Summary: The stock market has become the next casualty of the COVID-19 pandemic, down 30% since February 19. If the epidemic grows much worse, the market might become a fatality. There is a simple solution: close the market. We should be preparing now for this, as well as other extreme outcomes.
After the 1987 crash, the Brady Commission asked brokerage firms for recommendations to prevent a recurrence (perhaps a more serious one). The recommendations were all about increasing liquidity. I wrote Charles Schwab’s submissions, saying that liquidity was a false god for the exchange. I said, “The NYSE cannot liquidate western civilization.”
Sometimes society face’s an existential challenge so great that it creates widespread panic – and insatiable selling. Sometimes the crisis is less existential, but with a fearful people easily panicked. Either way, no market machinery can withstand a flood of sellers that overwhelm buyers. The only viable response is to close the exchange.
It has been done before successfully. The test case was WWI, which happened at the peak of the first globalist era.
An assassin killed the Archduke Franz Ferdinand of Austria on 28 June 1914. In the following month, stock prices declined throughout the western world. Prices of US railroad and industrial shares dropped 15%. The Vienna stock market crashed on July 13. Although the selling of stocks intensified, investors in most assets in Europe’s so-far unaffected nations remained calm (especially in the bond markets, which dwarf stocks in size).
For a scholarly yet readable account of what happened next, I recommend Harvard professor Nial Ferguson’s “Earning from History? Financial Markets and the Approach of World Wars” (2008).
“The Vienna market was the first to close, on July 27. By July 30 all the Continental European exchanges had shut their doors. The next day London and New York felt compelled to do the same. Although a belated settlement day went ahead smoothly on November 18, the London Stock Exchange did not reopen until January 4, 1915. Nothing like this had happened since its founding in 1773. The New York market reopened for limited trading (bonds for cash only) on November 28, and something like normal service resumed the following month, but wholly unrestricted trading did not resume until April 1, 1915.
“Nor were stock exchanges the only markets to close in the crisis. Most U.S. commodity markets had to suspend trading, as did most European foreign exchange markets. The London Royal Exchange, for example, remained closed until September 17. It seems likely that had the markets not closed, the collapse in prices would have been as extreme as in 1929, if not worse.”
New York – trading among the bystanders
On 31 July 1914, the New York Stock Exchange closed its doors for the longest period in its history. Bonds began trading again on 28 November 1914. Stocks began trading on 15 December 1914, but they were not allowed to trade below the closing prices of 30 July 1914. Free trading resumed on 1 April 1915.
This worked. NYU professor William Silber said that this was a fantastic policy success, described in his book When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy
London – a front-line State
The London Stock Exchange closed on 31 July 1914. Trading resumed on 4 January 1915 (the Berlin Stock Exchange did not reopen until December 1917). They prevented catastrophic declines in stock prices forbidding sales below the closing price on 31 July 31. Sales of new shares were allowed only with government approval (i.e., if the issue was in the national interest). The government wanted capital to fund the growing war debt.
The British government also instituted controls on flows of capital out of the country for the remainder of the war.
These policies were incredibly successful, preventing financial turmoil and allowing the government to finance the immense burden of the war.
Other machinery is needed
People and businesses need to sell stocks for cash, so some machinery must provide liquidity. Perhaps limited sales, with permission – purchased by the Fed. Or limited low-interest loans against shares by the Fed.
The machinery will be cumbersome and have big side-effects. But easily manageable if the crisis does not last too long.
The economic effect of wars and epidemics
The case for closing stock exchanges is stronger during a severe epidemic than during wars. Wars are the extreme case of fiscal stimulus boosting GDP. There are not good GDP numbers before the 1930s, but the GDP of Britain and the US almost certainly rose during WWI. Both rose strongly during WWII.
But an epidemic does the opposite, shutting down large parts of the economy. The current effects are small, but illustrate what might lie ahead if the epidemic takes hold in the developed nations. Allowing the stock market to implode would make the effects worse.
It’s easy to follow the COVID-19 story
The World Health Organization provides daily information, from highly technical information to news for the general public. These are the best sources of information.
- There is their daily situation report, with detailed numbers.
- The Director-General of WHO gives frequent briefings, which are quite insightful.
