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This. Was. Not. Supposed. To. Happen. (Quoting ZeroHedge.) Worth noting: in the past few weeks, Chinese government tried very hard to stop the fall and prevent

by tomp 11y ago

This. Was. Not. Supposed. To. Happen. (Quoting ZeroHedge.) Worth noting: in the past few weeks, Chinese government tried very hard to stop the fall and prevent a crash - preventing selling by large stock holders, criminalizing short-selling, ordering stock buybacks, outright buying stocks, relaxing margin requirements, stopping IPOs, ... Obviously, that's not a viable long term solution.

JohnTHaller 11y ago
They'd have fallen a lot further if China hadn't added so many artificial controls. So, they'll likely be falling a lot further, just more slowly.
- bko 11y ago
  A lot of economists and market participants believe that these measure not only fail to mitigate falling asset prices but make them worse. For instance, short selling often makes matters worse: >In 2008, U.S. regulators banned the short-selling of financial stocks, fearing that the practice was helping to drive the steep drop in stock prices during the crisis. However, a new look at the effects of such restrictions challenges the notion that short sales exacerbate market downturns in this way. The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011—another notable period of market stress—stocks subject to short-selling restrictions performed worse than stocks free of such restraints. [0] Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster. Also, allowing the short sale of a stock incentivizes research that bring new less favorable information to public view. For instance, ability to profit off the decline of a stock may result in market participants in uncovering and reporting fraud or helping to pop bubbles. Often times government interventions and restrictions in the market fuel panic. [0] http://www.newyorkfed.org/research/current_issues/ci18-5.pdf http://www.newyorkfed.org/research/current_issues/ci18-5.pdf
  - ptaipale 11y ago
    I suppose you meant " For instance, prohibiting short selling often makes matters worse:" ?
    - seanmcdirmid 11y ago
      Both are true.
    - bko 11y ago
      Yes, I meant to say prohibiting short selling makes matters worse. Thanks for the correct. Unfortunately too late to edit my original comment.
  - mrec 11y ago
    > For instance, short selling often makes matters worse Did you accidentally a word?
  - TheOtherHobbes 11y ago
    Which just proves that economics isn't a science. For genuine science you'd have to have a control group. "The same group two weeks later" is not a control group. >Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster. This is story-telling. What happens has more to do with barely sentient flocking behaviour than "reaching equilibrium." There is no "equilibrium" to reach. There are only more or less naive and information-poor actors looking at each other and trying to out-guess the movement of the flock centroid. It's like running an economy on the basis of a ritualised spot-the-ball competition. If markets had any real interest in equilibrium or efficiency, bubbles wouldn't happen. But markets don't - mostly they have an interest in short-term gain, which makes the whole system as predictably unstable as any other system driven by positive feedback. Of course some agents profit very nicely from bubbles, and politically bull markets are a useful way to create an illusion of shared prosperity. So it's in their interests for the manic-depressive nonsense to continue.
    - bko 11y ago
techhackblob 11y ago
Is that interventionist policy any different to the Fed and ECB propping up of the US and European stock markets since the depths of the crash with QE? If not then when is the long term viability of that solution going to be called into play?
- foxhedgehog 11y ago
  AFAIK, QE did not include forcing share buybacks for employees of SOEs, for instance.
  - westiseast 11y ago
    lol or banning 'negative' news articles and blaming the whole debacle on foreigners out to split China up.
- surfmike 11y ago
  Yes. The Fed and ECB's goal is not to prop up stock market valuations, but to help the economy by encouraging spending and investment through moderate inflation. The banks are tightly bound by inflation targets. Arguably, the ECB has done too little QE since nominal GDP has barely (or hasn't) recovered in most of Europe since 2007, and inflation has been way under target since the crisis. It seems like China's reaction is more panic-driven, and doesn't have a framework such as inflation targeting to constrain it. In addition, this intervention is just to prop up stock asset prices; encouraging spending and growth in the whole economy is not the primary goal.
  - themartorana 11y ago
    Not to mention that I can't imagine how illegalizing trading and other knee-jerk reactions could possibly instill confidence in the market. Even if they can slow the decline, it seems like they'd just enlongate the decline until it reached a similar reality (if their actions don't actually increase the sell-off out of fear).
    - 11y ago

by tomp 11y ago

JohnTHaller 11y ago

They'd have fallen a lot further if China hadn't added so many artificial controls. So, they'll likely be falling a lot further, just more slowly.

