Exactly. I've been wondering this for a week now.

Here in Vietnam when the market started to crash this spring amid currency worries, they instituted a 2% per day maximum trading band. Every day for 6 weeks, the market would open, fall 2%, and shut. Traders complained, but you know what? F*** the traders. They don't know what's good for the economy. They thrive on volatility, not productivity. I would be surprised if the resistance to closing the US's market, like resistance to flat-out nationalizing US banks, doesn't come from a combination of residual ideological refusal to believe what's in front of their eyes, and the self-interest of traders who still, in a crashing market, would rather things change than stay the same, even if they're only changing on the down slope.

But the problem isn't the stock market, it's the credit freeze, right? Closing the stock market won't lower the TED spread.

No, but it could prevent trillions of dollars of value from being destroyed by the uncertainty over the credit situation. People are (or were as of Friday) in irrational panic selling mode. That can destroy real companies and real value for no good reason.

Just guessing, but shutting down the US markets might worsen the credit freak-out, as lenders would have no idea at all which institutions were in trouble. Shit looks bad with the lights on, but everything's scarier in the dark.

Continuing to guess, perhaps the reason smaller, poorer countries can get away with shutting down their markets is because no one but their own citizens really care how their companies are doing.

David morris is right.

And this is a period of weeks. What if you were thinking, "hmm, let me sell my stocks to pay for some big thing I'm doing."

Then you would be out of luck and have to wait for a week or so. The point is: if the gov't is planning on taking a coherent and well thought out measure to sort out the credit squeeze, why allow investors to panic in the run-up to the introduction of that measure? Close the market. Give yourself a week. Then open, with a 5% or smaller trading band. Let the market drop to the limit for a few days as people get their bearings. Then it's burn itself out.

As George Soros said on CNN yesterday, the idea that markets tend to equilibrium is wrong. The price that the market settles on for stocks is not going to be the price that reflects their fundamental value. It will be the price that obtains in the week when the panic subsides. The smart thing to do would be to slow the speed of destruction through the weeks of panic, so that at the point when sentiment stabilizes, less value will have been destroyed.

I'm no expert so I probably shouldn't talk but possible reasons:

Firms/funds need cash, either to pay redemption, meet payroll, finance new projects, etc. Normal credit lines for cash are frozen. Issuing bonds may require seriously high long term interest payments, and thus, selling assets for cash may be the best remaining option. Cutting off that option as well may make things worse. And, remember, most of the problems are in OTC and non-exchange markets, and closing the NYSE/NASDAQ may just worsen the problems in the OTC/credit/money markets, not to mention the foreign exchanges.

I don't know what role hedge fund redemptions are playing, but Sept 30th was when most investors had the option to pull their money out and usually a fund has 45 days to get them their money. If we close the markets, the hedgies can't sell and their investors and counterparties don't get their money. This may cause bad things, worse that stock market declines.

just tossing ideas out. Feel free to question and/or correct me.

Other random thought. With derivatives, you can make a KILLING when a market crashes (and banning some shorts won't stop that). Anyone want to bet that a lot of the people who got us into the mess are profiting from this crash?

brooksfoe,

Devaluation in the stock market isn't particularly damaging to the economy, atleast in the short run. So even if stocks are being gripped by panic selling, the effects on economic activity won't be very large.

I'd worry about the effects a shutdown would have on the *important* markets. The last thing we want to do is inject more uncertainty into the bond markets.

Besides, isn't this discussion a bit moot? It's not like the president can shut down the stock futures or Nikei...

Nylund,

I've heard from some friends in the industry that the ban on short selling really hurt a lot of hedge funds.

But everyone I talked to *claims* that they(unlike everyone else) have been doing really well.

So... I don't know. Anyone else have an idea?

Shutting down the stock market is treating a symptom, and not a cause.

Silvio Berlusconi of all people was pushing this sensible idea last Friday until someone (possibly Bush) persuaded him to back off. I posted on this here.

If you shut down a stock market, people will trade off market.

When US markets were shut for 9/11, trading went on elsewhere. When US markets re-opened, they traded just where you would expect based on other trading.

Shutting formal markets will make trading less efficient and not really accomplish anything useful.

Jesus, Ezra.
How big a panic are you looking to cause?

Unrelatedly, congrats to krugman!!!

