Time Out
Ezra Klein said this when I saw him last night, and I don’t have a good answer:
Why haven’t we simply shut down the stock market until we can draw up an appropriate recapitalization program and implement it? There would be plenty of precedent. FDR shut the markets down in 1932. Bush shut them down after 9/11. I guess it’s possible that the market would drop sharply on the day it reopened, but if the plan was sound (and given some time to build a plan — time that would be provided by a closed market — you’d have a higher chance of that), and the government had already demonstrated that sort of seriousness of purpose, it’s hard to why the markets would be more freaked out than they already are. What am I missing?
Is there a real reason here besides an ideological aversion to heavy-handed measures and a pollyanish desire to insist that everything’s all right? It seems logical enough to say that if we’re going to have an emergency intervention in the marketplace that we can take a “time out” from the stock market to give people time to put the plan together.
40 Responses to “Time Out”
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October 13th, 2008 at 9:48 am
Why haven’t we simply shut down the stock market until we can draw up an appropriate recapitalization program and implement it?
Ooh! Ooh! For once I know the answer! It’s because the real problem is not in the stock market but in the commerical paper market, on which a large chunk of American business relies for day-to-day functioning and which is now in a major state of uncertainty due to the complex nature of the “toxic waste” held by many lenders and considered collateral.
A+ for Jim!
October 13th, 2008 at 9:52 am
As I understand it, the thing people are worried about is not drops in stock prices. So it’s not clear to me what closing the stock market is supposed to get you. It freaks people out a bit, the credit market gets even more edgy and risk averse–and you can’t close that; its sclerotic behavior even for a few hours is what’s freaking people out, so closing it for days is a disaster–and things don’t get better and maybe get worse.
October 13th, 2008 at 9:54 am
Is it supposed to be some sort of unchallenged public good now that the stock market value remain at someone’s preferred level?
October 13th, 2008 at 10:03 am
I’d be more curious to hear a real reason FOR closing the stock market. There are mechanical reasons why there are “circuit breakers” in case of really phenomenal single-day declines, but it’s not like closing the market really keeps prices from declining in any real way.
October 13th, 2008 at 10:06 am
The stock market is a sign of people’s hysteria over what is happening in the credit market and it’s also a sign that hege funds are having to meet margin calls, which is clearly exacerbating the drops in the stock market. Round and round we go — where we stop nobody knows. But closing the stock market for a period of time won’t help if, when it reopens, there is still panic in the credit markets. It would be the kind of symbolic gesture that McCain seems to love, but really, it’s not a good idea. If you want a parallel: there was a moratorium on shorting financial stocks. As soon as it was lifted, the shorting began anew, and it was even worse than it was before.
October 13th, 2008 at 10:07 am
Could you give me advance notice of these policy trial balloons so I can load up with puts beforehand?
October 13th, 2008 at 10:08 am
That would kind of suck for anyone who needs to sell stock to raise funds in the interim. The economy already has a liquidity crisis, why make it worse?
October 13th, 2008 at 10:11 am
Is it supposed to be some sort of unchallenged public good now that the stock market value remain at someone’s preferred level?
Well, the pro-”Main Street” bailout proposals generally have the effect of propping up housing prices a their current levels. I don’t see the philosophical difference in messing with the stock market, either. (Which is to say I think both proposals are ill-conceived.)
October 13th, 2008 at 10:11 am
Presumably, shutting down the stock market would be about failure, but this administration is about success.
October 13th, 2008 at 10:21 am
As mentioned above, there are “circuit breakers” built in to the stock market that shut it down with big enough single-day drops. Importantly, we’ve not hit any of those, so it would seem that the drops are not big enough to warrant shutting it down. Also, shutting it down keeps people from getting their money and also from putting money in. And, as also noted, the real problems are not with stocks per se, but with other things. Those problems won’t be made better by shutting down the market and might be made worse. (Note how this wasn’t true of the situation after the Sept. 11th attacks.) Given all of these reasons shutting down the market is probably a bad idea.
October 13th, 2008 at 10:25 am
I thought Jewish people were supposed to be keeping a VERY low profile in this mess– and NOT rocking the boat with policy recommendations.