bko 11y ago
A lot of economists and market participants believe that these measure not only fail to mitigate falling asset prices but make them worse. For instance, short selling often makes matters worse: >In 2008, U.S. regulators banned the short-selling of financial stocks, fearing that the practice was helping to drive the steep drop in stock prices during the crisis. However, a new look at the effects of such restrictions challenges the notion that short sales exacerbate market downturns in this way. The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011—another notable period of market stress—stocks subject to short-selling restrictions performed worse than stocks free of such restraints. [0] Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster. Also, allowing the short sale of a stock incentivizes research that bring new less favorable information to public view. For instance, ability to profit off the decline of a stock may result in market participants in uncovering and reporting fraud or helping to pop bubbles. Often times government interventions and restrictions in the market fuel panic. [0] http://www.newyorkfed.org/research/current_issues/ci18-5.pdf http://www.newyorkfed.org/research/current_issues/ci18-5.pdf
- ptaipale 11y ago
  I suppose you meant " For instance, prohibiting short selling often makes matters worse:" ?
  - seanmcdirmid 11y ago
    Both are true.
  - bko 11y ago
    Yes, I meant to say prohibiting short selling makes matters worse. Thanks for the correct. Unfortunately too late to edit my original comment.
- mrec 11y ago
  > For instance, short selling often makes matters worse Did you accidentally a word?
- TheOtherHobbes 11y ago
  Which just proves that economics isn't a science. For genuine science you'd have to have a control group. "The same group two weeks later" is not a control group. >Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster. This is story-telling. What happens has more to do with barely sentient flocking behaviour than "reaching equilibrium." There is no "equilibrium" to reach. There are only more or less naive and information-poor actors looking at each other and trying to out-guess the movement of the flock centroid. It's like running an economy on the basis of a ritualised spot-the-ball competition. If markets had any real interest in equilibrium or efficiency, bubbles wouldn't happen. But markets don't - mostly they have an interest in short-term gain, which makes the whole system as predictably unstable as any other system driven by positive feedback. Of course some agents profit very nicely from bubbles, and politically bull markets are a useful way to create an illusion of shared prosperity. So it's in their interests for the manic-depressive nonsense to continue.
  - bko 11y ago

techhackblob 11y ago

Is that interventionist policy any different to the Fed and ECB propping up of the US and European stock markets since the depths of the crash with QE? If not then when is the long term viability of that solution going to be called into play?

foxhedgehog 11y ago
AFAIK, QE did not include forcing share buybacks for employees of SOEs, for instance.
- westiseast 11y ago
  lol or banning 'negative' news articles and blaming the whole debacle on foreigners out to split China up.
surfmike 11y ago
Yes. The Fed and ECB's goal is not to prop up stock market valuations, but to help the economy by encouraging spending and investment through moderate inflation. The banks are tightly bound by inflation targets. Arguably, the ECB has done too little QE since nominal GDP has barely (or hasn't) recovered in most of Europe since 2007, and inflation has been way under target since the crisis. It seems like China's reaction is more panic-driven, and doesn't have a framework such as inflation targeting to constrain it. In addition, this intervention is just to prop up stock asset prices; encouraging spending and growth in the whole economy is not the primary goal.
- themartorana 11y ago
  Not to mention that I can't imagine how illegalizing trading and other knee-jerk reactions could possibly instill confidence in the market. Even if they can slow the decline, it seems like they'd just enlongate the decline until it reached a similar reality (if their actions don't actually increase the sell-off out of fear).
  - 11y ago