Asia Times Online - Speaking Freely

News articles and editorials from Asia Times Online frequently come our way, and they rarely disappoint. It's not clear whether this is because others continue to find diamonds amongst the coal and feel compelled to share them, or because the writing there is overall, of consistently high quality.

Yesterday another gem came to our attention.

It seems that the report (warning - PDF) by John Embry and Andrew Hepburn of Sprott Asset Management, "Move Over Adam Smith: The Visible Hand of Uncle Sam", is getting much more attention around the rest of the world than here at home. Yesterday's article in Asia Times Online first appeared a few days prior in Japan Focus - a publication based just east of the Chinese mainland with a similar penchant for speaking freely.

The Embry/Hepburn work is well worth reading in its entirety. In addition to a well documented account of the Plunge Protection Team's surreptitious intervention in financial markets since 1987, it offers a few grim warnings about moral hazard precedents and unfair competitive advantage accorded to institutions aiding government agencies in the plunge protection work.

But even more intriguing than the report itself is the commentary by an unidentified writer from Japan Focus, which was reprinted in Asia Times Online:

If their account is correct, it means that US markets look a lot like the Japanese markets that were long derided for being subject to repeated official manipulation. A more important conclusion may be that US markets are even shakier than many believe.

The trail that the two analysts follow is long, dating to just after Black Monday, October 19, 1987. On that day, the US stock market abruptly crashed. The Dow Jones average dropped by 508 points, to 1738. It threatened to do even worse the next day when, after a brief rally, it went into reverse.

The markets seemed on the edge of a meltdown, but the abyss failed to open up. This lack of a meltdown has generally been attributed to the Federal Reserve Board's (FRB) steady hand and promises of liquidity. But sophisticated research on the events of those two days indicates that a sudden and unprecedented rise in the Major Market Index (MMI) sparked a recovery across the board. There is good reason to suspect that this recovery was the result of concentrated buying by a few firms.

It was after this crash that the President's Working Group on Financial Markets was put in place to prevent destabilizing declines. The Plunge Protection Team was institutionalized in 1989 as a follow-up from this working group, and originally included the top public-sector financial authorities.

On subsequent interventions that have become more frequent during the term of Fed Chairman Alan Greenspan, who is due to retire in 100 days:

This aggressive manipulation of the system took place on Alan Greenspan's watch as chairman of the FRB. The authors don't discuss the fact that Greenspan is to retire at the end of next January and the White House is having trouble finding a replacement in whom the markets will believe.

It may be that no credible candidate wants to take the baton from Greenspan at a time when it seems likely that the market will implode. Observers note that earlier changes of the FRB chair have generally been followed by much buffeting in the markets as they test the new maestro.

Market drops are common. Present risks include the American housing bubble blowing out, oil prices exploding, and inflation blowing in, at a time when the twin deficits of trade and budget are already in the troposphere.

This situation points to the likelihood that the Plunge Protection Team will be working overtime early next year.

It is likely that the author meant stratosphere, rather than troposphere, but when translating to English, funny things apparently happen.

The point here is that there seems to be growing awareness of the predicament in which the world finds itself today - the recipe of "bring to a steady boil, and remove Greenspan" could in fact be a recipe for disaster. No one knows the extent to which markets have been propped up over the last couple decades - as our Fed Chairman has been saying frequently as of late, stability may be breeding instability.

What's distinctly different this time around however, is that the most bubbly of all markets today is real estate. One has to wonder if the Plunge Protection Team has been gearing up to buy single-family homes in large quantities, if need be, over the next few years in order to keep the U.S. real estate market, and hence the world economy, from collapsing.

If they haven't, maybe they should be.

A billion dollars buys 2000 half-million dollar homes - what's a few billion more here or there each month. In December, maybe buy 1000 homes in San Diego, another 1000 in Boston, and 500 in Miami and Las Vegas - you get the idea - this could work wonders at keeping prices at levels where the citizenry will feel comfortable continuing to remove equity to support consumer spending in the new American world of zero-savings.

If some government agency could be set up to rent out these newly purchased homes, then that could create even more downward pressure on housing rental costs, and hence keep reported inflation, particularly reported "core" inflation at acceptable levels.

Just a thought.

Here are a few other recent Asia Times Online articles that are worth a look:

• The Wizard of Bubbleland - two pieces by Henry C K Liu on Alan Greenspan. Long and detailed but worth the effort, however beware of the truly disturbing Photoshop work at the expense of John Everett Millais.
  
  
• The inflation freight train by Jephraim P Gundzik, with the enticing section headings "Join the party", "Choose your poison: Inflation or bankruptcy", and "Deluded optimism".
  
  
• America's Nightmare: Becoming Britain by Jim Lobe - the title says it all.
  
  
• A commentary on some things Paul Krugman said a few months back while visiting Thailand - 'We are a banana republic'.
  
  
• Two commentaries by The Prudent Investor blogger Toni Straka - The next reserve currency and Killing the dollar in Iran.