On Markets, Manipulation, Regulation, and Nationalization

On August 12th the newspaper headlines had some exceptionally bad news: Four European Nations to Curtail Short-Selling. This is an ill-advised panic move, following some massive losses on the European stock markets. (The French CAC 40 index is down 18.2 percent thusfar in August. Meanwhile, the DAX was down 15% in just a week.) Banning short selling does not bode well for the free market, nor for any meaningful stock pricing numbers that we can rely on.

As the nascent global credit crisis deepens, we can expect more monkeying with the markets, on both sides of the Atlantic. For example, the already highly-manipulated COMEX precious metals market will probably become less free, and less transparent. I predict that if the spot price of gold gets above $1,900 per ounce, the COMEX regulators will raise margin requirements to absurd levels–just like they did with Silver Rule 7 to stop the Hunt Brothers in 1980.

At the risk of sounding like someone from the Tinfoil Hat crowd, there are also persistent rumors of the Federal Reserve buying up stock shares. This has been attributed to the President’s Working Group on Financial Markets (commonly called the Plunge Protection Team.) The Fed is also very quiet about what it calls Permanent Open Market Operations (POMO). And of course the same net effect has been accomplished indirectly on a grand scale through massive infusions of credit, via the Quantitative Easing monetization mechanism. (This is where money is created ex nihilo as the government buys its own debt.)

Another threat to free markets and investor freedom of choice is a legislated nationalization of our IRA and 401(k) accounts. The estimated $14 trillion in those accounts are the choice fruit that some in government have been eyeing for many years. If enacted, a nationalization scheme will likely “invest” in a mix of government-managed stock purchases to make Wall Street happy, and “annuities” (Read: worthless Treasury paper), to make Tim Geithner happy. They’ll no doubt claim that they’re doing so “for our safety.” Thankfully, this hasn’t progressed beyond a lot of Think Tank talk, yet.

Never underestimate the ability of politicians to manufacture a crisis to fulfill their goals.