Jul

28

If there really were a Plunge Protection team why didn't they come save the world this week? Could it be there isn't one, as certainly this week they were needed?

Charles Pennington comments:

Government likes plunges because they provide an excuse to seize new powers and enlarge the government footprint. It certainly worked out that way during the plunge of the 1930s.

If there were a government Plunge Protection Team, the government would heavily publicize it and its heroic role in stopping plunges. The Hong Kong government openly stepped in to buy stocks in the midst of the 1998 Asian market collapse — the intervention was announced in August 1998 — and to my surprise, the announcement just about coincided with the market low.

My theory, then, is that governments relish plunges and would only intervene if done with great fanfare to take credit. 

Kevin Eilian writes: 

Sometimes "plunge protection" can take the form of a wink and a nod, like the 1998 Russian meltdown/LTC deal. The knight gathered together the biggies from all participating banks (so I understand) and "asked" them to "coordinate" a de facto bailout. Now with huge consolidation among world financials, this type of pp (reminds of me of JP's role in the 1900s) should be easier.

The government will use plunges to assume new power - if it lasts (i.e., the 30s or the late 60s/70s for example). Since most of the world's politicians do not really understand economics (growth causes inflation, static budget analysis, cap gains balance the budget, etc.) the attempt to gather more power in light of a prolonged plunge is worrisome ("double whammy" potential).

I think most politicians dislike the uncertainty and potential shorter term election implications of a typical plunge and/or dislocation, so they'll do what they can to bring in a plunger. To me, whether it’s explicit (like r*bin), informal (like the knight in 98) or just day to day (central bank coordination) they are around. We just need to be careful what we wish for! 

David Wren-Hardin writes:

We're in just the first episode of a multi-episode drama. It's like in the comic books or cartoons where the evil overlord rises up, and a second tier superhero team from another country like Alpha-Flight or Justice League Europe tries to take him on, only to be crushed. Then the real superheroes come in.

We saw Plunge-Protection Team Europe take a swing. Bernanke is still ensconced in his Fortress of Solitude, waiting to call on the rest of PPT-USA. 


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2 Comments so far

  1. Ronald Weber on July 29, 2007 5:30 am

    What makes you think that they didn’t intervene?

  2. Cassandra on August 2, 2007 12:00 pm

    If there were a PPT, it would be known.

    MoF coordinated intervention in Japan’s stockmarket more or less continuously in the 90s through a variety of direct and indirect methods, and almost the entire market knew when and how much KAMPO was buying, typically large (with and for impact) into a free-fall buyers market, or so&so Trust Bank was doing a large program on behalf of MoF -controlled investment schemes.

    But a PPT realistically in the USA? Particularly when it requires complicity from the two places where secrets obviously CANNOT be kept - Washington & Wall Street (excepting Bob Woodward & Deep Throat)? And the latter being the likely reason why trend-following, and momentum to some extent, works on stocks. For the sheer number of people involved over the different administrations, agencies, brokerage firms - low-level people, margin clerks, runners, what have-you - would have yielded something firmer than a William Poole mis-interpreted off-the-cuff remark. Something would have come out, by Seymour Hersh, for example. Surely. Even the CIA cannot keep a secret!

    The conspiracist and Macchiavellian in me is sympathetic to the concept (which is plausible), but the empiricist in me rates it as unlikely to have been the cause of any US market movement in the overt methods ascribed to it [PPT]. That is not to say that in the future some of our dear leaders may not deem it necessary to directly intervene as such. But trust me, if they do, we’ll know about it.

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