The Great American Bailout of 2008: Where We Were, Where We Are, and Where We're Going, Part II
I was talking to my stockbroker today and I said, "Waiter!"
- Jay Leno, October 1987
Jay Leno's opening joke on the Tonight Show got a huge laugh from the audience, and with good reason.
That may sound a bit odd, but you need to consider the context. You see, his wisecrack came within days of the Monday, October 19, 1987 stock market crash, an event that has come be known as Black Monday.
On that fateful day, the Dow had dropped over 22%, a record one day percentage plunge exceeding even the big one-day percentage plunges that marked the 1929 stock market crash, and people were in the mood for some good comic relief.
To give a sense of what people were thinking at the time, TheStreet ran an article last year marking the 30th anniversary of Black Monday. In his piece, author Michael Brown noted, "Many thought the crash was the start of the next Great Depression and the headlines of the day reflect it."
As it turned out, no Great Depression ensued. In fact, things got back to normal pretty quickly. Today, Black Monday is considered something of a one-off oddity. An interesting piece of investing trivia to be sure, but not something terribly relevant for today.
What does Black Monday have to do with the 2008 financial crisis?
You may be wondering at this point why I'm dragging Black Monday into a discussion of the 2008 financial crisis. What's October 1987 have to do with our current situation?
In the opinion of this author, the answer is quite a lot. Allow me to explain.
A month after Black Monday, James Stewart and Daniel Hertzberg penned a Pulitzer-prize winning article for the Wall Street Journal titled "Terrible Tuesday: How the Stock Market Almost Disintegrated A Day After the Crash."
The focus of their piece was not on Monday plunge, but on the events of the next day, Tuesday, October 20. They opened their article by writing, "A month ago today, the New York Stock Exchange died. But within an hour or two, it was raised from the dead."
So just how was the stock market resurrected on Tuesday when all seemed lost? The article's subheadline provides the answer. It reads, "Credit Dried Up for Brokers And Especially Specialists Until Fed Came to Rescue."
Stewart and Herzberg give more details in their article, writing, "Only the intervention of the Federal Reserve, the concerted announcement of corporate stock-buy-back programs, and the mysterious movement - and possible manipulation - of a little-used stock index futures contract saved the markets from total meltdown."
So there you have it. The V-shaped recovery - a "V-shaped" recovery is a term used by financial types when talking about a sharp plunge in value followed by a rapid recovery, so called because the price chart of a stock or stock index goes nearly straight down and then straight back up producing a v-shape on the chart - that occurred after Black Monday was orchestrated by the Federal Reserve System (henceforth, The Fed), which is the name of the Central Bank of the United States.
And just who was it who was running the Fed at the time? It was none other than rookie Fed Chairman Alan Greenspan, a man then little known but someone who would go on to become perhaps the most famous Fed Chairman of them all.
It is not my intention here is go into great detail about Mr. Greenspan, his previous life as an Ayn Rand devotee and supporter of the gold standard, the philosophical about face he pulled to become counterfeiter in chief during his 18 years as Fed Chairman, and his subsequent attempt to rehabilitate his image following his retirement.
While these are things worth commenting on, for our purposes I would prefer instead to draw your attention to another noteworthy aspect of his career: that of an activist central banker. Many consider Greenspan to be the first of the modern, activist central bankers, the man who set the "gold standard" for central bank interventions in the economy to which today's central bankers look for guidance.
If Stewart and Herzberg are to be believed, it was the Fed under Greenspan's guidance that bailed out the stock market in 1987. In their article, they bring up three principal items that prevented a stock market meltdown following Black Monday, intervention by the fed, a concerted announcement of corporate stock buy-buybacks, and market manipulation.
In the opinion of this author, Stewart and Herzberg may have been more accurate if they had simply mentioned intervention by the Fed which consisted of orchestrated announcements of stock buy-backs and manipulation the stock market behind the scenes through asset purchases.
Since 1987, market intervention by central bankers in concert with governments has grown to the point that one insider has stated flatly, "there's no price discovery anymore by the market...governments impose prices on the market."
Now one may be tempted to reject the idea of central bank and government intervention in financial markets as just a lot of undocumented conspiracy theory with no basis in anything resembling fact.
To this I would respond that not only do central bankers and governments have both the motive and the methods for interfering in financial markets, but the evidence that they do is overwhelming.
