Violent securities price movements can sap economic confidence but are not in themselves signs that markets are not working. Photo / AP
EDITORIAL:
Even after central banks launched a co-ordinated economic support package on Sunday, markets plunged again hours later.
One way to prevent a further slide, now being discussed, would be to close financial markets temporarily,as Franklin Delano Roosevelt did with US banks in 1933.
Advocates of closure say price discovery — markets' primary function — has become almost impossible given the unpredictability of the economic damage.
Markets can no longer act as vehicles for efficient allocation of capital, but are layering a financial crisis on top of an economic and health crisis.
But markets are not acting dysfunctionally. Violent securities price movements can sap economic confidence but are not in themselves signs that markets are not working. While price discovery is difficult, it should be allowed to continue.
It is not better for the economy to have no public prices at all. Closing exchanges could create the very problems it is intended to prevent, as investors are shut out but struggle to value assets and meet redemptions.
It is particularly important that small investors should not be excluded from trading, given that large investors will continue to trade privately.
Current prices reflect not panic but real yet unquantifiable concerns about the economic impact of travel bans, social distancing measures and supply chain disruptions. Trading will stabilise when the outlook clarifies.
New information — a coronavirus vaccine, lower infection rates than estimated, efforts to support sectors — will help boost share prices.
The actions taken by the Federal Reserve and others on Sunday to improve liquidity, including a new US$700 billion ($1.1 trillion) round of quantitative easing, a rate cut and dollar swap lines for foreign central banks, have proved insufficient, but show international authorities are starting to co-ordinate efforts.
The analogy with Roosevelt's 1933 Bank Holiday is misleading. Banks are not markets; the week-long shutdown was designed to stop bank runs, and also to put in place the then novel institution of deposit guarantees before reopening.
There is no suggestion a market closure would be accompanied by such significant reforms.
In the past exchanges have usually closed only due to physical disruption: the New York Stock Exchange shut briefly after hurricane Sandy and the 9/11 terrorist attacks.
There are alternative measures to calm the turbulence. The Australian regulator asked institutions to reduce their trading by a quarter on Monday because the volume risked overwhelming the infrastructure. High-frequency trading was a key problem.
Circuit-breakers that close markets after a sharp fall and create breathing space may need to be extended. Exchanges may also wish to look at "speed bumps" that delay the execution of trades.
Governments should focus on public health first and their fiscal response second. These will do more to help stabilise markets than shutting them.
Though central banks have used most of their ammunition, finance ministers will now need to use government balance sheets to make the recession as shallow as possible, whether through providing credit to struggling businesses or welfare spending to workers.
Closing markets now would heighten the risk of a meltdown once they reopen, should the economic shocks continue during the shutdown.
As long as they stay open they send a powerful message that more action is needed: central banks alone cannot hope to solve the challenge posed by a pandemic; governments must act fast and not dodge their responsibilities.