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Prepare now in case they close the stock market

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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.

Crashing of an airplane made of a dollar bill
ID 7115676 © Alexkalina | Dreamstime.

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.”

Stocks Crash

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. In his paper “What happened to liquidity when world war I shut the NYSE?” (Journal of Financial Economics, December 2005; open copy here), Silber called the exchange closing “the longest circuit breaker in American financial history.” And the most effective.

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.

Also, see the wealth of information at the CDC website, especially their situation reports.

Posts about effects of the coronavirus pandemic.

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…

  1. See the ugly cost of the next big flu pandemic. We can do more to prepare.
  2. Stratfor: The superbugs are coming. We have time to prepare.
  3. Posts debunking the hysteria about the 2009 swine flu in America.
  4. Posts debunking the hysteria about the 2015 ebola epidemic in America.
  5. Important: A vaccine against the fears that make us weak.

He predicted 9/11 and COVID-19

In his 1994 novel Debt of Honor, Tom Clancy described how a loaded civilian jetliner could become a powerful weapon – crashing down to destroy a giant building. In his 1996 novel Executive Orders, he describes how a president responds to early signs of a massive epidemic – a highly infectious form of Ebola. This is far worse than COVID-19, but illustrates a national application of the policies China used to contain the COVID-19 to Hubei Province.

Executive Orders
Available at Amazon.

“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.”

The post Prepare now in case they close the stock market appeared first on Fabius Maximus website.


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