Friday, August 5, 2011

Explaining the Crash

Many plausible causes have already been invoked for the current spectacular worldwide market crash: anticipation of a US double-dip recession, the Obama consent to a debt ceiling having the effect of cutting the macroeconomic stimulus too early, -- mostly in the US -- evidence that the European policy of helping Greece, Ireland and Portugal with more and longer term loans to alleviate the burden of their austerity programs did not produce the expected positive results, fear of contagion in sovereign bond markets engulfing Spain and Italy, lack of political leadership in Europe, and the excessively conservative policy at the ECB, -- mostly in Europe.

But all of these, and some others too, belong to the “guessing in the dark” category.

As “Buttonwood” writes in The Economist, the cause or causes may be what he defines as “non-economic”, but I think he means “non-macroeconomic”.

“Some of the biggest falls of the last 25 years have been down (sic, but maybe he meant “due”?) to market dynamics, from program trading in 1987 to the LTCM crisis through August 2007’s quant blow-up to May 2010’s flash crash. We will find in a few days or weeks that someone was a forced seller.” (My emphasis).

Because, in the end, more sellers than buyers is the explanation to give whenever the markets fall. And that’s the only explanation that counts.

Let’s add that the reasons for selling should have been (a) global (because the Thursday crash was global), and (b) due to some unexpected news that led some large global investors to sell large quantities of stocks (including emerging economies’ stocks) and buy “safe” government bonds. Let’s wait for more evidence about who the sellers were, and why they felt compelled to sell.

Read the post here .

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