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December 2, 2008

Should the Fed Be Buying Stock Index Futures?

Tom Sowanick of Clearbrook has a suggestion sure to entrance and enrage investors in equal part:

By purchasing outstanding debt directly from GSEs and commercial banks, the Fed is injecting liquidity into the coffers of select financial institutions, such as commercial banks. Unfortunately, these measures fall short of helping the consumer directly and efficiently. It is time for the Fed to focus on purchasing stock index futures to help stabilize the other financial markets (i.e., equities).

Purchasing futures contracts on the US equity market would immediately squeeze the short-sellers who are running recklessly through the stock market because of the abandonment of the up-tick rule.

Stabilizing US equities would certainly end the hemorrhaging of corporate and public pension funds and at the same time act to stabilize declining 401(k) and IRA savings plans. If quantitative easing is to stabilize financial markets, then the Fed should act with all haste to begin the implementation process.

I'm with Tom that there hasn't been enough focus on consumer balance sheets and income statements, but I'm not convinced this is the way to get there. Other thoughts?

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