John Crudele: How to 'fix' a market

By John Crudele
New York Post
Tuesday, August 9, 2011

http://www.nypost.com/p/news/business/how_to_fix_market_KtRAwdgyfU0I6Lfp...

Relax -- all Washington has to do is rig the stock market.

Yes, you heard me right: rig the market -- as in, make sure it doesn't go any lower and scare the hell out of all the good, conscientious investors who once again trusted Wall Street to do what was right by them.

Sure, it would be a black eye to the American way of life. We believe in free, fairly traded markets. But that was back when we were naive and thought that America would never lose its innocence, the Ryder Cup or its AAA bond rating.

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Word filtered out of Tokyo a few weeks ago that Japan had instituted what was being called a 1 percent rule. No government ever confirms this sort of thing (some still have their pride) but the rule is supposed to state that the Japanese government will prop up the stock market through the purchase of exchange traded funds if there is a 1 percent loss in a single trading session.

You still don't think we should rig our market, do you? Well, put your ear closer to the newspaper, and I'll let you in on a secret -- we probably already have. Lots of times.

Those quick turnarounds in the stock market in mid-2008, when the financial system was supposedly failing, were probably market riggings. And when the hedge fund Long Term Capital Management nearly sent the financial world into a tailspin in 1998, the stock market was probably propped up then, too.

The blueprint for this sort of hocus-pocus came from -- get really close to the page for this -- the Federal Reserve. Back in October 1989, a guy named Robert Heller, who had just quit his post as a Fed governor, suggested that the government should purchase stock index futures contracts to calm the markets in times of distress.

"The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole," Heller wrote in an op-ed piece in The Wall Street Journal after saying the same thing in a little-noticed speech. "The stock market is certainly not too big for the Fed to handle."

It's hard to believe Heller would have made this bold suggestion without the Fed's unofficial permission.

At the same time the President's Working Group on Financial Markets was assembled. Those of us who cover this sort of thing affectionately know it as the Plunge Protection Team.

Ah, but here's the problem.

Heller suggested that the stock market be rigged before the Fed does all the dangerous things it has already done -- like adding too much liquidity to the monetary system. That, he said, would be a bigger mistake than forfeiting our innocence by propping up stocks.

A couple more days like yesterday and the riggers will be at work.

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