Guess Matthew didn’t get the memo:
http://www.jewishjournal.com/united_states/article/will_wall_street_crisis_spur_anti_semitism_20081007/
October 13th, 2008 at 10:31 am
Matt B: Certainly some pro-’Main Street’ approaches have been wrongly focused on maintaining inflated housing values. But in the good old programs like we used to have, the government would intervene to help renegotiate the actual mortgage with the bank to reflect a newer value.
Intervening to keep housing prices high is a conservative approach. Real liberals have better ideas.
October 13th, 2008 at 10:31 am
Seems like a good time to put on the small-government glasses to look at the problem. The question isn’t “Why shouldn’t the government suspend trading?” but “Why should the government suspend trading?”. The only reason to suspend trading is to artificially hold prices in place- suspending trading doesn’t actually respond to or alleviate any of the real problems. That’s hardly a compelling reason to prevent people from buying and selling their property as they choose.
October 13th, 2008 at 10:32 am
1) Here’s the Saturday Night Live skit skewering Nancy Pelosi, Barney Frank, and the ownership of the Democratic Party by certain billionaires.
http://www.nbc.com/Saturday_Night_Live/video/clips/c-span-bailout/727521/
Note: NBC deleted the subtitle “People Who Should Be Shot” under Herb and Mariam Sandler — as well as the Scene where Herb thanks Barney for not investigating him
2) In the interest of transparency, note that Herb and Marian Sandler are the major funders of this website.
October 13th, 2008 at 10:32 am
Matt, please, as a big fan who would hate to see your credibility tarnished behind an idea this stupid, update this post and disassociate yourself from it forthwith.
October 13th, 2008 at 10:37 am
Oliver Kamm, who I imagine you’d disagree with on most subjects, has had some good analysis on his blog. And suggests why he doesn’t think it would be a good or useful idea.
http://timesonline.typepad.com/oliver_kamm/2008/10/time-for-a-trad.html
‘But stock markets are not the drivers of this crisis; they are the messenger of underlying weaknesses in the financial system. That’s why they’ve been falling precipitately. The best you can say in favour of trading halts was cogently presented by the Nobel laureate Merton Miller after the 1987 and 1989 experiences (”Volatility, Episodic Volatility, and Coordinated Circuit Breakers”, in Financial Innovations and Market Volatility, 1991, pp 227-55):
“Price limits and trading pauses can spread the [price] falls out over time; but neither circuit breakers nor more drastic steps (such as banning index futures altogether) can prevent major changes in price levels from occurring whenever a sufficiently large fraction of investors seek to reduce the proportion of their wealth they hold in equities. The best that can be hoped for is that as the public becomes more aware of circuit breakers, their triggering during a fall might alleviate what opinion pollsters have identified as a major concern during recent crash episodes: the fear that computer-driven markets are thrashing about, like some mad Golem, totally out of human control.”
I do not believe that Pearlstein’s more ambitious proposal would do anything much, but at the margin it would do harm. The role of governments is to stabilise the financial system, not to stabilise securities prices. Governments and central banks are trying to do that by, respectively, recapitalising the banks and acting as lenders of last resort.
In liquid capital markets, arbitrageurs help narrow the discrepancy between market price and fundamental value. Trading halts will just keep them out, while – as James Forsyth intimates – the noise traders, caught up in the mood of the moment, will return to the market as soon as the suspension is lifted. It’s a reasonable supposition that market volatility will thereby increase, and that pricing inefficiencies associated with these huge dislocations in financial markets will become more extreme. ‘
Shaun
October 13th, 2008 at 10:47 am
Ezra is sounding like Joe Biden. FDR was not in office in 1932. Nor did FDR shut down the stock market. He declared a “bank holiday” in which the banks were closed so that no one could withdraw their money for about a week. This was to put a stop to the bank runs that were then in progress. His famous line “we have nothing to fear but fear itself” was a specific reference to the bank runs.
What the government has been doing over the last few weeks, such as raising the FDIC limit to 250,000, insuring money market funds, and talk about insuring inter-bank loans has all been directed at trying to stop the current run on banks. The TED spread is indicative of this bank run. It is the credit markets, not the stock market, where the problem lies. I really do wish people would attend to Krugman’s blog more closely, especially now that he has won the nobel.
One last time: THE PROBLEM IS NOT THE STOCK MARKET, IT IS THE CREDIT MARKETS!
