Between October 1998 and November 1999, the Nasdaq composite rose 150%. Everyone who was invested believed in Alan Greenspan and the Federal Reserve. At a Grant's Interest Rate Observer conference in November 1999, Michael Steinhardt, one of the best traders over the previous three decades, did not buy it.
He did not think the Fed's leadership would be worth much when it was needed most. He spoke about Wall Street's abandonment of controls, leadership and responsibility: "The liquidity safeguards, historically, were the specialists' books, the retail system, and the institutional liquidity providers in the major brokerage firms. They were the mechanisms that the stock exchange itself had provided, and they were all structured for a system where trading was a very, very small fraction of what we're seeing today. Now there are no specialists' books; there is no serious liquidity provided by brokerage firms; and the trading mechanisms of the exchange are hardly relevant to the sorts of volumes that exist today. So yes, the Federal Reserve, if you define that broad context of liquidity in a financial sense, does still exist, but in a securities market sense, none of the former ones do."
That was 14 years ago. In this age of uplift and improvement, does the current Federal Reserve Board understand the consequences (as seen in April 2000 and in 2007 and 2008) of the lost "liquidity safeguards...."?
This can only be answered in the future, 500 years from now - it will take that long for the human mind to believe this Arsenal of Annihilation was given responsibility above latrine duty. From all sources though, the top of the Fed has grown more withdrawn, abstract, and divorced from reality since the millennium. The king pins are not interested in the functioning of markets. Markets exist to fulfill economic policy of our policy-makers. It is unfathomable to the anointed that government control of markets would even be questioned.
AT THE COUNCIL ON FOREIGN RELATIONS, June 28, 2013:
James Grant, addressing Governor Jeremy C. Stein, Federal Reserve Board: "Good morning, Governor. James Grant of Grant's Interest Rate Observer. Could you help us understand the economic difference - not the legal one, but the economic distinction - between the private manipulation of Libor, on the one hand, and the public manipulation of markets, on the other, doing business as ZIRP, QE, Twist, the "portfolio balance channel"? What ever did happen to the price mechanism?"
Governor Jeremy C. Stein, Federal Reserve Board: "You know, that's a hard question for me to answer, because [laughter] I don't see the connection between these two whatsoever. I mean, obviously, the Libor set - it is a set of criminal and near-criminal activity, which is a very substantial policy concern. A lot of effort is going into trying to, you know, both reform Libor itself, look at other benchmarks, see if they're more resilient. That's a whole set of issues. To be frank, I just don't see the connection to that and the monetary policy issue."
This is the type of thinking that gives investors confidence (apparently) that the Fed will not permit the stock market to fall 20%. Yet, the man has no interest in how people participate (or don't) in markets.
Over these same 14 years, technology has turned public-market investing into a much more dangerous arena. Some will say the withdrawal of private money from markets shows the public understands this, since there is very little trading left, except by institutions and their algorithms.
The curious investigator, 500 years from now, will study our worship of technology despite daily evidence of its failure. Here, we discuss the malfunctioning of public markets. The Nasdaq took a mid-week siesta on August 22, 2013, and there are no answers. (An hour before the Nasdaq died, NYSE Euronext announced a breakdown of its Arca exchange, for symbols from TACT through Z. Two days before, Goldman Sachs pushed a wrong button and stock-options with ticker symbols between H through L fell to $1.00. After the Nasdaq ran through the usual excuses - "software bug" "connectivity issue" "latent flaw" "system overload" - the exchange magnanimously announced it crashed "to protect the integrity of the market.") With technology, any excuse for obvious failure is taken as gospel.
None of this nonsense would exist if "liquidity safeguards, historically...the specialists' books, the retail system, and the institutional liquidity providers in the major brokerage firms" - that is, people, were still on the chopping block.
Turning exchanges back into public utilities is sine qua non.
OF ALL THE COMMENTARY REGARDING THE NEXT FED CHAIRMAN, NONE WAS MORE FETCHING than that offered by star Financial Times columnist Gillian Tett. Under the headline "Central bank's chief needs to master the art of storytelling," she wrote: "The next Fed chair also needs to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's economic goals, without us even noticing. Somebody, in other words, who can cast spells with both their spreadsheets and words. In short, what is needed is nothing less than a monetary shaman."
A test of such talent will be the day stock markets shut - and never reopen - claiming they are protecting the integrity of the market. Very few will protest.
In fact, the new Fed head may have more leeway to "shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's economic goals." So we learned under the headline: "U.S. Repeals Propaganda Ban, Spreads Government Made News to Americans." ForeignPolicy.com, July 14, 2013 [Note: Bastille Day].
Reporter John Hudson: "For decades, a so-called anti-propaganda law prevented the U.S. government's mammoth broadcasting arm from delivering programming to American audiences. But on >July 2, that came silently to an end with the implementation of a new reform passed in January. The result: an unleashing of thousands of hours per week of government-funded radio and TV programs for domestic U.S. consumption in a reform initially criticized as a green light for U.S. domestic propaganda efforts. So what just happened?"
That's as far as I got. The propaganda machine seems to be working at full tilt already.
This was announced on the heels (July 12, 2013) of a Washington Post article by Josh Hicks after the Department of Homeland Security had "warned its employees that the government may penalize them for opening a Washington Post article containing a classified slide that shows how the National Security Agency eavesdrops on international communications.... An internal memo from DHS headquarters told workers on Friday that viewing the document from an 'unclassified government workstation' could lead to administrative or legal action. 'You may be violating your non-disclosure agreement in which you sign that you will protect classified national security information,' the communication said. The memo said workers who view the article through an unclassified workstation should report the incident as a 'classified data spillage.'" Hicks provided a link to the double-secret Washington Post article.
OF COURSE, FINANCE IS ONLY A SUBSET OF THE GENERAL DELERIUM. IT WAS QUITE A LEAP for Secretary of State John Kerry to sit before Congress and extort the imagery of Americans dying during the Normandy invasion ("You ask the question, 'Why does the United States have to be out there?' You ever been to the cemetery in France? Ya know, above those beaches? Why'd those guys have to go do that?") as reason to invade Syria. The congressmen did not seem to notice. Maybe they felt sorry for him.. He was stumbling all over the lot trying to make sense.
Frederick Sheehan writes a blog at www.aucontrarian.com