- Their daily press briefings have more information. An audio goes up quickly afterwards. A transcript is posted the next day.
Also, see the wealth of information at the CDC website, especially their situation reports.
Posts about effects of the coronavirus pandemic.
- Hidden news about the epidemic sweeping across America! – Fake news drives out good news.
- Lessons from the coronavirus about climate change.
- A devastating epidemic spreads across America – An epidemic of panic and ignorance.
- Soon we’ll see if the US can defend itself again COVID-19.
- COVID-19 will hit world economy hard. Here’s how.
- Seeing what went wrong can help us beat COVID-19.
- COVID-19 shows the new center of the world.
See all my posts about the pandemic.
For More Information
Ideas! For some shopping ideas, see my recommended books and films at Amazon. Also, see a powerful and disturbing story about “Birth of a Man of Steel …for the Soviet Union.”
Please like us on Facebook and follow us on Twitter. Also, see these posts about epidemics…
- See the ugly cost of the next big flu pandemic. We can do more to prepare.
- Stratfor: The superbugs are coming. We have time to prepare.
- Posts debunking the hysteria about the 2009 swine flu in America.
- Posts debunking the hysteria about the 2015 ebola epidemic in America.
- Important: A vaccine against the fears that make us weak.
He predicted 9/11 and COVID-19
In his 1994 novel Debt of Honor
“Therefore containment is the only option,” General Pickett went on.
“How do you contain a whole country?” said Cliff Rutledge, Assistant Secretary of State for Policy.
“That’s the problem we face,” President Ryan said. “The only way to contain the epidemic is to shut down all places of assembly – theaters, shopping malls, sports stadia, business offices, everything – and interstate travel. To the best of our information, at least 30 states are so far untouched by this disease. We would do well to keep it that way. We can accomplish that by preventing all interstate travel until such time as we have a handle on the severity of the disease we are facing, and then we can come up with less severe countermeasures.”
“Mr Presdient, that’s unconstitutional,” Pat Martin (representing DoJ) sid at once. Travel is a constitutionally protect right. … {But} Mr. President, I do not see that we have much of a choice here. …The Constitution is not a suicide pact.” …
“Thank you” Ryan said, checking his watch. “I am calling the issue on the table.”
Defense, Treasury, Justice, and Commerce voted aye. All the rest voted no. Ryan looked at them for a long few seconds. “The ayes have it,” the President said coldly. …This has absolute nad unconditional priority over any other matter.”
Interesting concept, Larry. Not sure it would work without modification in the current time. In the WWI period, the stock market was a useful tool for the wealthy but most of them had other sources of income and survived (although I doubt many of them thrived).
Today we’ve designated the stock market as the best tool for retirement planning for the entire population and a large percentage of the Boomers are either already in retirement or going to retire in the next year or two. They are going to think that they need that money. Taking the action of closing the stock market on top of the current set of concerns could lead to some true craziness on the part of our citizenry.
At the same time, I understand your reasoning and can find no flaw in it other than the likely reactions of our fellow Americans. To make matters worse, I can’t think of a better choice at this time.
To borrow a phrase from the Milpub, We Are So F****d (usually abbreviated to WASF) and we did it to ourselves with the best of intentions.
Pluto,
“Not sure it would work without modification in the current time. …They are going to think that they need that money.”
I mentioned that specific point in this post.
“To make matters worse, I can’t think of a better choice at this time.”
That’s backwards. The market crashing would devastate moral. Markets are closed to prevent that happening. The resulting prices, as of the close, might be artificial – but are nonetheless reassuring.
Your reasoning – seeing the effects of remedial action but not inaction – explains what people often find puzzling about behavior in crisis: why leaders are so passive. They see the downside of any actions but not the need for action, and so become paralyzed. In fact history shows that action itself builds morale – showing people that their leaders are alive to the situation.
In a crisis, leaders often take a wide range of actions (“throwing things against the wall to see what sticks”). See FDR in 1933 and Churchill after the fall of France.
Larry: “I mentioned that specific point in this post.”
Sorry, I hadn’t noticed until you pointed it out. Thanks.
Larry: “That’s backwards. The market crashing would devastate morale”
I didn’t give you enough context for my comment. You’re correct that your plan is a good one for saving the stock market but I view the stock market as part of the ClownWorld problem.
