${Html.ActionLink("My MarketWatch", "index", new { controller = "composite", area = "section", page = "my" })} | !{Html.ActionLink("Sign out", "LogOff", new { area = "User", controller = "Account" }, new { id = "signOutLink" })}
Welcome, ${UserDisplayName}
Log in
Become a MarketWatch member today
David Callaway Archives | Email alerts
March 8, 2012, 10:27 a.m. EST · CORRECTED
Want to see how this story relates to your portfolio?
Just add items to create a portfolio now:
Create Portfolio or Cancel Already have a portfolio? Log In
By David Callaway, MarketWatch
This column has been corrected to show that bonds fell on Wednesday.
SAN FRANCISCO (MarketWatch) -- At some point, the world's major central banks are going to turn off the three-year spigot of free money supporting much of the world's economic and market gains these days.
Just not right before a key Greek debt swap on Thursday that could ignite the European crisis all over again.
The Federal Reserve's signal on Wednesday that it is considering buying more bonds to keep interest rates low was welcomed by global markets stinging from the worst day of the year in their previous sessions. The Wall Street Journal's Jon Hilsenrath broke the story during the morning trading session in New York, turning a wait-and-see day in the markets into a nice rally for stocks, and everything except bonds and the U.S. dollar. See the WSJ story.
The story brought back into the mix the idea that the Fed and other central banks will continue to spray the world with free money to keep growth moving, and investors optimistic. For the last several weeks, the Fed at least had been backing off from a third round of bond buying in the last few years, or quantitative easing in economic terms, in what's come to be known as QE3.
Stocks rose as markets digested news of a Fed bond-buying measure, Paul Vigna reports on digits. Photo: AP.
Perhaps Tuesday's sharp declines in global markets focused central banking minds on the possibility that Greek debt holders might kill the fragile Greek bailout on Thursday by not swapping their debt for new debt at a huge loss.
While European officials are making all the right sounds about the Greek swap expecting to be successful, the signals of more bond buying come at a suspicious time. Which brings us back to the Plunge Protection Team.
The Plunge Protection Team is a name coined by a Washington Post headline writer after President Reagan set up a "working group" between the government and the Fed to make recommendations on how to maintain integrity in the markets after the 1987 stock market crash.
Conspiracy theorists and Robert Ludlum fans have always charged it with everything from illegally propping up markets to running the financial world from some shadowy, Washington bunker deep beneath Capitol Hill. Others deny it still even exists. The Fed and government never comment, seeming to enjoy the mystery of it all.
I'm not much of a fan of this theory, if only for the reason that I can't believe any group of government and central bank officials could possibly be smart enough to mastermind strategies to control the markets. If this group did exist, it would more likely to bet the farm on Enron and Lehman Brothers and be plotting right now how to load up on Facebook when it goes public.
But there's no doubt that after three of years of wrenching financial crisis and the near loss of the entire system, Fed Chief Ben Bernanke and Treasury Secretary Timothy Geithner are more sensitive to market moves than ever. So at some point in the cycle, the myth becomes reality.
The latest Greek hiccup aside, the Fed, the European Central Bank, the Bank of England, the Bank of Japan, and every other central bank contributing to the manipulation of interest rates to near-zero levels are going to have to change this policy. It might be before the Fed's 2014 deadline. It could be well after.
But when that happens, there will be great weeping and gnashing of teeth. Bond yields will soar, and prices will plummet. Stocks will react as the dollar leaps. Even this group knows it has to take that into account. You can solve a debt crisis by issuing more debt, but what happens when you finally stop?
Until this week, global markets have been on a two-month tear, with Japan up more than 10% and the S&P 500 /quotes/zigman/3870025 SPX +0.82% up 8.6% since the end of December. A new bull market had been declared. As of Tuesday, all the worries about Europe, Iran, and soaring oil prices had returned.
So whether there is a mysterious group with an unknown mandate and financial powers in Washington really doesn't matter. The markets have shown what they will do if they get any hint that the free-money era is over. Preparing them for this inevitability is an open secret to investors.
And while the markets love the free money, each time the prospect of another round of easing comes up, the flip side will inevitably be concerns that somebody thinks something is about to go very, very wrong.
David Callaway is editor-in-chief of MarketWatch.
Six tricks to spend less, save more for retirement
U.S. stock futures rise on Greece deal optimism
European stocks rally as Greek debt deal looms
Will Iceland decide to go loonie?
U.S. stocks rise as Greece swap nears closure
Americans borrow for college, not for housing
Plunge protection team hedging on Greece
Plunge protection team hedging on Greece
Will Iceland decide to go loonie?
Quality Is Investors' No. 1 Job
Asia Week Ahead: Investors Eye Aussie Data, NPC
What Romney, Obama Tax Plans Might Mean for You
The Big Themes From Mobile World Congress
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A... Expand
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator. Collapse
Tech Tales
Is Apple vs. Amazon winner take all battle?
Money and Power
Punish bankers? We're still rewarding them
Read Full Article »