Monday, May 19, 2008

J. S. Kim: Did Reagan end the era of free markets?

Those that argue that free markets are dead state that free markets ended when U.S. President Ronald Reagan signed Executive Order 12631 into law on March 18, 1988, establishing the Working Group on Financial Markets, known as the Plunge Protection Team [PPT] in more conspiratorial circles. The Working Group's members consist of the most powerful men in global finance - the U.S. Secretary of the Treasury, the chairman of the Board of Governors of the Federal Reserve, the chairman of the SEC and the chairman of the Commodity Futures Trading Commission. Reagan's decision to form the Working Group was inspired by Black Monday, a day when U.S. Dow Jones index shed an incredible 508 points, or 22.6% of the index's value at the time, in a single day.

The Working Group was assigned the mission of ensuring that such an event would never happen again. Instead of addressing the root causes of Black Monday such as money supply growth that encourages the formation of speculative stock market and real estate market bubbles that lead to inevitable crashes, many have contended that the Working Group instead operates by intervening in the free markets to prop up stock markets and real estate markets when bubbles form and threaten to burst, thereby compounding the problems that give rise to these bubbles instead of attacking the root of these problems.

Despite a mountain of circumstantial evidence that seems to point to the existence of "propping up" measures, circumstantial evidence is called circumstantial because of the lack of a "smoking gun".

Still, the circumstantial evidence is overwhelming, as in the case of O.J. Simpson and the bloody gloves. Just as there are still legions of people today that claim that O.J. is innocent despite the mountains of circumstantial evidence primarily because the murder weapon was never found, there will always be legions of people that insist that since free market interference is so un-American and un-democratic that there is no possible way it could happen.

In the end, only members of the Working Group themselves will ever know exactly to what extent and how frequently they intervene in free markets. But do I think O.J. murdered his wife and that various financial entities interfere in free markets? The answer and reasoning for my answer to both questions is the same. Yes - because the circumstantial evidence is overwhelming.

In recent years, members of the Working Group themselves and high-level government officials have directly fueled the rampant accusations that free markets no longer exist. In 1989, former Board Member of the U.S. Federal Reserve Robert Heller stated:

Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole.

On January 14, 1997, former U.S. Federal Reserve chairman Alan Greenspan, during a speech delivered in Leuven, Belgium, stated the following:

We have the responsibility to prevent major financial market disruptions through development and enforcement of prudent regulatory standards and, if necessary in rare circumstance, through direct intervention in market events.

Later that same year, in February of 1997, Washington Post journalist Brett Fromson stoked the fires of these supposed manipulative free-market intervention schemes by reporting that a government official who attended Working Group meetings told him that:

The government has a real role to play to make a 1987-style sudden market break less likely. That is an issue we all spent a lot of time thinking about and planning for. You go through lots of fire drills and scenarios. You make sure you have thought ahead of time of what kind of information you will need and what you have the legal authority to do.

Fromson reported that other unnamed Working Group officials told him that their mission "would be to keep the markets operating in the event of a sudden, stomach-churning plunge in stock prices — and to prevent a panicky run on banks, brokerage firms and mutual funds."

Fromson also reported that of the four bodies that constitute the Working Group, that all pay deference to the U.S. Federal Reserve's wishes because the Feds are the only entity that can create money. Given the very secretive nature of the Working Group's meetings, of which minutes of their meetings are never made available for public scrutiny, the admission of various Working Group members and their high level associates that they would directly interfere in free markets if necessary is quite curious when you consider that they unilaterally deny ever executing such interventions whenever questioned about specifics.

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