the homage track a bit.
The guests were Jim Grant, one of the few financial gurus on Wall Street who does have a clue, and Richard Sylla, the Henry Kaufman Professor of the History of Financial Institutions and Markets at NYU’s Stern Business School.
I don’t know Sylla, but I do know Henry Kaufman, a famous financier. And I think Henry would have had a stroke to hear what Sylla said.
“The Fed seems to have — I think almost deliberately — is trying to push the stock market up,” said Sylla, with a bit of a grammatical hiccup. “I’ve watched this stuff for 40, 50 years now, and this is the first time in my memory when it seemed to be official US government policy that the stock market goes up.
“And the Fed likes this because it thinks that when the stock market goes up, people who own stocks feel richer, they’ll go out and spend more money, and the unemployment rate will come down.”
Grant concurred. “New thing — [the Fed] is in the business of talking up the stock market. The Fed is manipulating prices, especially on Wall Street.”
The Fed has tried to boost the economy with its radical policies since the 2007 crisis, and it has, overall, failed.
While the nation’s GDP spurted a bit in the last quarter, that seems to be an aberration that will correct itself in the quarters ahead.
But the effect of the Fed’s policies on the stock market has been an unquestionable success.
Ben Bernanke’s Fed has been so successful in pumping up the stock market, in fact, that just about everyone with any gray matter left on Wall Street has officially protected himself by uttering, “bubble.”
As you might have heard, the stock market is making record highs almost daily (as it did Monday, for the 48th time this year). And prices are up 25 percent this year alone.
This despite the fact that corporate earnings (which are supposed to determine stock prices) are weak.
The biggest recent pop in stocks, in fact, occurred last Wednesday, right after the Federal Reserve said it was going to scale back on its quantitative easing (QE) program by $10 billion a month.
Through this highly unorthodox QE policy, the Fed has managed to keep short-term interest rates exceptionally low. This has benefited banks, Wall Street, investors and Washington, which probably couldn’t afford to fund itself if borrowing costs reached normal levels.
But it has taken trillions out of the pockets of Americans who rely on savings. It has been called — by me and many others — the greatest effort to make the rich richer and the poor poorer in history.
So reasonable people were worried that the stock market wouldn’t be happy when the Fed decided it needed to cut back on QE. But, amazingly, stock prices rallied very strongly last Wednesday nevertheless.
Why? The official explanation we all gave at the time was that despite the tapering, the Fed was still being very accommodating on interest rates, and Wall Street needn’t worry.
But something else may have been going on. And if you were watching stock prices right after the tapering announcement, you would have noticed that the market fell sharply before suddenly climbing.
It looked like someone suddenly got an insatiable hankering to own stocks. Could it have been the Fed, or one of its Wall Street proxies? Maybe Bernanke isn’t just talking up the market like Grant and Sylla suggested.
Maybe the Fed or one of its secret Wall Street agents was actually buying stocks!
Let me finish up by getting back to Robert Heller, who said in a speech in 1989: “Instead of flooding the entire economy with liquidity … the Fed could support the stock market directly by buying market averages in the future market, thus stabilizing the market as a whole.”
In other words, the Fed should rig the market, although Heller thought it “ought not to be very ambitious.”
The Fed’s current QE program, which has printed so much new money that the Central Bank’s balance sheet is now $4 trillion, is as ambitious as anything ever done to the economy. For the Fed to rig stocks on top of all that additional liquidity would be insane.