I was wondering as I wrote my post (too early in the morning, frankly) if a massive shock to the morale was a good way to clear up the ClownWorld problem and coming to the conclusion that “good” was, at best, relative and that massive problems would follow regardless of the shock that is needed to solve ClownWorld.
As you know, I value evolutionary government (small, well-considered reforms) over revolutionary government (sweeping solutions that tend to do a poor job of addressing the problem they were intended address and cause lots more problems which leads to lots more sweeping solutions).
FDR in 1933 a classic example of revolutionary government. In that time, revolutionary government was the only possible way forward. Is it so in 2020? I fear the answer is yes. But we don’t have an FDR; my current favorite candidate for president is “None of the above.”
This implies that the results we get from revolutionary government will not be near as effective as they were for FDR. Buckle up folks, its going to be a rough ride until 2024.
As for your understandable reflexive call to join political parties, I did. And I got involved until they shut me down. The political parties above the state level are currently too much a part of ClownWorld for anybody to change the outcome. If you start changing them, they’ll deal you out of the deck.
I’m going back to 3rd parties where I’m not treated like something scraped off the bottom of their shoes.
Pluto,
You get into deep waters, big questions about which we can only guess. My opinion, FWIW it is worth, is that you confused a bullet in the head with brain surgery.
“I was wondering …if a massive shock to the morale was a good way to clear up the ClownWorld problem”
It’s a common belief (which I’m unclear if you share), one which I have always considered to be daft if not mad. A people incapable of clear thought and collective action in good times will not recover those attributes under pressure. I’m sure there are historical examples of that, but I can’t think of any – and can recall many counter-examples.
“I value evolutionary government (small, well-considered reforms) over revolutionary government”
Me, too. Revolutions seldom end well. Those in the Anglo-American world tend to be with small “r” – very incremental, and hence usually successful.
“FDR in 1933 a classic example of revolutionary government.”
Only with a very small “r”. Most of what he did, Hoover had already tried – but on too small a scale. Plus, there were precedents aplenty (mostly from the Civil War and WWI, since national crises tend to be similar in nature).
“And I got involved until they shut me down.”
You are unclear how that works. It means finding people who agree with you, getting them into the local party and organizing from within. Just joining and tell them how to change won’t work. Collective action.
“I’m going back to 3rd parties where I’m not treated like something scraped off the bottom of their shoes.”
That’s funny – and sad. Pitiful, really.
Pluto,
I just realized that you probably don’t understand my response.
“I’m going back to 3rd parties where I’m not treated like something scraped off the bottom of their shoes.”
Nothing big is done without time and sacrifice. As a citizen, you’re called to do some simple organizing. Not sacrifice your “life, fortune, and sacred honor.” I’m sorry if you find it too difficult, and in the process you are not treated well. Were you treated as badly as these people?
Samuel Adams and his fellow activists in 1764 Boston organized the first of the Committees of Correspondence. They formed the nucleus of shadow governments, which later formed the basis of revolutionary governments, and then the USA.
In 1787 William Wilberforce began his crusade in Parliament against slavery in the UK. Full victory came in 1833.
Benjamin Franklin helped organize America’s first Abolitionist Society at Pennsylvania in 1785. These spread across the nation. Partial victory came in 1865. Full victory came in 1964.
The first women’s rights convention was held at Seneca Falls NY in 1848. The first National Women’s Rights Convention was held in Worcester, MA in October 1850. The 19th Amendment became law in August 1920.
Also look at the long struggles to limit immigration (1880-1930) and force businesses to stop pouring filth into our air and water (first successes were the Water Pollution Control Act of 1948 and the Air Pollution Control Act of 1955).
Larry: “You are unclear how that works. It means finding people who agree with you, getting them into the local party and organizing from within… Collective action.”
That’s what I did. The local party apparatus decided that I was disturbing party unity and shut me down.
1) They tried taking me off the mailing list so I wouldn’t know when meetings occurred but they also published their meeting dates on the internet so that didn’t work well for them.
2) They pulled me aside and told me to shape up or ship out. They also strongly hinted that contacting people in the party above them would not end well.
3) They just wouldn’t call on me or my allies in the meetings and avoided putting items on the agenda that they knew were hot-buttons (age of Democratic candidates for example).
