Will the Financial Markets be Shut Down?

As global financial asset values turbulence over the context of the continuing outbreak of coronaviruses, the clamor for a temporary closure of the financial markets has intensified.

Over the past three weeks, the world's stock markets have been on the ice. The US stocks plummeted more than 30% from their summit in mid-February, with the S&P 500 four times in 10 days to trigger a circuit breaker for a record.

A conference call with incoming Governor Andrew Bailey of the Bank of England reported earlier on in the Wall Street Journal that several prominent asset managers are raising the solution to the temporary shutdown of financial markets in the face of severe volatility.

Campbell Harvey, Professor of Finance at Duke University and Partner at the California-based Research Affiliates investment business, quoted liquidity as a highly significant issue, says "Closing markets is nearly always a mistake."

"You shut off people's capacity to liquidate and purchase when you close markets. There is the knowledge that is learned by others through price changes. It is never a good idea to cut off this information, "He added.

Talking about the efficiency of financial markets shutdown, Harvey remarked "there is the logic of large information asymmetries that some individuals have within information and that some people cease trading."

Previous demands for closure and limited short-selling of financing markets have resulted from the severe unpredictability and losses on stock markets. However, it would be an error to shut them down. In the midst of turbulence, financial market prices provide information that is very necessary.

When the Government shuts down, financial markets remain open

The state's short-term shutdown reveals the inadequacy of regulators in America's financial regulatory framework. The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) closed down when the government shut down the two primary regulatory bodies on capital markets. This contrasts sharply with banks' regulators such as the Federal Reserve and the FDIC, according to top Forex trading brokers, which continue to safeguard depositors at work and play the central bank's essential function. Why do two key governmental institutions differ in current economics? The response reveals even more concerns, including one of the Dodd-Frank failings.

The foundations of the construction of regulations first. Every financial regulator was created by Congress in reaction typically to a distinct financial crisis. Over the years, Congress has recognized that financial regulation often requires unpleasant political judgments. Smartly, most regulators were organized as financially independent bodies by Congress. This provides regulators the flexibility to act harshly without fearing that some in Congress try to smuggle riders in annual spending bills, a minor policy proposal that may constrain legislation.

The result was a system of bank regulations that financed itself. The Federal Reserve, FDIC, and the Office of the Currency Comptroller (OCC) are all funded by various methods and are typically linked to their primary operations and are often supported directly or indirectly by the financial institutions regulated by them. That implies they don't rely on Congressional financing.

The SEC and CFTC, which oversee financial markets, also use the same rationale behind the treatment of bank regulators. In order to regulate stock, commodities, futures, and debt markets, governmental decisions are needed. The authorities can support themselves by minor fees on participants on the market, who rely on their control to gain from the financial markets of our country.

When the federal government closes down as long as bank regulation vanishes, the necessity for market regulation does not go away. The result of prolongation in the Congress, however, would be that the SEC "should not be able to handle submissions, provide interpretive advice or write down no actions or conduct any further normal division and office activities by corporate finance, investment management, and trading and markets, or by the Office of Compliance Inspections and Examinations. As a consequence, the status of any examination of the files will not be considered for new or ongoing declarations or applications for example relief." In addition, "just a few personnel are in charge of performing key duties" by the SEC's enforcement department. In most cases, ongoing litigations, the SEC's bread and butter of criminal offenses will be stopped as "the collection of any crime debt or the allocation of monies to injured investors is pursued." The cops are going to be off.

Since the last financial crisis, the government has shut down twice. During those shutdowns, there has been no significant financial market catastrophe. But this danger is not reasonable. Even when the federal government goes down, banks and financial markets remain open. The regulators should do likewise.

COVID-19 pandemic financial market impact

COVID–19 economic upheaval, encompassing stocks, bonds, and commodities (particularly crude oil and gold), has had a broad and severe influence on financial markets. The main events were the Russian-Saudi petroleum price war, resulting in a drop in crude oil prices and a stock-market meltdown in March 2020, following the failure to achieve an OPEC+ agreement. The market consequences of the COVID-19 recession are part of the pandemic's numerous economic consequences.

As the coronavirus pandemic increased dramatically outside China, throughout the week Dow Jones Industrial Average and FTSE 100 declined by more than 3 percent on 24 February 2020. This results from the significant decrease in benchmark indexes throughout Asia in mainland Europe. The FTSE MIB decreased by almost 4% and the DAX, CAC 40, and IBEX 35 each decreased by over 5%. The oil price fell down substantially and gold prices rose significantly, to a height of seven years. Dow's stock market index (NASDAQ-100), S&P 500, and the Dow Jones Industrial Average reported its steepest declines since 2008 and the Dow's decline of 1191 points on 27 February, the greatest one-day collapse since 2008 financial crisis. The international stock markets recorded their worst one-week falls since the financial crisis in 2008 on 28 February 2020.

The worldwide stock markets came to a close following the second week of the turbulence (although the Dow Jones Industrial Average, the NASDAQ Compose and the S&P 500 came to an end on March 6), whereas the US treasuries' returns fell below 0.7 percent and 1.26 percent respectively on 10-year and 30-year terms. US President Donald Trump has approved a bill for emergency and pandemic counter measurement funding, which includes government expenditure of $8.3 billion. After the failure on 5 March of OPEC and Russia on oil cutbacks, when both declared increases in petroleum output on 7 March, petroleum prices decreased by 25%. The importance of transboundary commodities movements in the contemporary economy has also had a great influence on the stock exchange, driven by decades of declining transport costs, decreasing communications costs, and, until recently, declining tariffs.

Overall, shares dropped by more than 30% by March; implicit stock and oil volatility increased to crisis levels, and non-investment debt credit spread increased dramatically as investors decreased risk. Nevertheless, the extensive and comprehensive financial changes that G20 financial authorities agreed upon after the crisis, these heightened volatility occur in global financial markets.

Bottom Line

Because of unusual conditions, the US stock market closed before.

After 11/9, it closed for two days because of the Sandy hurricane, which struck New York City directly in 2012. The rationale would probably derive from the possible closure linked to a coronavirus catastrophe, that the government would take some time to develop and carry out a complete relief plan. Individual stocks are frequently stopped before significant news announcements. It's improbable, but a chance.

The market was halted by a bank holiday in 1933 by the president of Roosevelt, ending the bank runs that spread. Because of reports of bank failure and loss of money, customers sought to get their money out. The depreciation of the dollar severed the gold connection and eliminated the 'gold clause' from the loan arrangements. It benefitted debtors compared to creditors by reducing the cost and ease of servicing liabilities and was a good step in stocks.

The market is in comparatively poor shape at the moment. People are essentially in a crisis which includes a steep component of earnings and losses in economic output, a part of loan problems caused by these profit shortcomings and an element in which the central bank can no longer facilitate monetary policy with interest rates and asset purchases because the interest rates are already at or near zero percent.

These are genuine economic issues. While the capital markets impact the economy, the present slate of concerns is merely reflected. Simply closing them would cause further difficulties and almost no treatment.