Former Plunge Protection Team Member Warns on Coming Inflation

Recently, I posted a short profile on Philippa Malmgren and the remarkable list of clients she has gained since leaving government.

There is no question that word is out among insiders that she is an up and coming player. Take a look at the client list again. Everyone who is an inside player is sending her a check.

Below is a one hour, eleven minute youtube video of a speech she gave recently. I highly recommend that you find the time to listen to the entire video right through to the last question, which was about whether insiders saw the subprime crash coming.

Keep in mind while you are watching this tape that this is a very connected and powerful woman who could very well become a future Treasury Secretary or Federal Reserve chairman. In the world of realeconomiks, I would be happy with her selection (although it's not going to happen in an Obama Administration).

The first item that should be noted about her approach is that she is looking at  the economy from a qualitative angle versus a quantitative approach. In the examples she uses, it almost appears that she looks at the economy in much the same way that I outlined the economy should be watched, when I wrote, How to Monitor the Economy.

That said, she gives no indication she understands business cycle theory. Further, although it is clear she understands that default or inflation are two of the ways by which the debt problem can be resolved, she also lists devaluation of the currency as a separate method, when it is really not different from an inflation. I have no idea how you would get a devaluation of the dollar without inflation being the cause.

She also talks somewhat in code, toward the end it becomes clear she is very critical of Obama but she takes a tact that Mises often took, i.e. criticizing a concept or a period in history rather than current players. She  talks about FDR instead  of Obama. She means Obama. She is also bullish on commodities, and this might also include gold, but as a former member of the plunge protection team, she is not going to say so outright.

The most remarkable part of the clip is her warnings on inflation, which starts roughly at the 20 minute mark. This is no ordinary analyst making this warning. This is a person who was a key member of the Plunge Protection Team, which means her warning about inflation and her very bullish stance on commodities is a quite remarkable thing to hear.

I should point out that she is probably talking long-term here and not anything that will occur, say, over the next six months or so. Thus, there is no conflict with my own short-term bearish view on gold (and most other commodities ) and my long-term bullish view.

There are a lot of insights in this speech. I don't agree with everything she says, especially her occasional nation/macro thinking, but overall it is a remarkably open speech from someone who is a major player.

Geithner Will Head Plunge Protection Team

Oh joy, John Crudele reminds us all that, as Treasury Secretary, Timothy Geithner will also head the The President's Working Group on Financial Markets, aka, the Plunge Protecton Team.

ALERT: Plunge Protection Team Press Briefing Tuesday Morning

The following is a Treasury Press Release on tomorrow's press biefing:

Secretary Henry M. Paulson, Jr., Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair will be joined by the other members of the President's Working Group on Financial Markets to make statements in the Treasury Department Cash Room at 8:30 a.m. (EDT) on October 14, 2008 on a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets. Following the on-camera statement Treasury officials will conduct an off-camera, background briefing in the same room.

Who
Treasury Secretary Henry M. Paulson, Jr.
Federal Reserve Chairman Ben Bernanke
FDIC Chairman Sheila C. Bair
SEC Chairman Christopher Cox
CFTC Chairman Walter Lukken
OCC Comptroller John Dugan
OTS Director John M. Reich

Plunge Protection Team Disses Senate Bill Harassing Speculators

The Plunge Protection Team gets one right:

The members of the President’s Working Group on Financial Markets (aka, The Plunge Protection Team) fired off a letter denouncing a Senate measure designed to curb speculation in the oil futures markets.

The working group — which consists of Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Christopher Cox and Commodity Futures Trading Commission Acting Chairman Walter Lukken — called the measure a bad idea.

The four noted in their letter that the bill would “significantly harm U.S. energy markets without evidence that it would lower crude oil prices.”

What’s more, they said, the bill’s “unprecedented restrictions on market participation could reduce market liquidity, hinder the price discovery process and limit the ability of market participants to manage and transfer risk.”

Quarles Goes Public With His Case for Allowing Private Equity to Buy Bank Stocks, Without Current Restrictions

Apparently the full court press is on. In addition to Bloomberg reports on the Carlyle Group talking to the Fed on "reforming" the restriction on limitations to the size of positions private equity funds can take in bank stocks, there's also an Op-Ed calling for the same.

Carlyle Group managing directors Oliver Sarkozy (half brother of French President Nicolas Sarkozy) and Randal Quarles are now aggressively promoting, very publicly, their reasons why private equity should be allowed to own major stakes in bank stocks.

While we have no problem with free markets being allowed to operate, as we asked in our earlier post, what's all this "dialogue" between the Fed and Carlyle Group and other private equity firms about? Only one sentence is required to remove the restrictions.

Further, Quarles continues to bring up the fact that public markets will not be able to provide the necessary funds the banking sector will need. Does this really mean that Quarles is angling to prevent public markets from investing at any new level that private equity funds will be allowed to invest at?

This has been an on going project for Quarles. His current argument is not any different from his argument during the luncheon I attended back in April.

See my report here.

See his recent WSJ Op-Ed piece here.

Note that the WSJ article identifies him as the former "under secretary of the Treasury for Domestic Finance in the Bush administration." More precisely, and importantly, he was the Treasury's coordinator to the President's Working Group on Financial Markets (aka, The Plunge Protection Team) But, of course, identifying him as such would add a new layer of mystery to the always mysterious operations of Carlyle.

Former Treasury Department Coordinator for President's Working Group Denies Working Group Manipulates Markets

Randal Quarles, former Under Secretary of the Treasury who led the Treasury Department's effort in the coordination of the President's Working Group on Financial Markets, and who is now a managing director at the Carlyle Group, has denied the Working Group manipulates the gold market or stock market.

Quarles spoke at a luncheon today at the Washington DC National Economists Club. During the question and answer period I asked him this question:

There have been rumors on the internet and a bit in mainstream media that the President's Working Group manipulates the gold market and stock market. Has the Working Group ever done so and do they have the funds available to do so? Secondly, have members of the Working Group ever contacted market participants to co-ordinate buying or selling in any markets?

Quarles replied "The short answer is no. No to all of it."

He then went on to state that the Working Group does not even have enough funds to buy notepads. "I had some notepads made that said President's Working Group on Financial Markets, but I paid for them with my own money."

After the Q&A session, I managed to corner him and again asked him if Working Group members ever made calls to co-ordinate market buying or selling. He said definitely not. He said that calls may be made to market participants to get market intelligence but that was it. He then went on to suggest in a casual off the cuff way that the Working Group was just various members of different regulatory agencies getting together to keep informed on markets. I then said to him that, yesterday, in questioning about the Working Group by Congressman Ron Paul, Fed chairman Ben Bernanke seemed to answer the question in the exact same casual way as though to imply that the Working Group was nothing more than some sort of collegiate-type discussion group. He laughed and said, "Yeah, that's what we are co-ordinating these days [Our responses]."

For full coverage of Quarles speech see Carlyle Group's Plan to Takeover the Banking System.