Should Markets Be Closed?

by | March 23, 2020

Albert Einstein got so much right, so far ahead of his time, it is easy to forget he was ever wrong. But, one time he may have missed the boat is useful for us today as we try to navigate COVID-19’s unprecedented social and economic disruption.

Quantum physics has a concept called entanglement. In simple terms, it means that if a tiny object like a particle is observed, even a long way away (light years), that particle will change its properties. It reacts to the watcher. Einstein dismissed this idea as ‘spooky action at a distance,’ but over time science has proved him wrong. And recently, we have learned that all kinds of objects interact with each other at a distance, even large ones like a satellite in space reacting to something on earth at the quantum level.

Today, our species is in panic. COVID-19 is driving upheaval in every human realm. There can be no doubt that the primary mission is to slow the spread of the disease and develop a vaccine as soon as possible. But a close secondary critical mission is to protect our global economy. If we don’t succeed here, it is not far-fetched to fear that society may unravel in fundamental ways at extreme human cost. And the biggest secondary threat we face from the virus is panic.

Financial panic is a kind of quantum entanglement. Our global economy is nothing more than a giant multi-player game of pong, with each person’s motion bouncing off of another, forever. At each bounce, a good or service is exchanged and resulting monies (energy) move in a slightly different direction. All financial markets are basically built on predicting direction of motion and rates of velocity, present-valued to discount future interactions as well.

Today, financial market participants are mostly blind to the true trajectory of COVID-19 and will remain so until there is (i) an effective containment of the pandemic in the major economies, (ii) belief that governments are undertaking sufficient steps to spur demand via fiscal policy, to underpin the ‘plumbing’ of the financial system via central bank action and to backstop credit via state guarantees and (iii) confidence that asset prices properly discount the impairment to earnings (equities), to financial disintermediation (credit spreads) and to growth (yield curves).

Panic of the kind we are witnessing now comes from uncertainty and fear that the bouncing ball’s motion may slow, or even stop. And since modern, technology-enabled financial markets are so intertwined, actions at any distance immediately affect the actions of others, and panic can spread with lightspeed. Moreover, with so many people working from home, many market participants do not have the tools they need to invest and trade appropriately.

So, why not freeze the game for a few months? The pong game stops, and we are told when it will re-start. Until then, all activity is frozen where it stands and each player is guaranteed two things: the time the game will start again, and that you won’t lose any points until then.

You might think this is a crazy idea, but we already do this. Remember that the US stock market has been halted three times in the last few weeks through its ‘circuit-breaker’ function. Yes, it has been for 15 minutes, but the precedent is clear: in times of panic, market rules dictate freezes so orders can be effectively processed and hopefully humans can calm themselves and act rationally. And the markets have closed before in times of great uncertainty and panic, such as after 9/11, or during WW1 when the NYSE was closed for four months.

Yet, there are at least three reasons why ‘suspending market motion’ (i.e., closing financial markets) is probably a bad idea today.

First, people tend to panic when they don’t have access to their assets. Closing markets is how a ‘run on the bank’ mentality starts. Given the complexity of various modern markets, governments around the world would have to guarantee the value of existing frozen assets to avoid leverage and margin calls leading to ruinous dynamics by creditors. Such guarantees could potentially undermine the government bond markets.

Second, markets are so intertwined that any freeze would have to apply to all major markets around the world, in all major asset classes and in derivatives and private markets as well, which would be impossible to enforce. Certain goods and services would have to continue trading to assure critical food and medical supplies, which would result in uneven rules being applied. Black markets would increase, leading to additional fraud and crime.

And third, and most problematic, the unintended consequences would almost invariably cause a cascade of black swan events that would likely be worse than the ‘cure.’ Spooky action.

True crisis times call for draconian measures and wild ideas that might be considered crazy in normal times. But, freezing markets is not the answer. Their wild fluctuations are symptoms of the crisis, not the cause.

Beyond the emergency fiscal and monetary steps being promulgated by governments around the world, there is only one antidote to avoiding panic.

It is the basic steps every human being knows, intuitively, when faced with stress: stop, gain control of your breathing, and do nothing until your head is clear. It is the saying your mother preached: this too shall pass.

We are all entangled with each other. Each of us can give in to fear and spread panic. Or we can take control of the one thing we can control – ourselves. This is how we avoid financial panic and its devastating aftermath.

Filed Under: Economics

About the Author

Alex is the co-founder of Jackson Hole Economics, LLC, a private research organization which provides analysis of key topics in economics, politics, the environment and finance, and develops actionable ideas for how sustainable growth can be achieved.
Alex has two decades of experience growing and transforming organizations in the financial and non-profit industry. He served as CEO and CIO for a number of publicly listed financial services companies and also as the Chief Financial Officer of the Bill & Melinda Gates Foundation, where he managed a range of day-to-day operating functions, was a member of the management committee and created the program-related investments group.
Alex served as a White House Fellow in the Clinton Administration and as an assistant to the Secretary of Defense. He is a member of the Board of Directors of Franklin Resources, Inc., a member of the Council on Foreign Relations, Chair of the Advisory Board of Project Syndicate and a board member of the American Alpine Club. Alex also writes regularly for various news outlets and is the author of The Big Thing: Brave Bea and Babu's Bindi, both children's books.  He is an avid mountaineer and rock climber and led the first major climb to raise money for charity through an ascent of Mt. McKinley.
Friedman holds a JD from Columbia Law School, where he was a Harlan Fiske Stone Scholar, an MBA from Columbia Business School, and a BA from Princeton University.

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