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Dollar gains on a flight to liquidity, not quality

Section: Daily Dispatches

By John Crudele
New York Post
Tuesday, June 13, 2006

http://www.nypost.com/business/a_plan_for_a_plunge_business_john_crud
ele.htm

The real circumstances behind the death of Vince Foster. The
location of Michael Jackson's nose. And the government's meddling to
keep the stock market from collapsing.

Those were three mysteries in the 1990s that were destined never to
be solved. But now only two remain.

That's because on Feb. 23, 1997, the Washington Post ran a very
curious feature article that explained the government's secret role
in the stock market.

It was so oddly written that another journalist might suspect that
the writer really didn't understand the importance of what he had
been given.

The piece started: "It is 2 o'clock on a hypothetical Monday
afternoon, and the Dow Jones industrial average has plummeted 664
points on top of a 847-point slide the previous week. The chairman
of the New York Stock Exchange has called the White House chief of
staff and asked permission to close the world's most important stock
market."

At this point, the writer explained, the president "confers with
members of his Working Group on Financial Markets -- the secretary
of the Treasury and the chairmen of the Federal Reserve Board, the
Securities and Exchange Commission, and the Commodity Futures
Trading Commission."

"The Working Group struggles to keep financial markets open so that
trading can continue," the article said.

The Post said that "an outline of the government's plan emerges in
interviews with more than a dozen current and former officials who
have participated in meetings of the Working Group," which it says
was established after the market crash in 1987.

The Tuesday prior to when this article ran, the Post contended, the
Working Group had met in a conference room at the Treasury
Department and discussed the risk of a sudden stock market decline
considering that the Dow was then over 7,000 (now close to 11,000).

The Working Group's nickname? The "Plunge Protection Team," which
was the headline of that Washington Post piece.

As I said in last Thursday's column, incoming Treasury Secretary
Hank Paulson soon becomes a member of that team.

In fact, as a veteran of Wall Street who would know what to do in
just such a crisis, Paulson might even be considered the likely team
captain.

There are, of course, some innocuous things that Washington could
(and should) do to prevent a bad situation on Wall Street from
rippling through the whole economy and becoming a national crisis.

For one thing, the Federal Reserve could immediately reduce interest
rates so that people will be able to borrow money more easily to
make purchases.

That easy money will eventually provide a prop under the financial
markets.

Or the Plunge Protection Team could simply rig the market, as was
proposed by former Federal Reserve Gov. Robert Heller in 1989.

After all, lowering interest rates is a nice (but slow) way to solve
the problem of a stock market collapse rippling through the economy
and creating a national crisis. Patience, in this case, is not a
virtue.

I'm bringing all this up now not only because the stock market has
been looking ill lately but also because Fed Chairman Ben Bernanke
is so new at his job that the financial markets might try to test
his resolve with a quick plunge here and there.

And it's nice to know that someone besides the newcomer is actually
looking out for investors. Bernanke -- known for a tongue that moves
faster than his considerable brain -- has already spoken out of turn
at least twice.

And with inflation still a tough problem even as the economy slows
(stagflation, it's called), the Fed chairman will have to
concentrate his efforts more on protecting the U.S. dollar's value
by talking tough than by babying Wall Street.

That's why the existence of the Plunge Protection Team deserves a
big cheer.

But think about that Washington Post article for a minute.

While I applaud enterprise reporting, the Feb. 23, 1997, article
smells like a government plant. It's not that the story isn't true --
it probably is very true. It's just that the timing for letting the
existence of this group come out seems very fortuitous.

Alan Greenspan, a member of the PPT, was after all
thinking "irrational exuberance" right about this time.

While I swear nobody in Washington asked me to write this column I'm
sure the team doesn't mind: like the Washington Post article it will
remind investors that they aren't in this on their own.

(Next: Me and the Plunge Protectors.)

----------

John Crudele is business columnist for the New York Post.

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