chris cox should be fired.
heckuva job, chris.

also, don’t the banks own the fed? if so, does it make sense for the regulator to be owned by those it oversees?

But didn’t you hear?

Greenspan said this was “an accident waiting to happen”.

This is my first comment here so I hope I avoid being an idiot.

I regard this as the first offer from the investment banking community as it exists today. If you read through everything, it really doesn’t do anything that they haven’t wanted for years. They are even taking the teeth out of the SEC for the most part.

However, I think they did make one crucial mistake. They admit early on that the system cannot be regulated with rules aimed at specific products or institutions, but would rather be better served with an objectives-based approach. Then the document goes on to lay out very modest objectives.

The admission that the objectives matter and are crucial to regulating the marketplace leaves the door wide open to proper regulation if there is another failure. If Lehman or JP need a guided nationalization, not only will it be clear the IBs and others are taking significant risk that could destroy the world economy but that pre-emptive powers are needed to avoid these catastrophies. As the objectives-based approach is already on the table, we can expect definintions like those of a security to apply broadly across all instruments.

As a result, this opening bid for weak regulation has high odds of leading to significant, properly constructed regulation. Note that this will happen after Bush is out of the white house.

Also, Yves, I agree fully about Greenspan. In 30 years and forever after, his reputation will be worse than Hoovers.

No offense taken at all; rather the reverse. I understood your purposes as ‘editorial’ in function in commenting on my post. The problem was that _I_ hadn’t been clear on the issue of the Fed’s standing—none—to manipulate equities, necessitating your remark. You do a good job here at NC in using good sense to referee nonsense rather than throwing darts at ideas you may not like, one reason why I’ve felt comfortable posting here. I took the opportunity of my reply to comment on the Fed’s presumed equities interventions since I missed the previous thread (I, too, have an odd schedule). I hope I’m contributing to the discussion rather than just soaking up pixels.

On ‘how does the Fed do it,’ I wouldn’t be surprised if this was entirely automated. Someone high up at several big dealers gets a code on his/her Blackberry, and just issues a standard order to buy to a specified number for a highly compartmentalized ‘Mr. Big’ account. The regulators all know what this is, and don’t mess with it. Historically, the big banks openly did this themselves at times of crises, buying shares to make markets and prevent asset price freefalls. But by ‘87 the numbers got too big, and the banks weren’t prepared to risk mega-losses trying to do this. . . . Sooo, to my hypothesis the Fed agreed to backstop any losses, and set up a system to coordinate—and control—the action. I have no firm opinion on whether Greenspan approached the dealers or vice versa; probably St. Alan, as he had the background. Doesn’t matter really. I also assume that appropriate committee chairs in Congress are _fully briefed_ on the existence of this mechanism, one reason whey we have never heard any Congressional fulminations, nor will we. But really, in Japan public or quasi-public authorities bought equities _massively_ at the time of their crash. I don’t doubt that the ECB has something lined up if they need to. . . . People lie about sex and money, let’s face it; they more they have, typically the more they lie. : )

It is true that the big dealers participating in such a mechanism, if it exists as I suspect, could blackmail the Fed. However, who do you think gets to keep the profits on those options when we get these whiplash market upswings? Natch. They’re paid off, so they are too deeply implicated to _ever_ squeal. It’s much like the illegal wiretapping we see in the last few years: yeah, everybody knows this shouldn’t happen, but in the end the government will find a way to (quasi) legally cover the Big Teles who played along—but nobody wants to bring the ugly copulations to light if they can possibly avoid it.

. . . The US has NO moral standing to lecture or advise any other country on their financial system. It’s not like everything is rotten here. The formal rules for securities dealing are pretty good, we’ve made some progress on restraining insider dealing, yadda yadda, yadda. The point is that the Big Fish rots from the head.

Truly, I’ve been watching the last twenty years of financial shenannigans in this, my native land, with horrified fascination. I have actually read moderately extensively on how monetary regime changes have occurred in the modern past since, say 1500 CE when the financial system we use now could be said to have been solidly begun. There is typically a ‘largest single player’ whose currency is the standard international reserve, especially once currency regimes became more standardized and reliable after 1600. Every single player has ultimately destroyed _themselves_, often by being overextended at the time a major war crushed their revenues, but also by the simple fact that every one has exploited their ‘most favored player’ advantage to get overextended beyond any reasonable factor in their actual economic circumstances in the first place. It’s the Peter Principle applied to international fianance: call it the Thaler Principle, why don’t we. The US has just done exactly that. Myself, I suspect it’s the collapse of the dollar that will get us, sometime in the next twelve months. But it could be an equities crash. Hard to say. But we have so gamed the system, and exploited our golden dollar past all rationality that we have, assuredly, killed the golden goose. It’s upright, but toxic shock has killed it, and we will soon notice that it isn’t breathing, regardless of the iron lung the Fed has clamped around our banking system. Oh well, I like to write poetry, and I enjoy rice and beans, so I’ll stay happy one way or the other.

Apologies if my earlier post sounded a bit tart. I simply didn’t want readers who might not know the score to think that there was any interpretation of the Fed’s charter, even a terribly creative one, that should give it any interest in the equity markets.

I have long been saying (as in before 1999) that Greenspan would go down in history as the worst Fed chairman. We’ve had the vast misfortune of not only having him enjoy a very long tenure. but having his time in office overlap with that of the worst President.

