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What Can The Government Do to Stabilize the Market?

Updated on March 15, 2020
jackclee lm profile image

Jack is a volunteer at the CCNY Archives. Before retiring, he worked at IBM for over 28 years. As of 2/2020, Jack has over 100,000 views.

Introduction

I am not an expert in this field and I do not have any financial degrees or government titles. I am just an average investor with common sense. These recent ups and downs of the stock market and swings of over 1000 points are a sign of instability.

The causes of these instability is worries over the coronavirus and the long term impact on various companies. However, there are a few things that makes this swing worse than necessary.

- March 2020

What Can Government Do?

The government already has a few actions to calm the market. For example, there is automatic trade suspension when the drop is below 7%. However, this is just a temporary pause of 15 minutes. They can also affect the market by adding liquidity to the market, such as buying Treasury notes. They can also, through the Federal Reserve, adjust the interest rates up or down.

As we have seem this past week, all of them are not a cure for this problem.

Here are a few concrete ideas that will reduce volatility. I believe they will have more lasting effect on the stock market and make it better and fairer for all investors.

  • Stop margins - no more borrowing of funds to buy stocks
  • Reduce program trading or eliminate them. The speed of computer trading programs add to the volatility.
  • Stop options trading and shorting of stocks.
  • Minimize day trading
  • any investments vehicle should be open to all investors, no special privileges for the wealthy investor like hedge funds.
  • Allow the market to close for short periods in black swan events, such as 9/11, and the current coronavirus.
  • Do not use interest rates to affect market
  • Do not use QE or print money to affect market

General Principles

I will not get into details of specific policies on controlling the market and reducing volatility. I will state some general principles as they relate to investments and the stock market.

  • The market is a long term investment to raise capital so that public companies can have access to equity to invest and grow.
  • The stock market should strife for fairness, such that all investors large and small would have equal access to all investment vehicles including stocks, mutual funds and hedge funds.
  • No companies should gain advantage by the speed of the network. HFT should be curtailed. There is no reason why the speed in milliseconds should allow a trader to gain an advantage. Just because our technology makes it possible does not mean it is good for the integrity of the system.
  • The market is not a gambling casino. It's main purpose is for investing and not for betting.

My Response to The Defenders of Current Policy

One policy of options trading is explained to me as needed to create efficiency and stability. This argument is never proven but assumed to be true. I challenge that assumption. It is just the opposite. This past two weeks of swings in the market of down 2000 points and up 1200 points of the DOW from day to day is an example of the failure of the current system.

I would suggest eliminating the trade in options for a few months and see the results.

Summary

In this volatile time, our government needs to play a role in helping to stabilize the market and not be an agent of more instability. When in doubt, it is better to slow down or even stop. Allowing trading in a free-fall environment only creates more fear.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 Jack Lee

Comments

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    • Ken Burgess profile image

      Ken Burgess 

      5 weeks ago from Florida

      Well it looks like what they did, was allow banks to have zero in reserves (rather than 10% and even that 10% was a stretch) and they funneled 4 Trillion dollars (created out of nothing) to Banks and 'select' Investors to prop up the market.

      We can see exactly when this happened, when despite all reason, the market began its climb from 30-40% down back to almost record highs today.

      The stock market will continue to trend upward while those that really don't understand what is going on wait on the sidelines for another big dip (because all their historic models show them that is what happens), but the only thing they are doing is hanging on to cash that will be worth less and less as the weeks go by.

      There will not be another major 'dip' or crash because the Fed is giving away money to ensure that doesn't happen,not only will the stock market hold, it will be above 40,000 by the end of 2021.

      "The powers of financial capitalism had [a] far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations."

      -Carol Quigley/Tragedy&Hope 1966

      The interesting thing here is the power struggle going on between China/CCP and the BIS, IMF, BIA, WB and the collective of Central Banks.

      I do not know exactly what the conflict or co-operation is between them, if there is a power struggle, or if there is an agreement to take down America's World Reserve status and replace it with China.

      Its hard to discern because there seems to be so much support for China's positions within the mechanisms of D.C. as well as in the WHO and UN.

      I don't suppose there would be such support for the CCP/China if they didn't have significant support from International Corporations as well as those trying to shape global policies.

    • jackclee lm profile imageAUTHOR

      Jack Lee 

      2 months ago from Yorktown NY

      christa, Thanks for stopping by and reading my article. My complaint is not about the drop of the market. I fully expect the market to go up and down as it lines up with economic boom and recession. My complaint is about the volatility which is the speed of the rise and fall. For example, a company report every quarter their financial status. In any normal situation, the value of this company cannot change so quickly from day to day. In an abnormal situation like the coronavirus, a drop is to be expected. But to drop 10-30% in one day of trading is abnormal. In some instances, it can happen in minutes. That is what my ideas address. The SEC has the power to make these changes if it choose. It is their job to act as overseer. If needed as post 9/11, they can suspend trading as a worst case scenario.

    • profile image

      Christa Flint 

      2 months ago

      The markets have a major decline approximately every 10 years. Sometimes the recovery in V, U or L shaped. It can take markets a couple months or a couple years to recover. This is a buying opportunity for those that have not invested before to get in at lows not seen in over a year.

      FINRA and government agencies have stepped in to make things more fair for investors. I highly doubt margin, options, or automated trading will ever be stopped. Any individual investor can use these same tools if they want, but they must fully understand the risks of these tools first.

    • jackclee lm profile imageAUTHOR

      Jack Lee 

      2 months ago from Yorktown NY

      Marie, These are common sense ideas. For the life of me, why our regulatory agencies allow this to happen is beyond me. This is not the first time and it sure won't be the last. With every bubble and crash, we react and yet things stay the same. The ones responsible are never held accountable. The small investor gets the short end of the stick. The large banks gets bailouts. It is a double whammy.

    • Marie Flint profile image

      Marie Flint 

      2 months ago from Tawas City, Michigan USA

      I know nothing about investing, Jack, but my daughter works for an investment firm. I can share this article with her. As far as I can tell, your reasoning sounds good to me. A little government pruning couldn't hurt right now.

      Blessings!

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