point Bernanke and the FOMC realized how serious the subprime contagion was). There had been a mini-crash in Japan the night before and stock futures were pointing to a large drop in the U.S. markets.
The Fed's announcement of it's discount rate cut had the desired impact. Stocks futures on the Dow rallied multi-hundreds of points by the opening, wiping out the profits of the shorts and transferring that money to the sellers of the future's contracts (could this huge transfer of wealth have been a gift from Bernanke to the broker-dealers?). If the Fed had waited one hour for its announcement, there of course would have been no difference in the impact of the discount cut on the economy, but the impact on markets would have been considerably different. The message to market participants was quite clear, from now on the Fed will be trading against the shorts and its actions can wipe you out whenever we chose to do so. By February 2008, the New York Investing meetup would document approximately a dozen times when the Fed engaged in similar extralegal activity in the U.S. stock markets ( put on video , which can be found at: http://www.youtube.com/watch?v=Sobq7wCXjUw). This of course leads to the obvious question, "When a powerful government agency like the Federal Reserve acts outside the law, who is going to stop it?" Based on recent history, apparently no one.
The U.S. Federal Reserve under Bernanke was not the first central bank to try to manipulate the stock market, nor was Bernanke the first Fed chair to engage in this behavior. Greenspan himself was not above using Fed policy to drive the markets up, but he would let the markets reach some clearing price first before stepping in. He would not try to use Fed policy to prevent the markets from selling off, the crude approach clearly being used by Bernanke, realizing how risky this this could be for the financial system. It was in fact, Greenspan's policy of doing away with Fed secrecy that opened the way for Federal Reserve manipulation of the U.S. stock market. Once the markets knew instantly what the Fed was doing, traders would adjust their actions just as quickly instead of over a longer period of time as people gradually figured out that the Fed had made a significant rate move as had been the case in the past.
Perhaps the most egregious example of stock market manipulation in the recent times was by the Japanese financial authorities in the late 1980s and early 1990s. While interference in the free operation of the stock market, was beneficial in the short-term, the consequences in the long-term proved disastrous. A buy and hold strategy in Japanese stocks would have earned an investor nothing from 1992 to 2007. A similar result in the U.S. stock markets from 2007 to 2222 would mean the huge population of Baby Boomers retiring in that time period and counting on stock market gains to fund their retirement would be in for a very rude awakening.
Perhaps, the ancient Greeks had it right after all, when those in power acted like the gods, a tragic ending was always inevitable.
Next: Bernanke Shoots the Dollar Down; New York Investing Predicts Out of Control Inflation
Organizer, New York Investing meetup
For more about the New York Investing meetup, please go to our web site: http://investing.meetup.com/21