David Morris has got it ... when FDR shut down the markets, banks were being dragged down by shares held on the balance sheet, as collateral against margin lending, and there was no trading of the same equities on markets overseas.

Share prices in the current mess is just a symptom, its not central to the problem. Indeed, since the finance sector must downsize, and the finance sector was a primary sector leading the rise of the stock market since the end of the 9/11 recession, if the stock market is not down substantially, then something is seriously wrong in the bail-out.

Trying to fix the current credit freeze by shutting down the capital markets would be like trying to bring down a fever by breaking the thermometer ... and when there are several other thermometers at hand, to boot.

Sry, OT, BREAKING NEWS!

Paul Krugman has "An interesting morning"!
http://krugman.blogs.nytimes.com/2008/10/13/an-interesting-morning/

Well deserved! Congratulations, Prof Krugman!

Ezra, Shutting down the Markets is not a bad idea but it presupposes that the people who got us into this mess will be able to lead us out of it. Hank Paulson et al have been running around with $700MM in their pockets but they have no idea what to do with it.

Yesterday Berlosconi suggested that, and on Late Edition Robert Reich said it was a bad idea--there would be pent up demand, anxiety, etc.

I suspect you don't want to side with Berlosconi on this one.

Shutting markets would build up tremendous sell pressure and panic among retail investors that would explode at opening. There ISN'T great precedent for such a move. There are other market slowing moves that can be taken short of complete shutdown. After 9/11 and the destruction of the NYSE neighborhood, it felt justfied to investors by the circumstances. Market drop not a sufficient cause to separate people from their money.

If you somehow managed to shut down stock markets, you would do two really bad things.

First, we'd have a terrible information problem. A significant part of the the problem with banks right now is that we have no idea what their assets are worth. Shutting down markets would make even more of their assets difficult/impossible to value.

Second, we'd increase the liquidity problem. If a company needs money, it can get it by selling stock. By making the assets of banks impossible to sell, you increase the risk that a viable bank will suddenly end up short of cash and be forced to shut down.

In the longer term you'd make it much much harder for companies to raise money--selling stock is one of the main ways that companies finance expansion.

Pakistan (effectively) shut down its stock market with bad results.

FDR was in no position to do anything in 1932. And I thought he temporarily shut down banks, not the markets, in 1933.

The point is: if the gov't is planning on taking a coherent and well thought out measure to sort out the credit squeeze

Does anybody believe the government is planning anything well thought out and coherent? The bailout bill would indicate to me that no such thing is happening. Or will.

Ezra is sounding like Joe Biden. FDR came into office in 1933, not 1932. And he did not shut down the stock market. He declared a "bank holiday."

It would have long term negative effects. The impulse for financial institutions around the world to hoard cash would be exponentially increased. Say you are a fund in London and you have planned to meet some obligation by closing a position on the New York market?
A move like that should only be done when necessary. Liquidity, liquidity, liquidity. (Did I mention the importance of liquidity?)

I had been wondering this exact same thing. The comments here are enlightening because I also just did not know what the negatives of such a move would be.

Ezra--

Today, markets are global and this is a global crisis.

If we shut down the U.S. market, all hell would break loose in other markets--and we would see it, which would only further shake confidence here.

Extreme volatlity. Huge
amounts of money flowing into gold. (Which would heighten the panic.)

Also, everyone needs to realize that our stock market was greatly overpriced.

It's not going to bounce b ack if we all just calm down.

The drop in the market is not just a psychological reaction to the subprime meltdown or the liquidity crisis. It's very important that people like you--who don't specialize in finance but can spread the word as to what is really happening-- understand this.

We never paid for the excesses of the 1990s. Stocks never went down as far as they should have-- they should have reverted to the mean, and to do that you have to swing below the mean. Maybe Dow 6000 or 7000.
That never happened.

Instead, Greenspan just kept on lowering rates and printing money (as did other central bankers) creating that "big pool" of money that you wrote about last week. This encouraged people to borrow more and buy more --at ever-rising prices-- real estate, but also stocks, commodities, etc.

The best thing that I have seen on the metldwon is what Jeremy Grantham says below.
(A brilliant money manager, and completely honest, Grantham is one of dozens of market watchers who has been trying to warn people that this was coming . .."

