Finance Roll

"We're now no different from any of those Western European semi-socialist welfare states that we love to deride. Italy? Sure, it's had four governments since last Thursday, but none of them would have allowed this to go on; the Italians know how to rig an economy."

- Bill Saporito, "How We Became the United States of France," Time (September 21, 2008)

October 24 marks the 79th anniversary of the October 1929 stock market crash. Heavy selling started on Thursday, October 24, 1929, and accelerated the following week on Black Monday and Black Tuesday, October 28 and 29. Many feared a repeat of this disaster on Friday, October 24, 2008, after Japan's Nikkei stock average fell nearly 10% during the night, Hong Kong's Hang Seng fell 8%, and Germany's and Britain's fell 5%.

"In a stunning turn of events," reported Yahoo! Finance, "the futures for the major indices were 'lock limit' down before the start of trading Friday, meaning they had hit a 5% threshold that prevented them from trading any lower until the stock market opened Friday." Traders prepared for the worst, but remarkably, disaster was averted. The U.S. market fell only 3.5%, just another "ordinary" bearish day.

Why the more modest drop in the U.S., where the financial debacle originated and should have hit hardest? Suspicious observers saw the covert hand of the Plunge Protection Team (PPT), the group set up under President Reagan to maintain market "stability" by manipulating markets behind the scenes. Bill Murphy commented in LeMetropoleCafe.com:

"Today the Muppets on CNBC were remarking how well our market acted, not falling apart as expected. All day long they spoke of how our market was acting differently today than every other stock market in the world. Well hello, the other countries don't have a PPT, which is WHY our market is so different.

"There are those who might think what the PPT is doing is right. What they don't realize is their making 'Everything is fine' for so long, and not allowing the market to trade freely . . . like allowing the stock market to fall the way it should, has kept the individual in the market . . . when they might have been SCARED out some time ago."

In response to Bill Saporito's comment in Time, it might be countered that Henry Paulson's Plunge Protection Team is quite adept at rigging an economy. The difference between an acknowledged socialist state and the stealth socialism we have in the U.S. today is that in a socialist state, everyone expects the market to be rigged and operates accordingly. In a rigged pseudo-capitalist economy, investors are easily separated from their money because they expect the market to follow "free market principles" based on "supply and demand." They are seduced into "pump and dump" schemes - artificial manipulations that allow insiders to unload stock at a high price or buy it at a low price - because they trust in Adam Smith's "invisible hand," which is supposed to automatically set things right in a market left to its own devices. The market today is indeed controlled by an invisible hand, but it is not necessarily serving the interests of small investors.

PLUNGE PROTECTION FOR SOME, PLUNGE CREATION FOR OTHERS

The most egregious examples of market manipulation have been in gold, silver and oil. The official "spot" (or cash) prices of gold and silver were taken down sharply in the week before October 24, despite the fact that physical demand has been inexorable. Gold is available in the "real" market only at huge markups, and popular types of silver are not available at all.1 We were taught in school that communism does not work because when industry is in the hands of a single owner (the government), competition is eliminated and chronic shortages and black markets develop, since the government does not let prices respond to "supply and demand" but dictates them from the top. Today this is happening with gold and silver, with the true physical price varying radically from the reported paper price.

Gold is known as the "contra-investment," the "go to" investment which historically has gone up when other stocks were failing. Investors see it as something tangible that will hold its value when everything else is falling apart. For that reason, rigging the market to "maintain stability" means suppressing the price of gold.

The current round of gold manipulations started on Thursday, October 16, at 10 am, when the price of gold suddenly suffered a freefall plunge of $45 within minutes. It continued to drop until it was down by nearly $60 in a little over an hour. Nothing happened on Thursday between 10 and 11 am to warrant this vertical drop. If anything, gold should have been shooting up in the same exponential fashion that it was falling. On Wednesday, the stock market had dropped over 700 points, and Dow futures (bets on which way the market would go) were down by 150 points Wednesday night. During the night, the Japanese stock market fell more than 10%, and all European markets were down.2 Thursday morning, among other very bad economic news, U.S. industrial output was reported to have posted its biggest fall in 34 years, and mid-Atlantic factory activity had crashed unexpectedly from September to October. Yet Dow futures were suddenly 130 points higher; and gold was slammed down right at 10 am, although physical gold was available only by paying huge premiums, and gold prices around the world were shooting up. The day continued in the same counterintuitive way, just one more egregious example of an ongoing pattern of manipulation that has become so blatant that either the manipulators have become supremely confident of their invulnerability or they are so terrified of impending doom that all pretense of plausible denial has been abandoned.

