Monday was a big day for all of us.
We all watched as the Dow dropped an eye-catching 1,000 points. A dramatic reversal from what we've come to expect this year.
You could see the tension mount on the faces of the television pundits, as real concern began to grow. It was the first real admission by the financial community that the Coronavirus, now labeled Covid-19, would likely have a major impact on the economy.
There was a lot said, suggesting that now was not the time to panic. Stay the course, was the suggestion of the day. Even President Trump and Treasury Secretary Mnunchin recommended the no-panic course. And even suggest that you might look at buying the dip.
Classically, this strategy is called “Jaw Boning” and it's an attempt by media and political leaders, to talk up the market, by calming investor worries.
But by now you're probably wondering if there is anything that can be done directly to help stop a market crash.
And the answer is that there are 3 ways, at least, that the government has to step in and help support markets in the event of a crash.
The first way the government can help the markets is through a special instrument of the US Treasury, called the Exchange Stabilization Fund. This fund was created back in 1934, as part of those great reforms instituted after the Stock Market Crash of 1929. by using the Exchange Stabilization Fund, the Treasury can step in and support the stock market should an out of control crash happen. Incidentally, the Treasury can use an ESF, not just in event of a stock market crash, but also in the foreign exchange markets.
The Second way the Federal Government can help avert a crash came about as a result of the Stock Market Crash of 1987. This is the Working Group on Financial Markets commonly called the Plunge Protection Team. Under this directive representative from the Treasury, The Federal Reserve, the Securities and Exchange Commission and the Commodities Futures Trading Commission, all get together to design a strategy to meet the current challenge.
The Plunge Protection Team has been effective in coordinating the actions of various government agencies. We saw this especially at work as recently as the financial crisis of 2008.
And the final method that Washington has to address any financial crisis, is the direct action of the Federal Reserve. The fed has the legal authority to directly enter a financial market to provide for orderly trading in a particular market over which the Fed has responsibility.
Since last September we have seen the Federal Reserve intervening in the overnight Repo Markets to support that market and its short term lending facilities.
So overall the United States has developed one of the most robust systems of handling a financial crisis should it occur.
And from all appearances, we may see some of those support mechanisms put to work shortly.