Tuesday, August 11, 2015

Misguided efforts by governments to manage markets are widespread

China devalued its currency last night.  They said that it was a "one-off depreciation".  We have certainly heard that before, beginning in the 1980's with Latin America.  We learned long ago never to trust such a statement, in fact generally it was just a sign of the inevitable opposite.

This move hit markets globally as it was self serving in the short term and simply inappropriate as a longer term action.  Greece, in its crippled financial condition, most likely would have benefited from a currency devaluation but could not do so without its own currency.  China, as the most powerful economic growth story in the world and a country with huge reserves, is the most unlikely candidate to get any long term benefit from a devaluation, at least one that has any benefit for a healthy global market, which they of course need. Competitive devaluations could easily become rife in Asia, and it would not be a surprise if the U.S. Congress responded in a less than market intelligent way.

The Chinese communist political dictatorship thinks that they have the power to determine all outcomes. After the last two years of the party newspapers encouraging the Chinese people to invest in the stock market and endorsing the steep rises in stocks, they have approached the recent collapse in stock prices as something that they have the power to contain and correct.  In the short term they do have the power to partially contain and partially correct, but at the price of making large parts of the market illiquid, scaring away many foreign investors in their markets for the long term, and mandating that brokerage firms, government controlled banks, and public enterprises load up on stocks at prices and concentrations that may not be prudent, in fact they are not at all prudent.

Here at home, Governor Andrew Cuomo of New York has led the effort to focus on one small slice of the economy to mandate significantly higher minimum wages, up to $15 an hour.  That's of course the fast food industry and impacts companies with more than 30 restaurants nationally.  As almost everyone but Governor Cuomo knows and understands, most fast food restaurants are owned by franchisees and many of those entrepreneurs have far less than 30 restaurants but, being part of a chain, the mandate applies to them as well.  Many are in wealthy areas of the state like New York City and many are also in poorer areas upstate which creates a startling mismatch of outcomes.  Some economists who don't mind telling the truth note that this will impact small business owners in many other product areas in New York in a way that almost certainly will have unintended consequences. Cuomo, early in his second term, is now using leftover campaign money and running regular television commercials lauding his move and his standing up for low wage workers.  A broader plan was  the only economically rational way to do this, but it would not have received as much attention for him. Is he running for Vice President on the Democratic ticket? Or is he simply establishing himself as a more powerful and progressive alternative to the distinctly limited Mayor DeBlasio, who is a publicity hound himself, even nationally.

Then there is Hillary Clinton calling for a government regulation of stock buybacks. There are different schools of thought on this, but echoing Elizabeth Warren and calling all buybacks market manipulation is suspect.  Clinton's prescription is for companies to immediately announce publicly that they are buying back stock.  It seems like that would be market manipulation for sure as it could cause a precisely timed surprise rise in a company's stock rather than one determined by the dynamics of the market, meaning the balancing of buy and sell orders.  Some knowledgeable market participants have their reservations about the way that buybacks are done and their purpose, but if they are done by companies with adequate cash reserves for operational purposes and for needed investments, and if a company's stock is trading below its intrinsic value, they are constructive for shareholders and the company.  Does anyone want politically appointed government employees making those judgments? Clinton and Warren certainly do, but that is surely not a good thing for efficient capital markets.

The above are just a few examples of misguided efforts by governments relating to financial markets. Don't get me started on the capital markets side of the Dodd Frank bill. These comments do not reflect any hostility toward regulation in general, just for regulation that is not based on an understanding of financial markets and is simply politically motivated.


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