Thursday, December 23, 2010

No pain with plunge protection

Have you ever heard of the “Plunge Protection Team” or PPT? If you're like me then the answer is no. Today I was watching an interview on MSNBC's “Closing Bell” interview with Charles Beterman. In this interview he talked about how individuals are doing major sell offs in equities, but the government was purchasing the stocks that people were selling because of QE2. When I decided to look into this I came across PPT, but it's official name is the Working Group.

PPT's official goal is 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. Officials worry that if investors all tried to head for the exit at the same time, there wouldn't be enough room -- or in financial terms, liquidity -- for them all to get through. In that event, the smoothly running global financial machine would begin to lock up.....In the 1987 crash, government officials worked feverishly -- and, ultimately, successfully -- to avoid precisely that bleak scenario.”
In simple terms, if we have a market crash like the housing and credit bubble that started to burst in 2007 the Federal Reserve, along with other agencies, would step in and prop up the market.

After reading this article, I took a trip back in the way back machine to 1907. In 1907 we had a similar crash. The market went so low that margins were being called and many people were on the verge of bankruptcy and ruin. If it wasn't for J.P. Morgan coming out and promising loans we might have had our Great Depression in 1907 instead. After J.P. Morgan went public with loan promises, the market rallied. Many believe that this is what led to the Roaring 20's or at least allowed it to happen. However, 22 years later, we had another crash, but people decided to get out of the market unlike the 1907 crash where people jumped right back in and the market rallied.

If you've ever watched the movie “The Recruit”, there's a scene where the main character was asked if he preferred a walk in the rain or to feel no pain. His first answer was to walk in the rain, but as he was walking out he told the truth, he wanted to feel no pain. I think with the creation of the Federal Reserve Bank in 1913 was what has led us down the road to feel no pain. After so many people had gone through the Great Depression, they wanted to make sure that future generations wouldn't feel any pain either, hence our entitlement programs starting with Social Security and the New Deal. The thing is every politician since has campaigned on the promise to let the general public feel no pain, which brings me to my favorite quote from the Tao Te Chang.

“If you want to be a great leader, you must learn to follow the Tao. Stop trying to control. Let go of fixed plans and concepts and the world will govern itself.

The more prohibitions you have, the less virtuous people will be. The more weapons you have, the less secure people will be. The more subsidies you have, the less self reliant people will be.

Therefore the master says; I let go of the law, and people become honest. I let go of economics, and people become prosperous. I let go of religion, and people become serene. I let go of all desire for the common good, and the good becomes common as grass.”

It seems to me that in our quest to feel no pain, we've caused even more pain than if we would have left things alone. There was 22 years between the crash of 1907 and the crash of 1929, it's been 20 years between Black Monday 1987 and the financial collapse of 2007. Economists have said that our current financial crisis is mirroring the Great Depression that started in 1929, but their propaganda lately is how we're coming out of this recession although anyone who's paying attention will see that everything is about to collapse.

The thing that is most important to take from this is that although things look like they may be getting better, they're not, the Federal Reserve is propping up the market to give an illusion of stability. During the Great Depression the market had upswings and crashed again and again. The main problem for the common man during that time period was jobs, over 30% of the population was unemployed. Some of the big differences between that time and now is that we were an emerging economy just like China whereas we're number 2 in the world now. Also, most of the people during that time had family farms or property, so they could grow their food. Right now, we don't own property and if we do, there's not enough land to grow a big enough space for a crop to survive for a year. Another thing that was important back then, they had little to no regulation so it was easier to start up a business compared to today. Most of all, during that time a war could bring an economy out of ruins unlike today where it's actually a drag because we don't make anything here.

I think we need to start feeling the pain. If we feel no pain, there's no real gain. By having hardships and working your way through rough times, it builds character and confidence. Right now with the Federal Reserve propping up the stock market, it's only making it worse. A couple years ago I got a spider bite. At first it was a bite, but then the redness started spreading. I took the attitude that it'll either pass or if I just ignore it, it will go away. After about two weeks my leg was so red and my foot so swollen that I went to the ER. The doctor had to cut open my leg which was so painful that when I squeezed my wife's hand, I almost broke it. A few days later the part of the infection in my foot finally exploded as well. The moral of the story was that if when I had the problem I took care of it, I would not have had to go through that ordeal which cost me money and pain. We, as a country, need to stop trying to ignore the problem like it's going to go away and let the impending crash happen because if we don't, we'll pay a higher price. The sooner we start to take care of our problem, the less pain and quicker we can get back on our feet. I believe it was Iceland who did just that, now they're coming out of their recession and starting to become productive.

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