Bailout Nation by Barry Ritholtz

doomsday tome Financial Armageddon (Kaplan Business, 2007), calls it “mission creep.”
    We know what happened next: Over the ensuing years, the role of the Fed crept significantly, from that of inflation fighter to market therapist, and ultimately to the guarantor of asset prices.
    After the 1987 crash, Wall Streeters were relieved. Instead, they should have been concerned. They had unknowingly made a deal with the devil, one that would prove quite costly down the road. The supposedly unique Federal Reserve intervention after the 1987 crash was hardly a one-off—it became the Fed’s modus operandi which continues to this day.

    T he 1987 crash laid bare many of the structural flaws of the market. During trading of the highest-ever volume on Black Monday, the market’s internal plumbing had failed. Orders were not executed for hours, quotes did not update, and specialists were overwhelmed at their posts. At brokerage firms, phones rang and rang unanswered.
    The mechanical functioning of the NYSE was not the result of any intelligent design. The conventions for executing equity orders had evolved on an ad hoc basis. It took the stresses of the crash to reveal the market’s warts.
    The President’s Working Group on Financial Markets
    In 1988, President Ronald Reagan issued Executive Order 12631 establishing the President’s Working Group (PWG) on Financial Markets. The goal of the PWG was to “enhance the integrity, efficiency, orderliness, and competitiveness of our Nation’s financial markets while maintaining investor confidence.” (Once again with the psychology.)
    Twenty years later, it remains a secretive organization, one whose formalized meetings keep no minutes and whose functions are poorly understood. There is surprisingly little academic publishing on this body. Due to its secretive nature, the PWG’s workings are often described in market folklore as “they,” as in “They won’t let the market drop, they were in buying today.”
    It wasn’t until 1997 that the PWG received the name by which they are best know today: the Plunge Protection Team (PPT). That was the headline of a Sunday Washington Post article by staff writer Brett D. Fromson. 3
    For our purposes, the PPT is an irrelevant footnote.
    Why? First off, it is hard to imagine a secret cabal manipulating markets, deploying billions or even trillions in capital, with a nary a shred of evidence ever surfacing. The Bush White House couldn’t illegally fire nine U.S. attorneys without the political motivation being discovered and a major investigation launched. 4 Could the markets be supported via massive trading, and no one anywhere would ever see proof and come forward? It’s hard to imagine that big a secret being kept for so long.
    Second, and more important, the PPT, well, they really suck at their jobs. If the conspiracy theorists are correct and this group is supposed to prevent market meltdowns, they are not exactly hitting the cover off the ball. The late George Carlin had a routine on American Indians’ military organizational structure. They weren’t bad fighters, he said, just because they started out defending Massachusetts and ended up in Santa Monica.
    And so it is with the PPT. How is their fighting prowess? Well, consider that starting in 2000, the NASDAQ fell from over 5,100 to about 1,100—a plunge of nearly 80 percent in about two and a half years. And in 2008, the PPT performed even more miserably. Bloomberg reported that as of November 19, 2008, markets were suffering from “the worst annual decline in the Standard & Poor’s 500 index since 1931.” 5 The carnage “dragged down every industry in the benchmark gauge and 96 percent of its stocks. Four hundred eighty-two companies slipped as the 500-stock index slumped 46 percent, poised for its biggest yearly retreat in eight decades.” And after the major indexes ended 2008 down more