Follow-Up For Bernanke

Recap: Before Ben Bernanke's confirmation hearing by the Senate Banking Committee, I posted this list of questions to ask him. After the hearing, Sen. Jim Bunning submitted my questions in writing to Bernanke, along with many of his own. The full set of questions and answers is here. Bernanke failed to respond completely to this question of mine (page 25):

Before the financial crisis there was a widespread sense, especially on Wall Street trading desks, that the stock market was strangely resilient. This encouraged excessive risk-taking in various types of assets. Do you have direct or indirect knowledge of the Federal Reserve or any government entity or proxy ever intervening to support the stock market (or any individual stock) via futures or in any other way? If yes, who decides the timing of such intervention and with what criteria? How is it funded? Which Wall Street firm handles the orders, and who sees them before they are executed?

Bernanke's response:

The Federal Reserve has not intervened to provide support to the stock market or individual stocks by trading in futures or any other financial instrument. I have no knowledge of any other U.S. government entity providing such support.

Bernanke's answer was incomplete because he ignored the word "proxy," an important part of the question. John Crudele then wrote this column in which he referenced my question verbatim.

This is an important issue for several reasons. As my question posits, in the years leading up to the financial crisis there was a widespread belief that the stock market was backstopped. As a former trader on one of Wall Street's top sell-side desks, I've experienced this firsthand and seen how it influences the perception of risk among society's biggest risk-takers. Current conversations with friends on bailed-out trading desks, where risk and leverage have surged in recent months, indicate that this belief is as strong and widespread now as it was in the period that preceded the crisis.

The issue of intervention is also important for other reasons, which I wrote about in this article for The American Conservative in January 2008:

The Dow is composed of only a handful of companies, but there’s no more important barometer of public psychology. The behavior of that small group of stocks can paper over a lot of distress under the surface. So what happens if that barometer starts to fall and interest-rate policy, a blunt tool that works with a lag, isn’t enough? The possibility of direct intervention in the stock market has been the subject of much debate in the financial community. Some believe that the government -- either the Federal Reserve, the Treasury, or a proxy -- has intervened in the past to prop up the stock market. If that’s indeed the case, a national debate about it should take place. Government-sanctioned intervention in the stock market would have serious implications, including the use of public money to buy stocks while corporate insiders are selling, select Wall Street trading desks profiting from knowledge of the intervention, and the ability to boost the market prior to an election or other event. We know from the past few years that much can be justified when a nation is “at war.”

Bernanke must now give a clear and complete answer on this, preferably before the Senate votes on his confirmation. Other select Fed officials need to be questioned as well, and that should certainly include William Dudley and Brian Sack from the New York Fed. Tim Geithner and top Treasury officials also must be included, for reasons Crudele explains. Get everyone on the record, in writing and in person if possible.

I phrased the original question to leave as little wiggle room as possible, since it's not enough to ask, "Does the Fed intervene in the stock market?" Follow-up needs to be as comprehensive and specific as possible. My suggestion:

Has the Federal Reserve, Treasury, or any part of the government ever directed or otherwise engaged a proxy or intermediary -- including but not limited to a private sector entity, foreign central bank, or foreign government -- to take action intended to support the U.S. stock market (or an individual stock) via futures purchases or in any other way? Has the Federal Reserve, Treasury, or any part of the government ever had an understanding with or given any assurances to a private sector entity, foreign central bank, foreign government, or any other party regarding compensation or consideration for losses related to intervention in the U.S. stock market or an individual stock? Has the Federal Reserve, Treasury, or any part of the government ever been involved in any type of effort -- via the Exchange Stabilization Fund, foreign custody accounts, System Open Market Account, or any other account or mechanism -- to intervene in or support the stock market or an individual stock?

These questions are important, as is the specific phrasing. Because of Bernanke's conspicuously incomplete response and the return of the stock market's perceived backstop, they need to be asked immediately.