The Great American Bailout of 2008: Where We Were, Where We Are, And Where We're Going, Part III - The Plunge Protection Team

"There's no price discovery anymore in the market...governments impose prices on the market."

- Dr. Pippa Malmgren, former member of the President's Working Group on Financial Markets

When I began writing this series on the 2008 Global Financial Crisis (GFC), the 10th anniversary of which we marked last month, it seemed best to provide the reader with some context.

After all, we're marking the 10th anniversary of the event, which for many people seems like ancient history already. So there's that. But more importantly, to really understand the GFC and the Great American Bailout of 2008, a little history certainly helps provides some perspective.

The crash of 2008 did not happen in a vacuum. Rather, it was the inevitable result of prior decisions, some of which could be traced back to the 1987 Black Monday crash that wiped out over 22 percent of the value of the Dow Jones Industrial Average in a single day.

Other contributing factors could be traced further back to the 1920's and 1930's, the years immediately preceding and following the stock market crash of 1929. Just as the 1920's roared in large part due to excessive money printing by the Federal Reserve, the party ended in 1929 when the Fed, attempting to reduce the money supply that had created a financial bubble, instead crashed the stock market.

The 1930's saw unprecedented governmental regulation of the financial markets and of the economy in general, the effect of which was to prolong the economic misery far longer than was necessary. During that decade, economist John Maynard Keynes supplied the needed intellectual justification for all this governmental regulatory interference in his 1936 book titled The General Theory.

In Keynes twisted world, it was savers who were causing all the problems in the industrialized economies of the West. What was needed was more debt. And if people wouldn't go into debt on their own volition, then their governments needed to step up and do the spending for them.

Finally, one could trace the 2008 crisis back to the progressive era of the early 20th century, specifically, the creation of the Federal Reserve in the United States.

For the purpose of this series, it is not my intention to cover the creation of the Fed, the Great Depression or Keynesian economics in great detail. For our purposes, it is sufficient to note them here. Lord willing, I hope to address these topics in future series.

In last week's installment, we left off discussing the October 1987 stock market crash, an event that has come to be known as Black Monday.

As part of our discussion, we noted that on the Tuesday following the big Monday crash, things were looking pretty shaky for major US markets. But just when things looked their worst, an event occurred which some observers described as almost miraculous, a huge and unexpected rally in the futures market that jump started a rally in the major market indices.

Some attributed the rally, "to a mysterious burst of bullish sentiment." Such an explanation seems strained to this author. Why, in the midst of the worst market crash in history would there be a "bust of bullish sentiment." One of the basic rules of stock trading is to avoid attempting "to catch a falling knife."' If the market's tanking, let it tank and buy once it appears a bottom has formed.

More realistic is the view of some traders who chalked up the rally to manipulation of the futures market by a few major firms.

Although the article from which I drew this history, a Pulitzer Prize winning piece from the Wall Street Journal, did not specifically mention governmental or central bank intervention, it is the opinion of this author that ultimately it was the federal government in conjunction with the Fed that "saved" the day.

One of the reasons for my opinion is Executive Order 12631 which was signed by then President Ronald Reagan in March 1988, just a few short months after the big crash of October 1987. It established what is officially known as the President's Working Group on Financial Markets, a group better known by its more informal name, the Plunge Protection Team.

It is to this Executive Order that we now turn our attention.

Yes, Virginia, There Is a Plunge Protection Team

For many people who follow financial markets, the existence and activities of the Plunge Protection Team (PPT) are considered something of a conspiracy theory.

If someone were to go on a major financial channel and state that the government is manipulating the financial markets by means of the PPT, he would be greeted with howls of laughter in much the same way as if he'd announced he'd just returned from being beamed up to an alien mother ship where he'd visited with Elvis.

In other words, to speak of the PPT is to court being labeled a tin foil hat wearing whackadoo. If you don't believe me, check out this 2008 clip from CNBC.

Taken in the midst of the GFC, most of the six (six!) CNBC commentators can barely contain their disdain for their one loan guest who dares suggest the PPT was involved in a couple of big ramp ups in the S&P during October 2008.

There are several noteworthy comments made by the CNBC crew. I've listed the times of each comment for your convenience.

0:56 - One of the commentators makes a weak attempt to refute the guest by suggesting he had his days mixed up. Scott Nations, the man making the claims that the PPT had interfered in the S&P on 10/10 and 10/28 2008, had said that 10/10 was on a Friday. The CNBC host can be heard saying, "that was Thursday, right?" She comes back again at the 1:16 mark and asks the question again.

The answer is no, it was not a Thursday. 10/10/2008 was on a Friday, just as the guest said it was. He wasn't confused at all.

1:30 - Bank of America Chief Economist Mickey Levy makes an appearance. He shakes his head and grins when asked if the government's out there manipulating the market. His response to this question is, "Absolutely not," and calls a discussion of this "silly."

3:30 - Guest Scott Nations asks the skeptical CNBC crew for their explanation of two shocking and unexplained moves up in the S&P index on 10/10 and 10/28. None of the smirking hosts rises to the challenge.

3:51 - CNBC host Joe Kernan raises the question of the 3:51 mark whether legislation would be needed for the government in intervene in the markets. Skeptical host Steve Liesman admits, "No, I suppose they [the government] could do that." Indeed they could.

4:22 - Perhaps most disappointing are the comments by Rick Santelli. Santelli is one of the few individuals on CNBC who seems to be relatively sound in his views on economics and politics, but he falls into mocking the claims of the guest as though his claims about the PPT were the stuff of tabloid headlines.

4:56 - Veteran UBS Director of Floor Operations Art Cashin seems to almost dismiss the very existence of the PPT. After Joe Kernan likens belief in the PPT as the stuff of conspiracy theory, Cashin replies that talk of the PPT is "black helicopter crap."

For those who may not know him, Art Cashin is one of the best known and most respected names on Wall Street, having become a Member of the NYSE in 1964 at the age of 23. What he says carries weight, which is the likely reason CNBC brought him into the discussion to pile on their badly outnumbered guest.

It is the opinion of this author that guest Scott Nations was thrown to the lions, as it were, not because he was wrong in what he said, but precisely because he was right.

As has become more and more apparent in recent years, the job of the mainstream media is not, as many people suppose, to inform the public. Rather, the MSM serves as the propaganda arm of powerful governmental and private interests - call it the Deep State or the establishment if you will - who want the public as ill-informed and dumbed down as possible, all the better to continue robbing us blind.

If you watched just the above segment on CNBC, you'd come away with the impression that anyone who so much believes in the existence of the PPT is a raving lunatic. And to suggest that the PPT manipulates markets? Well, that's simply off the charts madness.

But the truth is far different. Not only is the PPT a real government entity, as can easily be shown, but there's ample evidence to suggest that it is used to manipulate financial markets, just like Scott Nations stated in his CNBC interview.

Of course, the existence and the activities of such a group raise troubling moral questions. By what Constitutional, not to mention, Biblical right does the government interfere in the workings of the free market? Do not the activities of such a group artificially create winners and losers? Does not the work of the PPT create market distortions which must be corrected, and will not these corrections be painful?

In short order, the answers are: Government has no right, either Constitutionally or Biblically to intervene in the markets; Yes, the PPT's activities artificially create winners and losers, and the proper term for these activities is theft; Yes, the PPT distorts the market in ways that will require a painful correction at some point.

(To be continued...)

Radio Lux LucetSteve MatthewsOctober 21, 2018Economics, PoliticsComment