Wednesday, May 17, 2006

Notes From The Nanny State

I read them so you don't have to. As part of my twisted taste in reading material and perhaps as an indication that I need to get out more, I'm finding interesting nuggets in recently-released transcripts of Federal Reserve meetings. At the FOMC meeting on May 16, 2000, Peter Fisher, then manager for the Fed's System Open Market Account, said the following as part of his presentation to the committee:
We also purchased $2.3 billion in bills for System account on April 11th. On that occasion we conducted operations from which we learned something by doing. On the first day of the quarter, [REDACTED] That was not something I was expecting to wake up to that morning; their request was a consequence of their intervention the prior evening. [REDACTED] it seemed to me that the bill market adjusted rather well to that rather large effect on supply. So, on behalf of the Committee, we purchased $2.3 billion of bills on April 11th for our own account.
Take a minute to view the actual FOMC transcript here; the above section appears on page 7 near the bottom. Note that the actual transcript does not use the word "redacted" to indicate missing text; it merely shows blank spaces where words have been removed. As a sidenote, I've read many FOMC transcripts and can't recall having seen such obviously altered text before.

Some context: Fisher refers to "the first day of the quarter," which was April 3, 2000. Readers may recall what was happening in the stock market at that time: the Nasdaq had fallen 18% from an intraday peak in early March to its low on April 3. On April 3, the Nasdaq fell 7.6%. But on that same day the Dow rose 300 points or 2.8%, which caused market observers to marvel at the relentless buying of a handful of psychologically important stocks while the technology sector collapsed.

I've contacted the Federal Reserve twice to ask about the redacted text, and have not received a reply. I know this blog has many keen observers of and participants in the financial markets, and I look forward to your speculation via posted comments or private email about the nature of the "intervention" to which Fisher refers, and by which he was apparently surprised.

This is not an insignificant issue, as the consequences of various forms of intervention over many years are manifest now in oil, the dollar, gold, and geopolitics.


Anonymous Anonymous said...

I am a Money Manager. I often times see irrational bids, esp. in the futures markets, that clearly indicate concerted buying to prevent market collapse.

Dare I say it: the PPT is evident in Mr. Fisher's comments.

5/17/2006 2:35 AM  
Blogger maeldon said...

Puppet Masters............

5/17/2006 8:20 AM  
Blogger Mike said...

Damn. That's astonishing stuff, CR.

5/17/2006 10:30 AM  
Anonymous Anonymous said...

April 3, 2000:

Rep. Patrick J. Toomey of Pennsylvania sponsored an amendment to an "emergency" spending bill that would set aside $4 billion of this year's projected $26 billion non-Social Security surplus to pay down the publicly held federal debt. The measure, which Mr. Toomey calls the first of its kind in the modern Congress, passed 422-0.

5/17/2006 11:26 AM  
Anonymous Anonymous said...

Didn't I get this off your site in the first place, TCR? Hmmm, I guess not, a quick Google search of your site comes up blank.

The Visible Hand: Government Intervention in the Stock Market (Adobe Acrobat file)

On the one hand, it's nice that the supposedly free-market, pro-business government tosses lassiez-faire aside at a moment's notice in order to prevent the economic dislocation that a stock market crash would cause. On the other hand, such actions inevitably prop up companies which a "real" free market would select against, leading to further interventions, and expense of taxpayer dollars (e.g. bailing out the airlines, etc.)

5/17/2006 12:17 PM  
Anonymous Anonymous said...

Dumb question - what is the PPT?

5/17/2006 5:44 PM  
Anonymous Anonymous said...

I certainly understand the need for Fed open market operations in the treasury market. My question, for TCR or any other financial professionals, is this: is government intervention in equity (or equity futures) markets simply an ethical issue or is it actually supposed to be illegal?

5/17/2006 6:19 PM  
Anonymous Anonymous said...

To Jason,

I think it's Powerpoint. Google also refers to Planned Parenthood of Toronto, but no relation here.

5/17/2006 7:30 PM  
Anonymous Anonymous said...

Think of all the folks sitting in cubicles all day and sending money each week to their 401k so the fund managers can buy stocks at prices that have been manipulated upwards to serve someone’s agenda or ego.

5/17/2006 8:57 PM  
Blogger semper fubar said...

