U.S. Plunge Protection Team Meets to Give Capitalism an Oil Change

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It’s like capitalism has gone in for an oil change. Bank of America is considering an offer for America’s largest mortgage-lender, Countrywide (NYSE: CFC). Countrywide has lost billions in market value this year and teeters on the edge of disaster. But its stock was up 50% today, from just above $5 to $7.75 by the time traders where through with it.

And if you think the markets will benefit from even more money pumped in to save the financial stocks, there’s more good news. That old inflation hawk Ben Bernanke, the man in charge of maintaining the soundness of American money, reassured investors he’d print more money to make things better.

“In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary,” Bernanke said in a speech in Washington D.C. And it won’t be just any easing. “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.”

What the hell does that mean?

How about a new “New Deal?” That’s what Ambrose Evans-Prithchard suggested yesterday in the Telegraph. Bernanke is just the dull tip of a long policy spear-a spear in hands of the President’s Working Group on Financial markets, otherwise known as the Plunge Protection Team.

This is the small group of Washington policy markers that have a vague mandate to monitor financial markets in times of crisis. What exactly they can do to avert the crisis is a matter of speculation. Some investors believe the PPT buys S&P futures in the morning when in wants the market to go up. You can think of the Plunge Protection Team as a stock buyer of last resort in the way the Fed is the lender of last resort.

“Bears beware,” Pritchard declares. “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.”

Hmmm. The trouble is banks are hoarding money. Worse than that really. Some banks are begging for money. The Wall Street Journal reported this morning that both Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER) are again in talks with investors in the Middle East for another cash infusion. Merrill is in the market for about US$4 billion, while Citi is looking for a more substantial US$10-11 billion.

This is what we meant by an oil change. The more correct name is recapitalisation. Some of America’s biggest investment banks and lenders have gone from lending capital to investors and businesses…to borrowing it and transferring ownership to foreign governments.

Are today’s developments from American enough to reverse the local malaise? It worked for the Dow, which ended the day up 117 points. And it may well do wonders for stocks for awhile. But if you’re thrill seeking, there are lower risk ways to get better thrills that put your trust in the world’s central bankers.

Gold hit a new record in the spot market in New York, trading at $895.

It’s a scorcher again in Melbourne today. Of course this would be the day your editor’s natural gas supply has accidentally been turned off by the provider. 40 degrees and no hot water. Go figure.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Dan & readers,

    US, UK, and Japanese economic prospects continue to be linked by the navel to Australia through the mechanism of direct investment.

    The US is the source of about 50% of the direct foreign investment in Australia. Consequently what happens in the US significantly impacts Australia’s economy.

    Much of the growth in direct foreign investment in Australia (in the last decade) has been financed through cheap credit. This growth is not sustainable in current circumstances. If the credit crunch continues many US and UK based corporations may indeed rationalise (i.e. cut loose) their Australian investments to raise funds for the home front. The impact on Australia’s GNP has to be high.

    I don’t have the time or the skills to analyse this tangent of thought too much further but at first glance, the prospects for Australia don’t any better than the economic prospects for the US.

    I am sick of hearing about the surrounding politics of the plunge protection team (PPT). As many have intimated, the primary goal the Central Banks and the PPT is to socialise losses in the short to medium term. The prospects of a decade or two of stagflation is a likely consequence – but who in the Bush administration would care?

    Coffee Addict
    January 14, 2008
    Reply

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