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Should we shut down the stock markets?

This is a very controversial question and there are pros and cons

#ShutdownTheMarkets

** THREAD **
First, know that automated circuit breakers were put in place after 1988’s "black Monday”

15' shutdown when the index falls 7%
15' again when it falls 13%
Shutdown for the day at -20%

Goal: Stop panic selling in the short term, not stop markets from going down midterm
We don’t want markets to artificially inflate prices just because it suits us

Pricing things adequately provides valuable information to society as a whole (here’s Con #1)

In fact, the recent crash helped trigger the alert, convinced many that #coronavirus was serious
Circuit breakers aside, let’s turn to history for shutdown precedents:

Shutdown during 4 days after 9/11

2 days after Hurricane Sandy (2012)

There's a couple more cases but you get the point
These shutdowns gave economic actors time to gather information and coordinate a response **great!**

...but...

knowing the price of things (stocks) is actually crucial to coordinate action amidst emergencies (Con #2)
Yet shutting down the stock markets could refocus attention on the health emergency (here’s Pro #1)

But it could also feed into the panic (Con #3)
A big issue with market shutdown is market interconnectedness

You can’t shut down US markets without shutting down foreign markets too

(some stocks are listed on multiple markets across countries)
You can’t really shut down the stock markets without shutting down:

(1) the derivatives markets (whose value depends on the price on the underlying stocks, hence the term “derivative”)

(2) the credit markets (access to loans) because the two are interrelated as well
Also, if you shut down the markets, investors who need emergency liquidity (cash) to respond to the crisis will not be able to sell & access their money (#PANIC!!)

This is why stock markets did not shut down during the 2008 crisis and it was a good thing
The typical crisis leads gov't & central banks to “inject liquidity” (=print money from scratch) to

(1) prevent bankruptcies
(2) boost consumer spending
both of which restore confidence

markets must be open to help gov't coordinate this type of action via the price mechanism
The #coronavirus crisis is different though

With businesses being shut down, there is not much we can “consume” with the cash injected to restore confidence

So "injecting liquidity" right now is like making cash rain above a bottomless well!
The stock markets are now essentially trying to price the #duration of the business shutdown

Meanwhile, many market players benefit from current market volatility and make millions

This isn’t too productive for society at this time (Pro #2)
This unprecedented situation creates opportunities for players with pricing power on certain goods to influence overall market prices in a malicious way

(#oil price war between Russia and Saudi Arabia, anyone?)

This sucks balls and doesn’t help society either (Pro #3)
The problem right now is that the “goods and services” economy is on pause while the “financial assets” economy is not

So the latter risks being disconnected from the former, with mostly speculators benefiting
Still, some say the stock markets are still fulfilling their core purpose:

@ImaraInc, a biotech, raised the $75 million it needed to develop new drugs a week ago on the @Nasdaq stock exchange

(fun fact: There are 13 exchanges in the US alone, not just 1)
This was an exception though, unlikely to happen again anytime soon with the current conditions

So the argument that we need stock markets over the next 4-8 weeks for startups to be able to raise capital (#IPOs) is mostly bullshit
Most finance experts find the idea of shutting down stock markets ludicrous

Even though I am a business school prof, I am not a stock markets expert

Just putting this out there before people get upset

Just tryin’ to brainstorm here😉
But there’s more:
During WWI, the markets actually shut down for 4 months

(not because of Spanish flu pandemic)

This made sense then because the “goods and services” economy was on pause for a while **wait whaaat?!**

And we were at war
Two days ago on national TV, French President @EmmanuelMacron declared

“We are at war”

He even said it 6 times ** I shit you not **
And there is Bill O'Donnell, US rates desk chief strategist at @Citibank, who just told clients

"a next major step might be to shut the stock markets to prevent a further, self-fuelling sell-off”

This guy is not random joker
He’s a stock markets expert (unlike me)
*** Time to summarize ***

There are pros and cons to shutting down the stock markets

I counted three of each
If a shut down were to happen, it would have to:

(1) Be globally coordinated (by @IMFNews?) and concern all financial markets (not just stocks)

(2) Be clearly bounded in time to match the duration of the “goods and services” economy’s lockdown (say, 2 full weeks)
(3) Involve government guarantees (both fiduciary and financial)

(4) Be leveraged to address the health emergency and (why not) work out a plan for firms that need to be nationalized

(unavoidable for some, let's face it, starting with airlines)

We're done here. Stay safe🙄
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