As for could the Fed defend its actions if they ever came to light…..no. The idea that the government was manipulating the markets (oh, for whose benefit?) would make the Teapot Dome look like a walk in the park. That would put us deeply in banana republic land. The idea that we had dared tell other countries how to run their markets when ours was a fraud would eliminate whatever standing we have left. Although, at this point, I think the only power we have is our nukes and an economic mutual-assured-destruction threat (”if we really tank, your Treasuries are worth zilch, and your populace will revolt that you let your country’s savings go up in smoke”).

And let’s say the operation worked as you suggested, some kind of coded message sent to the IBs. That means the IBs can extort the Fed by threatening to reveal their market manipulation, if such exists. Not very clever.

I well understand that the Fed has NO statutory authority whatsoever to support equities or other assets, and moreover that Fed spinmeisters ‘vigourously deny’ doing so, in any way, at any time. —But we all know that the Fed does this, and I’m not talking conspiracy white noise on this. A few days ago, you had a thread going here with various anonymous posters mentioning hints and observations on how such actions have been or might be done, though no one has come out and said up front what the mechanism is. For good reason: the authorities don’t want anyone to be able to piggyback on their interventionary moves, so they keep their hand close to the vest on this. But it is clear that this has been going on throughout Greenspan’s tenure and since: it was his major innovation as Chair. Personally, I thought he started doing it as far back as ‘91 during the S & L meltdown. There were days that the markets should have had a good washout, but got a mysterious early bounce to burn the shorts and brake the process. I suspect that this was something Uncle Alan came up with after ‘87 re: how to stop a market crash when it was at the tipping point rather than after it was turned over. Of course he didn’t and the Fed doesn’t have the authority; what’s that got to do with it? The Fed didn’t have any authority for the BSC manuevere. The Fed is expected to maneuvere creatively, statutes be damned, and does. This is the real reason for the lack of transparency at the Fed; it allows them to intervene suddenly and effectively without the markets (always) anticipating and profiting from such actions. If we knew what they were doing, smart money would negate it. I think that you know this.

Bear in mind, of course, that I don’t manage money for a living; I’m just an interested observer. But does the Fed game the markets to preserve price _gains_?: Yes, I believe so. What I suspect is that they have a standing order with several of the major i-banks and commercials to buy a set program to a set level if they get ‘the overnight code call,’ with the Fed standing for any losses. Remember, the Fed and the SEC are the regulators, so if they sign off on an under the table move, all is good. What is more to the point is that the major players have adapted to an expectation that ‘the powers that be’ will act to brake serious gappage. Free markets?: that’s for the amateurs. This is a paramutual system for the Big Boys, and they like it that way, so who’s going to run crying foul on it?

Whether or not the Fed ’should’ intervene to prop up asset price gains is a more complicated question. This is rigging the roulette wheel, of course, and that’s, well . . . unethical. Look, we know that the top level of the financial system, including the Treasury and the Fed play by their own rules. Again, I’m not pushing ‘conspiracy’ puffery on this; this is simply an evident fact. The ‘rules’ are for public consumption, but the insiders play a different game. If asset prices at any time DO crash, as we see now from these bizarro in-securities widely held, many banks and bank-like institutions can and will go bust. Is it cheaper and more efficient for the powers that be to game the system to avoid that outcome (assuming they can), or to play by the mom and pop rules and so pay ten times as much to clean up the mess? St. Alan sold everybody else at the top that he could prevent most crashes, so everyone has stood back and let this go on. Of course, this makes big gains for the plutocracy on the way up, and leaves the public to pay for the shoveling out of the rubble on the way down, but again Greenspan did this successfully three times—’87, ‘91, and ‘98—so he thought he was too smart to lose in ‘01. Now, BenBer and the rest are desperate to keep _multiple_ crashes from happening at once, so yes, they will game the markets, junk mark-to-market reporting, ignore the insolvency of the monolines, and many, many other things that, in the mom and pop world, ‘aren’t supposed to be permissible.’ The Fed, the Treasury, and other central banks play by different rules. If they succeed, they know they will be praised; if they fail, they know they will be dismissed, and it will be someone else’s problem. But they also know that they will never be prosecuted or investigated. I mean, for what? If a private player did this, that might be actionable; if the regulators do this, it’s . . . what, tell me again? I’m not saying I like it, but.

. . . Of course this has allowed the public authorities to baloon credit, cut regulation out of the loop, and prevent market adjustments to the point where we have a great chance to have all gaskets blow at once. This is what happens when smart guys think they can beat the system: they do so until their cumulative risks _kill_ the system.

I can’t speculate as to the others, but Paulson has long had a taste for the dark side. He was John Erlichman’s assistant 1972-1973. As you no doubt know, Erlichman was convicted of conspiracy, obstruction of justice and perjury for his role in the Watergate scandal. Paulson previously worked as a staffer at the Pentagon during Vietnam. another dubious undertaking (1970-1972, by then pretty much the entire country was against the war).

When asset values were rising, they steadfastly clung to this principle. Yet now that asset values are falling, we have emergency rate cuts when stocks plunge and overall aggressive rate cutting to try to support home prices.

You cannot insist on non-interference when asset prices rise (and bubbles form) and then later intervene to prop up asset prices when the bubble has burst. This is an asymmetric policy response. Where is the logic here?

Greenspan and Bernanke represent sheer madness disguised in sober and convoluted academic verbiage.