Howe won despite dismissal of his suit against gold price fixers -- Part 1


By John Crudele
New York Post
April 2, 2002

With the economy looking extraordinarily weak back
in January and Alan Greenspan just about out of room
to cut interest rates, the Federal Reserve considered
a variety of "unconventional" emergency measures.

Recently-released comments from the policy-making
meeting that month show the Fed had what might seem
to be a largely academic discussion about the other
options available to it. This is an amazing revelation.

I've been giving hints about this sort of thing since
September, but I believe the Fed's discussions were
much more than just theoretical. I think the Central Bank
actually stepped in and saved the stock market.

With the Fed taking an active role in the market, just
about anything could happen -- both good and bad.
The Fed's intervention in stocks is, to put it mildly,
earth-shaking in a free-market economy that prides
itself for having equities that move up and down on
their merits alone.

Let me give credit where it is due. While I was on
vacation last week the Financial Times of London
quoted a Fed official who didn't want to be named
as saying that one of the extraordinary measures
considered in January was "buying U.S. equities."

The FT quoted the official as saying the Fed could
"theoretically buy anything to pump money into the
system" including "state and local debt, real estate,
and gold mines -- any asset." Including stocks. There
are lots of things wrong with the stock market right now.

Despite a wobbly market these past two years, equity
prices are still much too high based on current earnings.
And the valuation of stocks isn't going to get any more
attractive when disappointing first quarter profits are
announced by companies in a few weeks. But all of
these things pale in comparison with the impact of the
Fed getting involved in the stock market.

Forget everything else -- this is the most important
thing you need to consider right now if you are thinking
of getting into the stock market.

I've been writing about the Fed's involvement in the
stock market for some time. And I have some first-hand
knowledge that I can now add to the FT report.

I had a conversation with a very worried Fed official
back on Sept. 17, the day the stock markets reopened
in the U.S. following the Trade Center attacks. He was
bothered by the market's apparent lack of interest in the
Fed's rate cut that morning. Our discussion moved on
to the fact that the Fed could easily intervene in the
market by purchasing stock index futures contracts.
That's an inexpensive and apparently foolproof way
of rigging the market without leaving a trace.

During that telephone conversation I pointed out that
just such a plan was proposed during another market
disturbance back in 1989 by Robert Heller, who had
just left his position as Fed governor. Heller's suggestion,
which was published in The Wall Street Journal,
seemed at the time like a trial balloon to see how Wall
Street would react to such an extreme solution.

The good news was that nobody appeared to be
bothered by Heller's proposal even though it would
turn the free-market concept on its ear.

About midday on Sept. 17 I faxed the Heller article to
my friend at the Fed. There's no way of proving that the
Central Bank took any extraordinary action that day.
But a stock market that looked down for the count suddenly
perked up. And since then, equities have staged a good
enough rally so that Wall Street is already gloating about
the new bull market.

Is this good or bad news?

You'd think that the Fed providing a safety net for the
market would be extremely good news for investors. In
fact, it would be logical to assume that big losses in
stocks would be impossible if the Fed was aggressive
in the market.

But there are other things to consider. The Fed will
probably come to the market's aid only if collapsing
stock prices are endangering the nation's economy
and national security. This would give the federal
government an excuse to violate the premises of the
market economy.

But there are a couple other worries. One is Japan
tried this and it didn't work. And then there's the big
worry: The stock market in the U.S. has worked very
well without government interference. In fact, our
markets are so much the envy of the world that foreign
companies are eager to list their stocks on our
exchanges. If the FT and my suspicions are correct,
Washington is getting into dangerous territory.