Business

How the Fed began rigging the stock market

Saturday is one of the most important anniversaries for Wall Street.

No, it’s not the anniversary of the big market crash in 1987. That took place with a lot of fanfare last Friday. And the 23rd commemoration of the 1989 mini-crash quietly took place two weeks ago.

This Saturday isn’t on anyone’s calendar. But it should be because on Oct. 27, 1989, a guy named Robert Heller proposed rigging the stock market so that crashes like those in ’87 and ’89 would never happen again.

Kooks propose things like this all the time. But Heller was the real thing. He was a renowned banker who had just left the Federal Reserve board weeks before he gave a speech that was reprinted in the Wall Street Journal.

Heller worried that the Fed was dangerously pumping too much money into the financial system whenever crashes occurred. All it really had to do, he said, was buy enough stock to keep the market afloat until the markets calmed down. Simple enough!

“The stock market is certainly not too big for the Fed to handle,” said Heller. “The stock market is the only major market without a market-maker of unchallenged liquidity or a buyer of last resort,” he added, noting that the Fed already had the much larger currency market’s back whenever it got into trouble.

In short, Heller wanted the Fed to rig the stock market when things looked dire — and only when they were dire. And he said stocks could be bought easily and cheaply enough through index futures contracts.

Just the year before President Reagan had put together the apparatus for rigging the market when he signed an executive order that created the President’s Working Group on Financial Markets. The commander-in-chief had created the rigger-in-chief or, as it came to be nicknamed, the Plunge Protection Team.

I mention this now because the Fed today is rigging the stock market. Indeed, ever since the day Heller proposed the unthinkable, Washington has been making sure stocks don’t go into an unstoppable slide.

The hand of the Fed was clearly protecting the markets during the crisis in 1998 caused by the collapse of an out-of-control hedge fund called Long-Term Capital Management. And in 2001, when the first Internet bubble of ridiculously overpriced stocks popped, the invisible hand of the Fed helped stocks along.

The Fed and the US Treasury kept stock prices lofty right after the 2001 terrorist attacks. But once rigged, it was hard to bring asset values back to Earth when things got overpriced before the latest collapse in 2007. But the Treasury, the Fed and some major Wall Street firms propped the market up then, too.

We should all say “hooray,” I guess. Sure, a lot of innocent investors get hurt when these Fed-created market bubbles pop. But it’s the integrity of the financial system that really matters, right?

There’s a big difference between what Heller proposed and what’s going on today. Heller wanted the Fed to be a temporary emergency backstop because he didn’t want the central bank to flood the financial markets with cash. That was too dangerous.

Yet that’s exactly what current Fed chief Ben Bernanke is now doing — flooding the financial markets with cash, although he calls it quantitative easing and pretends that the electronic money he’s creating is somehow better than printing currency and dropping it from helicopters.

The Fed will conclude its two-day Open Market Committee meeting tomorrow, and we are likely to get a communiqué that says the economy is improving. This will be the final meeting in which the Fed can affect the presidential election.

When the policymaking group met last month, it announced Quantitative Easing Forever — an open-ended, money-printing operation that was supposed to thrill Wall Street. That didn’t happen.

Wall Street didn’t cheer much, and QE Forever isn’t showing any signs of helping the staggering economy.

Not only is President Obama’s job on the line next month, but so too is Bernanke’s. Mitt Romney has said Bernanke’s a goner if the Republicans win the White House.

I don’t know how you feel about rigged financial markets. Personally, I don’t like games of chance, but I’m especially leery when someone else knows when the dice are loaded.

But if Romney wins, and if Bernanke goes, and if the stock market collapses because of those developments, then someone had better remember Heller’s cure for the common collapse.

Happy Anniversary, you rigger!

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As I’ve said before: Keep your eyes on corporate revenue.

Twenty-five percent of the 500 companies in the Standard & Poor’s index have reported third-quarter profits, and 61 percent have reported revenues below analysts’ expectations. In a typical quarter only 38 percent miss those estimates.

Corporations can fudge their earnings. But it’s harder to play with revenues.

The bottom line: the economy is slowing. And the number of companies warning that about the quarters ahead is growing.

Be careful!

john.crudele@nypost.com