When the Federal Reserve was instituted back in 1913, it came into being with just two primary mandates. The first was to curb inflation through the adjustment of interest rates, and the second was to be a lender of last resort for troubled banks in need of liquidity. Over time however, Congress pushed a third mandate onto their balance sheet, which was to ensure full employment in the economy.
But after the stock market crash of 1987, the Fed became involved in a new area of the market that was never part of their mandate… propping up and protecting equity values in the stock markets. And while most of that work was relegated to the government run Plunge Protection Team (PPT) from the 80’s onward, it wasn’t until the Credit Crisis of 2008 and the implementation of Quantitative Easing that the central bank’s thrust into the stock markets became a near daily excursion.
So this now begs the question… just how does the Fed manipulate stock prices if they have no legal authority to do so, and no mandate at all to get involved in equities? The answer appears to lie in a loophole that is facilitating their use of other central banks to do their work for them by supplying necessary funds to foreign banks to purchase stocks on U.S. exchanges.
Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich?
These questions came to mind when we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying.
It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.
Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off.
The Fed is prohibited from buying equities by the Federal Reserve Act. But an amendment in 2010 – Section 13(3) – was enacted to permit the Fed to buy AIG’s insolvent Maiden Lane assets. This amendment also created a loophole which enables the Fed to lend money to entities that can use the funds to buy stocks. Thus, the Swiss central bank could be operating as an agent of the Federal Reserve. – Paul Craig Roberts.org
Last year, a study reported that central banks own more than 50% of all stocks in the global equity markets, and are by far the primary catalyst for the recent moves into all-time high territory. And in fact, the central banks work almost daily to protect equities from falling despite the fact that the companies they purchase have valuations exceeding their true value and revenues.
Perhaps when you can print money out of thin air as often as you like, purchasing assets and manipulating natural market trends are no big deal.
Ironically, the primary market trend since 2011 has been one of insider selling coupled with share buybacks to cover this, making Dr. Robert’s assertion that the Fed is propping up markets to protect the wealthy and elite a viable reality.
Either way, stock markets are more than ever rigged games in which the common investor cannot hope to win at since it is no longer about gambling on fundamentals and technicals anymore, but in how the Fed will intervene in the markets on any given day.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.