Globe - Ideas The Operators

Behind a seductive Wall Street conspiracy theory

By Drake Bennett

September 21, 2008

For the past few weeks, as some of the biggest firms in American finance have lurched toward collapse, and as markets the world over have seesawed in response, economic policy makers in the United States have scrambled to insulate the broader economy from panic. The federal government has leaned on Wall Street banks to come to the aid of their rivals. It has committed over $200 billion altogether to rescue Bear Stearns, then Fannie Mae and Freddie Mac, and the insurance company AIG, and in the process it has taken control of the two mortgage giants and gained an 80 percent ownership stake in the largest insurer in the country. By week’s end, federal officials and congressional leaders were working on a plan to buy distressed mortgages from banks and other institutions that could become the biggest bailout in US history.

That is what the federal government has done publicly. But in the uncertainty of the souring economy, a rumor has taken hold in some of the less orthodox corners of the financial world that a more shadowy government force may be at work. As the story goes, a select group, comprising the Secretary of the Treasury along with the chairmen of the Federal Reserve, Securities and Exchange Commission, and the Commodity Futures Trading Association, has been using its considerable power to manipulate the markets directly.

Meeting in the utmost secrecy, this group has coordinated the targeted buying of billions of dollars in stocks and stock index futures to blunt the force of stock-market sell-offs, to prevent slides from developing into outright crashes, and to keep the American public from learning that the economy is actually in much worse shape than any of us can imagine.

Its name: the Plunge Protection Team, or PPT.

Few economists and Wall Street analysts have heard of the PPT, and most who have call it a conspiracy theory. Nonetheless, the PPT has proven a durable idea, and has fired imaginations not only in small blogs and online message boards, but in the mainstream press. British financial writers at the Observer and the Telegraph have asserted its existence and its extensive powers, and so has the writer and political commentator Kevin Phillips. John Crudele, a columnist at the New York Post, has in the past few years mounted a sustained campaign to expose the group’s machinations.

The PPT has some basis in fact: There is a group of top economic policy makers, the President’s Working Group on Financial Markets, who meet to coordinate responses to financial crises - though there is no evidence that they have ever coordinated the buying of stocks or derivatives. Financial analysts interviewed for this story say that the whole premise is based on faulty economic thinking: government-led, top-secret market manipulation of that sort, they argue, is not only implausible but useless - it could do little in the face of real financial turmoil like what we saw last week.Continued...

But the PPT fears tell us something important in themselves. They reflect a broader apprehension at the expansive powers the executive branch has taken on in recent years, not just in financial markets, but in everything from dictating the terms of trade agreements to national security matters like wiretapping, detention, and starting wars. Anti-PPT activists see a world in which the market, like the political process, is being wrenched away from the millions of individual actors whose decisions should cumulatively decide its fate, and handed over to a cabal.

"Governments have an incentive to intervene at certain times because markets tend to have some inefficiencies," says Itay Goldstein, a finance professor at the University of Pennsylvania’s Wharton School. "And when people see the government doing certain things, you start seeing speculation that there are other things you’re not seeing."

It is also the case that events in recent weeks have begun to look a lot like a conspiracy movie. At a time when the news has been full of images of government officials and corporate executives on their way into closed-door meetings to decide the fate of multibillion-dollar companies, we don’t lack for reminders that there are a few people who wield enormous power. And when the market seems so profoundly out of whack, there may be something comforting in a story that emphasizes - and even exaggerates - that power.

The idea that a few men conspiring in a room can bring the market to heel is an old and familiar one, and history provides vivid examples.

In the Panic of 1907, when a failed scheme to corner the copper market brought New York City to the brink of bankruptcy, J.P. Morgan famously invited the presidents of the New York trust companies to a meeting in his library, locked the door, and didn’t let them out until the next morning, when they had pledged enough cash to stop a bank run that was threatening to engulf the financial world.

Indeed, the Federal Reserve was created to formalize the response to this sort of crisis, and its framework was laid out three years later by a Rhode Island senator and several New York bankers in a secret meeting on Jekyll Island, off the coast of Georgia. The fact that the island was an ultra-exclusive resort frequented by Astors, Morgans, Vanderbilts, and Rockefellers (not to mention the island’s spooky name) has provided fodder for generations of those whose politics revolve around a deep suspicion of financial elites.

If the Fed today displays anything, though, it is just how open the government is about its extraordinary power over the economy. Changing interest rates is a very public move, and one that has immediate, often dramatic results. The merest remark by the Fed chairman can move markets. And the hundreds of billions of dollars the Fed has made available to borrowers in recent weeks would do far less good if the public didn’t know about it. There’s nothing paranoid about the idea that the government pulls strings to keep the markets running smoothly: That is how modern economies work.