Wednesday, January 9, 2008

An Amazingly Blunt Commentary on the Plunge Protection Team

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I was a bit taken aback to see this quite blunt commentary about the Plunge Protection team in the UK Telegraph (you see me source articles from them quite a bit since they have a different view than most stateside papers - a more pragmatic view I'd say). The American press never really talks about this group - or at least I have not found a lot of articles (try googling for it), most of my stories about them come through the British press. Interesting....

I half sarcastically discuss this group as the "invisible hand", and a lot of things you see over time (especially the last 6 months) seem to be more and more blatant attempts at 'propping things up'. But the more you see of it, the less conspiracy theorist it sounds and the more grounded in reality it becomes. But rarely do I see an article like this - I will be curious if this 'rebate check' scheme (remember Bush tried this once before) is announced at or before the State of the Union. Usually politicos like to float things ahead of the actual speech as a trial balloon so let's see if we hear anything about it in the coming weeks. If not, well then we can just call this article nonsense ;)
  • Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.
  • It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.
  • The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.
  • Judging by a well-briefed report in the Washington Post, a mood of deep alarm has taken hold in the upper echelons of the administration. "What everyone's looking at is what is the fastest way to get money out there," said a Bush aide.
  • Emergency measures are now clearly on the agenda, apparently consisting of a mix of tax cuts for businesses and bungs for consumers. Fiscal action all too appropriate, regrettably. We face a version of Keynes's "extreme liquidity preference" in the 1930s - banks are hoarding money, and the main credit arteries of the financial system remain blocked after five months.
  • "In terms of any stimulus package, we're considering all options," said Mr Bush. This should be interesting to watch. The president is not one for half measures. He has already shown in Iraq and on biofuels that he will pursue policies a l'outrance once he gets the bit between his teeth. The only question is what the president can manage to push through a Democrat Congress.
  • The Plunge Protection Team - long kept secret - was last mobilised to calm the markets after 9/11. It then went into hibernation during the long boom. Mr Paulson reactivated it last year, asking the staff to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis", he said. It seems he failed to spot the immediate threat from mortgage securities and the implosion of the commercial paper market. But never mind.
  • The White House certainly has grounds for alarm. The global picture is darkening by the day. The Baltic Dry Index has been falling hard for seven weeks, signalling a downturn in bulk shipments. Singapore's economy contracted 3.2pc in the final quarter of last year, led by a slump in electronics and semiconductors.
  • The Bank of Japan has been the biggest single source of liquidity for the global asset boom over the last five years. An army of investors - Japanese insurers and pension funds, housewives and hedge funds borrowing at near zero rates in Tokyo - have sprayed money across the Antipodes, South Africa, Brazil, Turkey, Iceland, Latvia, the US commercial paper market and the City of London. The Japanese are now bringing the money home, as they always do when the cycle turns. The yen has risen 13pc against the dollar and 12pc against sterling since the summer. We are witnessing the long-feared unwind of the "carry trade", valued by BNP Paribas in all its forms at $1.4 trillion.
  • Sovereign wealth funds stand ready to rescue banks, as they have already rescued Citigroup and UBS. But as Moody's pointed out this week, the estimated $2,500bn in lost wealth from the US house price crash is more than the entire net worth of all the sovereign wealth funds in the world.
  • Add fresh losses as the property bubbles pop in Britain, Ireland, Australia, Spain, Greece, The Netherlands, Scandinavia and Eastern Europe, as they surely must unless central banks opt for inflation (which would annihilate bonds instead, with equal damage), and you can discount $1,500bn in further attrition.
  • Not even a Bush New Deal can hold back the post-bubble tide that is drawing in across the globe. What it can do is buy time. Fortunately for America - and the world - the US budget deficit is a healthy 1.2pc of GDP ($163bn). Washington has the wherewithal to fund a fiscal blitz.
Interesting. Very.

EDIT: Ok I guess it's not just a rumor (the tax rebates)
  • The White House is preparing to grant tax rebates for individuals and businesses in an attempt to boost the American economy as Goldman Sachs yesterday became the latest bank to give warning that recession is going to hit the United States this year.
  • Although the proposals are at an early stage, the White House is expected to return up to $100 billion (£51 billion) to individuals and companies. One option would mean that people in certain tax bands would receive cheques of about $500 in the hope that they would spend it and stimulate the economy. Companies could be able to deduct from taxes a substantial portion of investments in equipment over a given period.
  • However, analysts believe that any tax rebate that could be afforded would have a negligible impact on the economy and have suggested that the move could be designed merely to appeal to voters in an election year. (nah.... never)
  • Lou Crandall, chief economist at Wrightson ICAP, a research firm, said: “A one-off tax rebate of, say, $75 billion would have a negligible impact, since it represents just a shade over 0.5 per cent of GDP. A permanent tax cut of that amount would be much more effective. For a one-off payment, the rebate would need to be far higher than the Government could possibly contemplate.”
  • Mr Crandall added that an earlier tax rebate, of about $40 billion, implemented by the Bush Administration during the 2001 recession, “made no difference”. (bingo!)
Well folks, with a political year upon us, this massive influx (cough cough) of cash could actually pass Congress. I mean who wants to be seen as voting down $500 to help the middle class. $500, should pay for 2 fill ups of gas and a trip or two to the grocery for Joe Average, family of 4-5. Or 1/10th of 1 one mortgage payment for some of those poor subprime folks in CA.

Classic! It didn't work in 2001, let's try it again. Sounds like politics at its best. But a great way to get out ahead of the issue and say "we do care about the middle class" (after ignoring your situation the past half decade). But its political season again, so once again we care...

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