Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown, 4th Edition

Appendix: Are the Bond, Stock, and Gold Markets Manipulated?

The possibility of market manipulation by governments comes up periodically from our readers, and so far we have mostly ignored the issue in our writings. It is sometimes brought up as a reason for short-term movements in the markets. This appendix will address three areas of potential government intervention or manipulation:

• Bonds
• Stocks
• Gold

Bond Market Manipulation

The Fed openly manipulates the bond markets, mortgage markets, and the foreign exchange markets. It also regulates and openly manipulates the banking markets. Open market operations, in which the Fed buys and sells Treasury bonds (money printing), clearly manipulate the bond markets. Buying bonds raises demand, which keeps interest rates low. Without money printing, interest rates would likely rise and bond prices would decline.

When the Fed buys Freddie Mac and Fannie Mae mortgage-backed bonds, it is clearly manipulating the mortgage market and the entire bond market. In addition, by buying mortgage-backed bonds, the government is also manipulating home prices by keeping interest rates low and reducing the speed with which banks need to foreclose on mortgage holders. By saving Fannie Mae and Freddie Mac and by bonding mortgage-backed bonds, the government made mortgage money easier to find, and housing prices were kept much higher than they would have been otherwise.

The Federal Reserve also intervenes in the foreign exchange markets. It uses foreign ...