The Symbiosis of Alan Greenspan and Bill Clinton

                         by J. Orlin Grabbe

        The Federal Reserve has no legal authority to intervene in the
stock market.  But they have been doing just that.  

        The existing Fed powers of conducting open-market operations in 
the Treasury market, of setting the discount rate for commercial bank 
borrowing of reserves, of establishing reserve ratios on demand and time 
deposits, and of controlling margin requirements governing the purchase of 
corporate stock--all these are apparently not enough for Mr. Greenspan.  

        So he has also arrogated to himself the right to intervene in the
stock market.  An example of this is the Federal Reserve's massive purchase 
of S&P 500 stock index futures, traded at the International Money Market of 
the Chicago Mercantile Exchange, on July 16, 1996.  The trades were executed 
through the brokerage firm of Merrill Lynch.  At that time the Dow Jones  
Industrial Average had fallen about 165 points, following the previous
day's decline of 165 points.

        Why does Mr. Greenspan wish to promote the illusion of prosperity
brought about by vastly inflated stock and other financial asset prices?
Was he, on July 16, secretly working for the benefit of Bill Clinton, in 
an attempt to keep stock prices pumped up prior to the Democratic National 
Convention?

        Let's consider some of the uncomfortable stock-related financial 
records that have been set this year:

        * Stock margin loans at an all-time high.

        * A ratio of liabilities to equity capital at large Wall
          Street investment firms near 50 to 1, as high as it's
          been in U.S. history.

        * A dividend yield for the Dow at a hundred year low.
        
        * A price/earnings (PE) ratio on the S&P 500 at 22.4.
          This compares to a historical average of about 15, and a
          August 1987 high (just before the October crash) of 22.

        * A PE ratio on a group of 30 favored OTC stocks at around 170.

        Do these figures make you nervous, Mr. Greenspan?  Is that why    
you are trying to bolster the myth that stock prices always rise, and hence
postpone the day of financial reckoning to some time beyond the November 
election? It sure looks that way.  

        Did some unknown authority sanction your intervention into the 
stock market?  If so, why not make this information public, and cite your 
legal authorization for this activity?  Why are you keeping your stock 
buying secret?

        The cracks in the banking system are showing up everywhere.  The
largest bank in the world outside Japan, namely the French bank Credit
Lyonnais, is going under.  You know this, don't you, Mr. Greenspan?  

        And what are the consequences?  Credit Lyonnais, in its desperate
search for cash, has plundered cash resources from two U.S. financial
institutions, and left them in a weakened state.  (They really had no
choice but to help Credit Lyonnais, because it would have taken them
down with it.)

        One of these plundered institutions is Citibank.  The other  
financial institution is in more serious shape.  Is it ready to fall
over the precipice?  Even while you foment stock market euphoria to 
stave off any perception of financial meltdown for the few short months 
necessary to re-elect Bill Clinton?

        Intervening in the stock market has only a short-run cosmetic
effect, and artificially rewards those who get out of stock during those
occasions of Federal Reserve intervention.  Is this your purpose:  to
reward favored players?  

        Or is your inflation of stock prices through the purchase of 
futures contracts intended to beautify a cosmetic Presidency that derives 
its power from image, smoke, puffery, and mirrors?

September 9, 1996
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