Grantham (from Barron's, this week-end)

Q."How much further do we have to go to get through this downturn?"

A."Great bubbles like the one in 2000 take a long time to wash through the system, and you shouldn't really expect a low much before 2010.

This was not only a monetary event, but it coincided with the first truly global bubble in all assets. You had inflated housing in almost every country in the world, except for Japan and Germany. You had overpriced stocks in every country in the world. And you had too much money and too-low interest rates. I was confident about very little, but I was confident that this would be different from anything we had seen before, and potentially more dangerous. It should have been treated with more care."

"Is this crisis playing out the way you thought it would?"

"No. . . . this is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and [firms like Merrill Lynch and Lehman Brothers] have turned out to be much less than I had expected; that's very disappointing.

And, therefore, how could one's confidence that the senior people would get us through the storm be very high? Prior to three months ago, we [Grantham's firm] were investing in emerging-market equities. Then we battened down the hatches, and I changed my view from avoid all risk except emerging markets to avoid all risk, period.

"The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap. You would imagine that, given the amount of panic, that it would be. But it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging."

"What about equities outside the U.S.?"

"Things are getting cheaper. We score the EAFE [the Europe, Australasia and Far East Index] as absolutely cheap, and it's offering a 7% real annual return over seven years. Emerging-market equities are a bit cheaper, and we see a 9.5% annual real return over the same period.

The problem, though, is that we have so much downside momentum, so many financial problems and so many interlocking relationships, that it is hard to imagine this crisis subsiding because stock prices are digging in their heels and approaching fair value."

"What happens to hedge funds in the wake of this crisis?"

"A year ago, I said that half of all hedge funds would go out of business in five years, and I would certainly stand by that today. Unfortunately, like a lot of my dire projections, that may turn out to be conservative.

"I also said that at least one major bank will fail. I got a lot of grief for that, and now it looks like I could have said at least a dozen major banks will fail.

"As for the broad, typical opinion that we would muddle through this crisis, it just shows you what a dangerous optimistic bias the advisory business has built into it."

"Do you think we will learn anything from all of this turmoil?"

"We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.

"What do you see ahead for commodities?"

"Commodities have a great long-term future, now that the long-term trend has shifted from falling commodity prices to rising commodity prices. Having said that, the next couple of years will be quite different. We are in a global slowdown, which I think will be worse than expected even today, and it will be longer than expected -- so this is not a healthy environment for commodities. Over a shorter horizon, I would be getting out of the way of commodities or I would be short commodities. I'm personally short oil; the firm is short copper."

"Do you have any closing thoughts about how we got into this financial state?"

I ask myself, "Why is it that several dozen people saw this crisis coming for years?" I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke -- none of them seemed to see it coming.

"I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained -- but we end up with an army of left-brained immediate doers.

"So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored.

"If you look at the people who have been screaming about impending doom, and you added all of those several dozen people together, I don't suppose that collectively they could run a single firm without dragging it into bankruptcy in two weeks. They are just a different kind of person.

"So we kept putting organization people -- people who can influence and persuade and cajole -- into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don't have those skills."

Ezra--

Today, markets are global and this is a global crisis.

If we shut down the U.S. market, all hell would break loose in other markets--and we would see it, which would only further shake confidence here.

Extreme volatlity. Huge
amounts of money flowing into gold. (Which would heighten the panic.)

Also, everyone needs to realize that our stock market was greatly overpriced.

It's not going to bounce b ack if we all just calm down.

The drop in the market is not just a psychological reaction to the subprime meltdown or the liquidity crisis. It's very important that people like you--who don't specialize in finance but can spread the word as to what is really happening-- understand this.

We never paid for the excesses of the 1990s. Stocks never went down as far as they should have-- they should have reverted to the mean, and to do that you have to swing below the mean. Maybe Dow 6000 or 7000.
That never happened.

Instead, Greenspan just kept on lowering rates and printing money (as did other central bankers) creating that "big pool" of money that you wrote about last week. This encouraged people to borrow more and buy more --at ever-rising prices-- real estate, but also stocks, commodities, etc.

The best thing that I have seen on the metldwon is what Jeremy Grantham says below.
(A brilliant money manager, and completely honest, Grantham is one of dozens of market watchers who has been trying to warn people that this was coming . .."

