Issues & Opinions

(The excitable investors, that is, not Pakistanis in general)

Clues can be found in a Marketwatch article from yesterday evening:

EMERGING MARKETS REPORT
Investors riot in Pakistan as market tumbles

Benchmark down for 15th straight session; loses 27.5% this year so far
By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) — Popular anger over tumbling equity prices erupted in Pakistan on Thursday, underscoring the difficulties regulators face in attempting to prop up falling markets as turbulence in many of the world’s financial markets continues unabated.

The turmoil in Pakistan comes at a time when several emerging markets are considering market stabilization measures, while regulators in the United States are moving to limit short selling and speculation in the oil market.

Regulators in China have signaled their intention to stabilize the local market, which became the worst performer among global markets this week. India has suspended futures trading in several commodities.
In Pakistan on Thursday, more than 200 protestors attacked the Karachi Stock Exchange, the country’s main equity market, and demanded a temporary closure of the market to curb further drops in share prices, the BBC reported.

Smaller protests took place in Islamabad and Lahore.

[continues]

For reasons not so easy to articulate, I find it breathtaking that such a reaction makes any sense at all to these aggrieved investors.

What, I ask myself, is the logical conclusion they’d expect here? To be offered their money back? By whom? With or without smoke-stains and cinders?

Are the investors in emerging Asian markets really so unsophisticated (Albania comes to mind, among others) that they’ll buy anything, at any price? I suppose so - this has happened throughout history, in Asia, the US, and elsewhere. But in the majority of those other cases that come to mind, when it all goes wrong, the populace doesn’t seem to automatically think that all can be made better by burning buildings down, do they?

Not only are such reactions destructive (to property and to society in general), they’re also of no use in resolving the problem.

Some folks, I suppose, should be completely protected from themselves, and prohibited from taking actions they might later regret. Much the same, I further suppose, as special needs kids are sometimes not allowed out of the house without a styrofoam-lined helmet.

Such paternalism would be troubling to those of us who feel able to take responsibility for our own actions, but, by definition, we’re also not the sort of people who’d think burning down the stock exchange (which, really, is just a building, and had no effect on the stupid prices people were willing to stupidly pay for securities, right?) was a great idea. The Pakistani authorities’ “styrofoam helmet” for the markets includes circuit breakers to dampen price volatility, short-selling limitations, and a “market stabilization fund”. Much the same set of tools has been used by other governments over the years, with little beneficial result.

The connection made in the original article to US commodity (primarily oil) markets and allegations of skullduggery in shorting of financial behemoths such as Fannie Mae, Freddie Mac, Lehman, et al is apt, though the differences between the two situations are meaningful. When you add in the other bugbear, the rapidly deflating asset (real estate) bubble, within the US, the focus is on systemic risk (in the financial behemoths) and pure political grandstanding (regarding the oil futures markets and residential real estate), but surely, a minimal number of buildings will be burnt to express disappointment.

The point the two situations have in common is the ultimate futility of efforts to game the market excessively, from either the regulators’ or the speculators’ side of the table. Market stabilization fund? Ask George Soros what he thinks of the efficacy of such devices.

Market volatility curbs? They are a band-aid solution, i.e. no solution at all. If the limits are hit on a given day (particularly down days), the selling frenzy can just as easily be pent-up until the next day. And the day after. In cases where limits on asset price increases would be helpful to halt bubbles of speculative excess (tech stocks in the 1990s, real estate more recently), the proper method isn’t price movement limitations, but instead should be monetary, in the form of interest rates and margin requirements.

Where does it all end? Not in violence, and not in wanton destruction of real property. Too many more gimmicks, such as stimulus checks designed to gull the electorate into thinking all’s well, or handouts to flagrantly uncreditworthy home buyers, and the road to the end of this mess gets steeper and more slippery. Oddly enough, that monetary hammer mentioned above, in the form of interest rates, can play a big part in solving the current woes, though it won’t solve them quickly.

Devaluation of the dollar is the flip side of cheap credit, and while dollar devaluation is a subject for another day, reducing speculative excesses by making money more expensive to deploy in speculation, whether it be in commodities, real estate, or the financial markets seems likely to be the only path out of the current unpleasantness.

If that turns out to be the case, many will feel the pinch. Fortunately, the stoics who make up a lot of the American population, sophisticated or not, seem more likely to suck it up, endure the pinch, and exit the other side better off than they are today. An optimist would further hope that this was all done without the government stupidly taxing the starch out of the economy, but if the government does so, perhaps the government after them will repair the damage, and reap the delayed benefits.

Regardless of government policies, the flame-throwing non-sophisticates of the Pakistani markets may not fare better nearly as soon.