October 13th, 2008 at 10:48 am
Um, people firms need to raise capital, and every day there are many transactions that really have little to do with the overall state of the economy but deal with things like investing in / cashing out IRA’s.
Also, if the commercial paper market is shut down, how is shutting down other markets any kind of solution?
October 13th, 2008 at 10:52 am
Closing down the stock market could easily exacerbate the problem – dramatically. If someone needs to raise funds immediately by selling stock, and the market it closed, they may lose their only lifeline and be forced to liquidate or file for bankruptcy.
The stock market is only a reflection of negative fundamentals; closing it down for a few days doesn’t make the fundamentals magically better.
I would like the days off that such a measure would provide in my career, but it has minimal benefits.
October 13th, 2008 at 10:59 am
Why would we need a shutdown of secondary markets?
The NYSE and other stock markets are secondary markets. The fact that a stock price tumbles does not in any way take capitalization away from the corporation that originally issued the stock. It is a fundamental error, not at all relieved by the frequency with which the error is repeated, to call the money that people put into this secondary market “investments”. They’re not investments. Secondarily-bought stocks are gambles, side bets to the real business the corporation does. You, the so-called investor, could lose the side bet without affecting underlying value at all. This is quite different from suspending business during a bank run.
Plunges in stock value are a signal, an effect rather than a cause of plunging value of the corporation in question. Stopping the plunge in the effect won’t work its way upstream to the cause. It won’t rescue a corporation that is failing because it financed itself with a faulty credit strategy (one based, say, on buying junk derivatives), or has a basically unworkable business model (like being invested up to the hilt in making SUVs when oil price rises were inevitable).
Not that plunging stock values are not a problem. The foolish idea that stocks are any sort of investment was so current for so long that many, many people who should never have been anywhere near the craps table that is the NYSE, have their retirement nest-eggs, or their kids’ college fund, tied up in stocks.
But the solution to this problem is not to try to prop up stock values (not that shutting the stock markets would even do that). The solution is to enhance Social Security so that it is a total solution, so that people can really live off their benefits in the absence of any other income stream. This should be done by soaking the folks who were running the craps table. Take off the income limits on the SS tax, and apply it to every sort of income, including anything offshore, and on a progressive scale.
October 13th, 2008 at 11:01 am
Because the way to fix a liquidity crisis is to make stocks less liquid?
The only problem with a falling stock market is when Moody’s starts threatening to downgrade banks when their stock price gets low. Other than that it doesn’t really matter. So, if we could just get the rating agencies to do what it’s done for the last several decades and not respond to short term market movements we’d be cool. Too bad that in a desperate gambit to save their tattered reputations they’re helping speed the collapse of the financial system.
October 13th, 2008 at 11:03 am
What “Cap and Gown” said. FDR wasn’t Prez in 1932.
October 13th, 2008 at 11:12 am
All those reasons aside, can’t you trade most stocks on markets in other countries? And wouldn’t shutting down the U.S. stock market cause all those other markets to crash as investors rushed to get their money out? This truly does seem like a terrible idea.
October 13th, 2008 at 11:26 am
Huh?
Why not shut down all news outlets(including blogs) until the news improves?
Common sense…
October 13th, 2008 at 11:49 am
I’m glad to see other commenters have addressed this nonsense already.
There are a lot of good responses here, but the fundamental point is that the falling stock market is not the problem: it’s a symptom of the problem. Closing the stock market will not help and will likely make it much worse as it would dramatically reduce liquidity.
October 13th, 2008 at 2:52 pm
Still obsessed with Jews, huh, Don?
Granted, the fact that you’re reading The Jewish Journal is genuinely amusing (if, okay, only in a sad, pathetic way. No doubt you were linked to it from God only knows where.)
Well — I look forward to the next eight or nine posts you’ll, no doubt, have before sunset!
October 13th, 2008 at 5:47 pm
Come on.
FDR did not become President until March, 1933.
He did not shut down the stock market in 1932.
The only times the market has been closed was when we entered WW-I and after 9/11.
I usually put down right wing blogs for this type of stupidity, but this time I have to call you on making up your own reality.
October 13th, 2008 at 7:24 pm
Biy, it’s too bad that they didn’t stop the market today, Matt. Boy, was it going down! To think how much loss of prices we would have been spared had we closed the market today!
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