Grantham (from Barron's, this week-end)

Q."How much further do we have to go to get through this downturn?"

A."Great bubbles like the one in 2000 take a long time to wash through the system, and you shouldn't really expect a low much before 2010.

This was not only a monetary event, but it coincided with the first truly global bubble in all assets. You had inflated housing in almost every country in the world, except for Japan and Germany. You had overpriced stocks in every country in the world. And you had too much money and too-low interest rates. I was confident about very little, but I was confident that this would be different from anything we had seen before, and potentially more dangerous. It should have been treated with more care."

"Is this crisis playing out the way you thought it would?"

"No. . . . this is much worse than I thought. All the fundamentals are turning out worse than I thought they would. All the competencies of the senior people at the Fed, Treasury and [firms like Merrill Lynch and Lehman Brothers] have turned out to be much less than I had expected; that's very disappointing.

And, therefore, how could one's confidence that the senior people would get us through the storm be very high? Prior to three months ago, we [Grantham's firm] were investing in emerging-market equities. Then we battened down the hatches, and I changed my view from avoid all risk except emerging markets to avoid all risk, period.

"The terrible thing -- after all this pain -- is that the U.S. equity market is not even cheap. You would imagine that, given the amount of panic, that it would be. But it started from such a high level in 2000 that it still has not yet worked its way down to trend, although it is getting close. But the really bad news is that great bubbles in history always overcorrected. So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging."

"What about equities outside the U.S.?"

"Things are getting cheaper. We score the EAFE [the Europe, Australasia and Far East Index] as absolutely cheap, and it's offering a 7% real annual return over seven years. Emerging-market equities are a bit cheaper, and we see a 9.5% annual real return over the same period.

The problem, though, is that we have so much downside momentum, so many financial problems and so many interlocking relationships, that it is hard to imagine this crisis subsiding because stock prices are digging in their heels and approaching fair value."

"What happens to hedge funds in the wake of this crisis?"

"A year ago, I said that half of all hedge funds would go out of business in five years, and I would certainly stand by that today. Unfortunately, like a lot of my dire projections, that may turn out to be conservative.

"I also said that at least one major bank will fail. I got a lot of grief for that, and now it looks like I could have said at least a dozen major banks will fail.

"As for the broad, typical opinion that we would muddle through this crisis, it just shows you what a dangerous optimistic bias the advisory business has built into it."

"Do you think we will learn anything from all of this turmoil?"

"We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.

"What do you see ahead for commodities?"

"Commodities have a great long-term future, now that the long-term trend has shifted from falling commodity prices to rising commodity prices. Having said that, the next couple of years will be quite different. We are in a global slowdown, which I think will be worse than expected even today, and it will be longer than expected -- so this is not a healthy environment for commodities. Over a shorter horizon, I would be getting out of the way of commodities or I would be short commodities. I'm personally short oil; the firm is short copper."

"Do you have any closing thoughts about how we got into this financial state?"

I ask myself, "Why is it that several dozen people saw this crisis coming for years?" I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke -- none of them seemed to see it coming.

"I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained -- but we end up with an army of left-brained immediate doers.

"So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored.

"If you look at the people who have been screaming about impending doom, and you added all of those several dozen people together, I don't suppose that collectively they could run a single firm without dragging it into bankruptcy in two weeks. They are just a different kind of person.

"So we kept putting organization people -- people who can influence and persuade and cajole -- into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don't have those skills."

Shut them down? But they're doing so well! As I write this the DOW has almost made its way back to 9000!

In this suggestion I see Ezra and others salivating for statism, with all the restrictions they hope to impose once the Party is the majority. I hope the suggestion to put the markets in a time out is not a sample of what is ahead, because it shows a thoughtless, casual mentality.

Ezra, you've got some good comments here, perhaps its time to synthesize them back on your blog?

My personal recap would be: (a) the change in stock prices is by and large a side show (what really matters is the credit markets, TED spread, etc) (b) to the degree that the stock prices ARE important we can't really control them very well (any effort to block selling would be inclined to increase panic, and I think overseas investors would completely lose confidence in the US, among other issues) and (c) to the degree that we CAN control stock prices, we would not necessarily want to keep them high (there's a lot to be said for finding the market bottom and going up from there).