4) They started punishing local candidates who seemed to be agreeing with me by withholding funds and volunteers (one of them won anyway). The official reason was scarcity of resources.
I gave up before they decided to sic Homeland Security on me.
Not sure if I ran into a particularly bad group or if this was the norm. Frankly, looking from the outside, I don’t see anything that contradicts my experience and I fear it was the norm.
Most of the people around me were not interested in discussing the issues. Their primary topics of conversation were:
a) how important being party members made them feel
b) how the other party wronged them.
This was a VERY discouraging experience.
Pluto: “I’m going back to 3rd parties where I’m not treated like something scraped off the bottom of their shoes.”
Larry: “That’s funny – and sad. Pitiful, really.”
Agreed.
Make sure you have cash.
Sven,
Everybody always would have cash reserves (bank accounts are OK) of 3 months living expenses, if they can.
Larry –
How do you imagine that a closure of the markets might impact the price of gold? Would it create great downward pressure due to forced selling, or the opposite, due to the perception that the fiat game is in its final throes?
Thanks in advance.
Tinky,
No need to thank me – since I don’t have an answer. There is no way to make a rational forecast since the effect will be purely psychological – not economic. Pundits confidently predict people’s mass psychology, which is one reason not to bother reading them.
Sometimes such a gesture is seen as desperate flailing, and so increases panic. Sometimes it is seen as a bold measure by competent leaders, and reduces panic. For example, there was concern among FDR’s advisors about the public’s reaction to closing the banks for a “holiday”. In fact it was one of the most successful actions he took in his near-mythical First Hundred Days.
I suspect what we will find with ‘working from home’ is that a huge number of jobs are actually not needed at all.
Just as we will also find by the lockdowns that large amounts of debt and large numbers of companies simply are not viable or rescuable. If WeWork for instance goes bust, it won’t be because it was perfectly viable absent a pandemic. If Tesla turns out not to be worth more than any other auto company except Toyota, it will not be that absent the pandemic it was really fair value at $100 billion. Or whatever it was at the peak.
Covid-19 will turn out to be the spark, not the fuel.
This is what appears to be guiding UK policy at the moment:
https://www.imperial.ac.uk/mrc-global-infectious-disease-analysis/news–wuhan-coronavirus/
Basically they are now closing all sporting and entertainment events, all pubs, theaters, restaurants etc, telling everyone over 70 to stay totally socially isolated. Home delivery of groceries is in great demand, some chains having totally run out, others having a one week lead time for a slot.
The Chief Scientist when asked about Sunday lunch with the grandchildren just looked straight at the camera and said ‘No’. They are not yet closing schools, but that may come shortly. They are also asking anyone with fever or cough to stay in isolation for 7 days, and any family where there is such a person to stay in isolation for 14 days.
There is even a rumour that London is to be isolated, with one commenter saying that Londoners should get back before the weekend. Who knows? Crazy rumours flourish in these circumstances, though the UK seems to have been so far rather free of them. What is certain is that trains and buses are emptying, airlines are cancelling most flights.
The Prime Minister, the Chief Scientific Advisor and the Chief Medical Officer are now holding daily press conferences in the late afternoon, and Parliament is still meeting, though the benches were a bit more spread out than usual yesterday.
There is a striking contrast between the UK’s response and that of the US and China – or indeed the Continent – and that is the openness of it all and the manner in which its being done. The questioning and criticism of the government is vigorous and frequent by media and in Parliament. Johnson’s presentation style is very different from Trump’s. The models and data they are relying on are all to be published. The paper referred to at the start of this is in the public domain. And there are the Parliamentary debates. There were also Health Select Committee hearings yesterday, which were broadcast live on the BBC news channel, and I guess will have been carried on the Parliament channel too, not certain of that. The Parliament channel is 7 days a week non-stop coverage of Parliament.
It makes a very different impression.
Just to add, the head of the National Health Service and some other senior health industry people appeared before the Select Committee yesterday. About 100,000 beds, of which they are freeing up 30,000 to get ready for the influx. They have around 8,000 ventilators which they will get up to 12,000 shortly and hope to get more manufactured.
Their current estimate is about 50,000 cases in the population. Far more of course than confirmed cases.