[caption id="attachment_4664" align="aligncenter" width="413"] A chart taken from Stewart and Herzber's November 20, 1987 Wall Street Journal article showing the "miraculous" jump in the Major Market Index future contract (circled). Many believe this was the catalyst for the rapid recover of the stock market from Black Monday's sharp selloff.[/caption]
Take, for example, the 1987 Wall Street Journal article cited above which clearly states the Fed's role in propping up the market.
Later in the same article we find the following,
Tuesday, [October 20, 1987] 12:38 p.m. With the closing of the Big Board [the New York Stock Exchange] seemingly imminent and the market in disarray, with virtually all option and futures trading halted, something happened that some later described as a miracle: In the space of about five or six minutes, the Major Market Index futures contract, the only viable surrogate for the Dow Jones Industrial Average and the only major index still trading, staged the most powerful rally in its history. The MMI rose on the Chicago Board of Trade from a discount of nearly 60 points to a premium of about 12 points. Because each point represents about five in the Industrial average, the rally was the equivalent of a lightening-like 360-point rise in the Dow. Some believe that this extraordinary move set the stage for the salvation of the world's markets.
How it happened is a matter of conjecture on Wall Street. Some attribute it to a mysterious burst of bullish sentiment that suddenly swept the markets. Some knowledgeable traders have a different interpretation: They think that the MMI futures contract was deliberately manipulated by a few major firms as part of a desperate attempt to boost the Dow and save the markets (emphasis mine).
...statistics supplied by the Board of Trade lend circumstantial support to the thesis that the index was driven upward by a small number of sophisticated buyers...
...the market got another important psychological boost: the announcement of stock buybacks by major corporations...
..."It looks like there's almost a get-together on the part of corporate America to prop up the market," Stanley Abel, a consultant specializing in buybacks, observed that day.
...On Wednesday, Americans woke to newspaper headlines proclaiming the largest rise in the Dow's history
Note how the sudden rise in the MMI index is explained by some as a "Mysterious burst of bullish sentiment." As with theology, so with finance, when someone starts talking about "mysteries," one would do well to be skeptical.
No profit seeking trader in his right mind would plow money into a futures market while the entire financial system was locking up. In trader's lingo, doing this is like catching a falling knife. It's best just to let the knife fall and pick it up once it's hit the floor.
In the opinion of this author, the traders had it right. The Major Market Index contract was manipulated up, almost certainly with the Fed and/or the Exchange Stabilization Fund supplying the capital for the purchases.
Going back to the question I posed earlier, What does Black Monday have to do with the 2008 financial crisis?
I would answer the question this way. There's an old saying, you can't tell just one lie. Tell a lie, and you'll find you have to cover it up with another lie, then another, then another.
And as with lies, so it is with market interventions. You can't do just one. One intervention inevitable begets another intervention. And not only that, but as with lies, the market interventions must get bigger the longer they go on.
Interfere in the financial markets and you'll soon find you have a tiger by the tail. You can't hold on. But at the same time, you can't let go either. It's not an enviable place to be.
This is the import of the Terrible Tuesday interventions for our current situation. It is the contention of this author that the massive interference of the Fed and possibly other government entities in the 1987 stock market crash set the precedent for, and indeed required, the increasingly large interventions that follow in the years leading up to 2008, and indeed which continue to the present moment.
The Bible tells us "Thou shalt not bear false witness" and "Thou shalt not steal." These are commands of God, part of the summary of the moral law contained in the Ten Commandments. And these commands apply to all men everywhere at all times, central bankers and government officials receive no special exception.
It is the contention of this author that by interfering in markets to make them appear better than what they are, central bankers and government officials are lying to the public. Further, their clandestine use of public funds to effect these market manipulations are nothing other than theft.
But there's an even more fundamental problem here than just lying and stealing by central bankers and the politicians who love them.
The more fundamental issue is the immorality of central banking itself.
It is not this author's contention that things would be better if only we had better, more honest central bankers. It is this author's contention that central banking - all of it, both in theory and in practice- has no warrant in Scripture, no warrant in the Constitution and represents perhaps the most serious threat to the remaining liberties of the American people and the citizens of other Western nations of any institution in the modern world.
Not only does central banking create artificial distortions in the economy, distortions which enrich the well-connected few at the expense of the many, but it enables the growth of government, both of the welfare state and of the warfare state, to a degree that would be impossible in a system of honest money.
Lord willing, next week we shall trace the activities of the Fed, specifically its increasing interference in the financial markets in the years between 1987 and 2008, showing how the activities of Alan Greenspan, Ben Bernanke and others set the stage for the 2008 financial crisis, the after effects of which continue to envelope the United States and the West, and for that matter, the entire world to this present day.