Jason - Plunge Protection Team

Read Kevin W's link.

Don't you just love it when all your darkest conspiracy theories turn out to be true?

5/17/2006 10:00 PM  
Blogger semper fubar said...

And by the way, where the heck was the PPT today?

5/17/2006 10:02 PM  
Blogger Ritholtz said...

Here's the problem with the Plunge Protection team thesis: Where were they in 2000/01?

The Nasdaq plummets 78%, and the PPT is nowhere to be found? Kinda kicks the whole idea down the tubes . . .

Lets' see where the PPT is by the end of 2006.

5/18/2006 7:01 AM  
Anonymous Anonymous said...

The great thing about conspiracy theories is that they're impossible to disprove -- whenever anyone brings up a counterexample, you just say the conspirators are hiding deeper.

Where was the PPT (Plunge Protection Team) in 2000/2001? Well, maybe they threw umpteen billion dollars of our tax money into market props, but it crashed anyway. Past performance is no guarantee of future returns. :)

5/18/2006 12:49 PM  
Anonymous Anonymous said...

Well, not our nanny state...
that would just have been the BOJ clamping down the yen. It plunged to 106 on 3/30 to 103 on 3/31, and would have shot through 100, but bounced up to 105 on Mon 4/3. BOJ sold USD bills for JPY in their day/our evening.

5/18/2006 4:07 PM  
Anonymous Anonymous said...

Well, the news clip that rdg posted fits pretty well into the redacted lines- as they also are talking about Treasury buy back operations in the same section.

Anyway, so what if there were a PPT? Sure, it would be relevant to investors and traders to some extent, but would it really be a big deal? People talk about it like it's a sinister conspiracy, as if the Fed flooding the mkt with liquidity during crises didn't already have the same effect. Many countries already have such a thing in place.

Taiwan for example:

5/18/2006 9:40 PM  
Anonymous Anonymous said...

What’s wrong with it is if there is a ‘hand-in-the-house,’ the well-connected players can make fortunes based on this knowledge with little risk of prosecution since a trial would make everything public.

5/19/2006 12:58 AM  
Anonymous Anonymous said...

The Idea of the PPT is not to prevent bubbles from popping; rather the idea of the PPT is to ensure that we dont' have another 1987 type of day.

5/19/2006 2:11 AM  
Anonymous Anonymous said...

To Anonymous 9:40 --

Pardon me for piling on and repeating what anon12:58 just said... but as with most politics, what's wrong is not so much the crime as the cover-up. If this PPT exists, and if it is indeed secret, how do we know they are using our tax dollars wisely and prudently? When they pick a stock or a commodity to "intervene", do they really get the most bang for the public buck, or do they steer things to their friends? Do their favorite brokers get advance warning, tell their friends where to bet, and make a killing? (It may seem hard to believe right now, but the Bush II administration did not actually invent the concept of Cronyism. -- they merely perfected it. -- So even though many of these events allegedly occurred during Bush I and Clinton, it doesn't make me any more comfortable.)

Plus the whole "moral hazard" problem. If you believe so much as a word of the free-market rhetoric that all politicians (both major parties) are constantly spouting, then the objections are legion. If you work hard, save money, invest in a stock that struggles but then ekes out a small profit through hard work and honesty -- and then your neighbor Joe gambles his whole retirement on a puffball snake oil commodities broker that he heard about in his e-mail Spam folder -- when the near-crash comes, your stock depreciates, but the government swoops in and rescues Joe's puffball company... why is Joe more deserving of government largesse than you are?

If the government has billions to spend propping up companies that are apparently about to fail in the free market, why can't it afford to spend a few billion helping honest, hardworking companies? By, for example, nationalizing health care so that small businesses don't have to deal with that paperwork? By revitalizing our public education system, so that uneducated people become better employees? Et cetera, et cetera. Do we really know for sure that cloak-and-dagger stock-market manipulation is a more effective and prudent use of government money than above-the-board investment in public institutions like those?

If this thing exists, and is secret, there is a lack of accountability. But if it were not secret, like the one in Taiwan apparently, then its existence would make 25 years of "free market" rhetoric from politicians on both sides of the aisle, into utter hypocrisy.

5/19/2006 3:06 AM  
Anonymous Anonymous said...

Don't really see the problem with agriculture commodities. If it pays, it pays!

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