"THE MOST MASSIVE INTERVENTION SINCE ROOSEVELT"

Market manipulation is not generally discussed by the commentators on CNBC, but sense can hardly be made of today's wildly unpredictable trading patterns unless the plays of powerful men behind the curtain are factored in. One commentator who does talk about this manipulation is Don Coxe, strategist for the Bank of Montreal. In a weekly conference call on September 5, 2008, he described what has been going on in the markets since July as "the most massive intervention of government into the capital markets or the financial system since Roosevelt closed the banks back in 1933."3

According to the British Globe and Mail, Coxe is "no paranoid conspiracy theorist. As the chairman and chief strategist of Harris Investment Management in Chicago, he is one of the most respected investment authorities in North America."4 The unprecedented intervention he described went back to when the financial establishment was facing a very banker-unfriendly market in July. Gold was about to break through the psychologically important $1,000 mark, oil was above $140 dollars a barrel, the dollar was breaking down, the bank stock index had dropped in six months from 90 to 50, and the Federal Reserve had a balance sheet to match, after making huge loans to banks on shaky collateral. Fannie Mae and Freddie Mac were on the verge of collapse, and hundreds of billions of their securities were held abroad. As if by magic, these trends all suddenly reversed, beginning with a dramatic reversal in the swooning dollar.

How was it done? The cat was let out of the bag by the Nikkei English News, which reported in late August that finance officials from the U.S., Japan and Europe had drawn up plans to strengthen the dollar following the collapse of investment bank Bear Stearns. The intervention called for the central banks to purchase dollars and sell euros and yen if the dollar's value dropped significantly, with Japan providing the yen for the currency swap.5

As the dollar strengthened, gold, silver and oil plunged. The pundits read the drop in gold and silver as a reaction to the rise in the dollar, since precious metals rise historically when the dollar falls. But what they failed to explain was why the dollar was rising. As Bill Murphy observed, "the dollar rallies sharply whenever the US stock market comes under pressure. It is almost simultaneous." He quoted one of his newsletter contributors:

"Since the [stock market] low on 22 SEP we have lost 8.3 trillion bucks worth of asset value within the equities markets and what happens? The US dollar goes up, and up, and up, and up, and up. From what? 72 to 84 now (up 1.14 just today??!!??)? A non-stop rally that is NEVER adversely affected by news or market events. It's almost been a 45-degree ascent. THAT is pure unmitigated intervention of a huge degree."6

How to explain the stunning reversal in the dollar's slide? In Coxe's September 5 conference call, he candidly laid out how the Federal Reserve and the Treasury, in conjunction with the CFTC (Commodity Futures Trading Commission) and the SEC (Securities and Exchange Commission), colluded to manipulate this "necessary" bounce in the dollar, along with a corresponding boost to financial stocks and sudden collapse in the commodities markets. Coxe called it "brilliant," but the play was at a cost of millions of dollars to commodities investors and short sellers who were betting on what a "free" market "should" do. Oil plunged more than 50%, from a high of $145 a barrel in July to a low of about $64 on October 24. The same pattern was seen in silver and gold, with gold falling from a high of over $1,000 an ounce to a low of $700 on October 23. It all added up to a massive "pump and dump" scheme, with insiders pocketing the fortunes lost by unsuspecting investors. It's a messy business, but somebody has to rake in these obscene profits for the "greater good" of market stability.

"THE MOST SORDID SCHEME IN THE HISTORY OF FINANCE"

Theodore Butler, writing on SilverSeek.com on September 2, reported that there was more than just central bank collusion going on behind the scenes. He tracked an unprecedented wall of short selling of gold and silver - massive "borrowing" of stock to sell it into the market, forcing down the price, then "covering" by buying the stock back at the lower price. Butler wrote:

"In gold, no more than 3 U.S. banks sold short in one month more than 10% of world annual mine production. This was the largest short position in gold and silver ever recorded by U.S. banks. After the massive and concentrated silver and gold short position was established by these U.S. banks, the [gold and silver] markets experienced a historic decline in price. It all took place during the first widespread retail silver shortage in history. It is completely at odds [with] how the law of supply and demand works."

Butler called it the most sordid scheme in the history of finance. "It makes a mockery of financial regulation and the rule of law," he wrote. "It allows a large financial entity, or entities, to rip off the investing public and gouge them for obscene profits. It is cronyism, back-room dealing, market fixing and inside information at its worst."7

While gold and silver were being shorted to oblivion, the SEC imposed a ban on the short selling of 19 select financial stocks, including Fannie Mae and Freddie Mac. It was blatant favoritism for the privileged few, but Coxe said it was necessary to make financial stock look attractive to potential buyers (particularly sovereign wealth funds), in order to allow the banks to sell their stock and raise the capital necessary to start lending again.

At the same time, Treasury Secretary Paulson sought and was granted an unlimited credit line to Fannie Mae and Freddie Mac directly from the U.S. Treasury, as well as the authority to buy the mortgage giants' stock. Fannie and Freddie were put into a form of bankruptcy called a conservatorship; but unlike in the ordinary bankruptcy, in which creditors divide up the debtors' available assets without government help, in this case the claims of the lenders were guaranteed by the Treasury. Foreign lenders were bailed out while the shareholders were wiped out - including banks, pension funds, and other institutions holding the savings of millions of Americans. In the long run, the "bailout" created more problems than it solved; but according to Coxe, it was a necessary sacrifice to keep the mortgage market functional for the near term.

How near? The Presidential election is now only weeks away. Markets have an uncanny way of looking good before elections.

Rob Kirby, writing in LeMetropoleCafe on September 9, observed that there are laws and stiff penalties against market collusion. The U.S. antitrust laws impose fines of up to $10 million and jail terms of up to 3 years for unfair practices that inhibit competition or monopolize markets in restraint of trade. "I admire [Coxe's] candor," said Kirby, "but my take on this is that all the perpetrators should face a firing squad, or worse, for treason."8

That probably won't happen, however, because the "perpetrators" can claim governmental immunity. The Plunge Protection Team, officially called the President's Working Group on Financial Markets, was formed by President Reagan in response to a stock market crash in 1987 for the express purpose of "maintaining investor confidence" by manipulating markets with public funds. The PPT includes the President, the Secretary of the Treasury, the Chairman of the Federal Reserve, the Chairman of the Securities and Exchange Commission (SEC), and the Chairman of the Commodity Futures Trading Commission (CFTC).9 Calling the shots is no doubt Secretary Paulson, who now has a $700 billion fund to use for the purpose, after Congress passed his massive bank rescue plan on October 3.

"SOCIALISM FOR THE RICH"

Nouriel Roubini, Professor of Economics at New York University, wrote on his popular blog Global EconoMonitor:

"Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill . . . ."10

Investment guru Jim Rogers told "Squawk Box Europe":

"America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich. . . it's just bailing out financial institutions. . . .

"This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this."11

If we are going socialist, we should own up to it and have some transparency in what's going on. We the people need to know how to plan and to invest for an uncertain future. If we're nationalizing the banks, let's nationalize them all the way, with the profits going back to the people along with the losses and risks. Better yet, let's nationalize the Federal Reserve, so it can issue "the full faith and credit of the United States" directly, without having to back this credit with a multi-trillion dollar federal debt that will never get paid back but just continues to grow. It would actually be less inflationary for the government to print dollars directly than for it to print bonds that are swapped for dollars created on a printing press by a privately-owned central bank, because in the latter case both the bonds and the dollars remain in circulation. U.S. bonds not only serve as money around the world, but they count as the "reserves" for banks to create many times their face value in loans. These bonds never get paid off but just get rolled over from year to year, inflating the money supply just as if dollars were printed directly; but the bonds carry the added burden of perpetual debt and interest payments.

The costly bank bailouts and blatant market manipulations going on today are justified as being necessary to save a private banking system that we think we need to get the credit that keeps the economy running. But we don't actually need private banks to get credit. Many authorities have attested that, contrary to popular belief, banks don't lend their own money or their depositors' money. Every dollar lent by a bank is money created out of thin air on a computer screen. It's just "credit." The bank "monetizes" the borrower's own promise to repay. The government could issue its own credit in the same way. There are a number of successful historical precedents for this, including the publicly-owned central banks of Australia and New Zealand, which saved those countries from the devastating effects of the Great Depression in the 1930s; and the publicly-owned bank of the colony of Pennsylvania, which funded the Pennsylvania provincial government without taxes or debt in the first half of the eighteenth century.

Today's bankrupt banks dug their own black hole when they loaded up their books with lucrative but highly risky derivative bets that are now backfiring on them. Instead of trying to clean up the banks' books by throwing taxpayer money at this impossible-to-fill black hole, we would be better off simply letting the banks go bankrupt, as President Reagan did with the savings and loan industry in the 1980s. The banks' bad debts could then be discharged in bankruptcy, and their assets could be absorbed into a public credit system with a new, untarnished set of books, a system that would serve the interests of the people and return the profits to the people.

SO WHAT IS AN INVESTOR TO DO?

That still leaves the question of how to negotiate today's very unpredictable markets. The Friday before the white-knuckle October 24 ride, investors were being encouraged to get back into the market. Commentators cheerily announced the best market week in 5-1/2 years, after the Dow climbed from a low of 7,774 on October 10 to a high of 9,924 on October 14. But the week still ended below 9,000, and the market was coming off the most historic plunge since the Great Depression, down from a high of 10,845 on October 3 to below 8,000 a week later. By October 24, the Dow was again hovering near 8,000.

"Frankly, I'm sick of this," said CNBC market watcher Erin Burnett as she tracked the Dow's wild gyrations on October 23. "Up and down, up and down. It doesn't seem to mean anything or be linked to anything."

Beleaguered investors might well decide it's time to pull their money out of a stock market that is looking more and more like a rigged and risky Las Vegas casino and put it somewhere else. As one talk show commentator quipped recently, "I'm fully diversified. I've got some under the mattress, some under the floor boards, some in the backyard."