Worth noting: in the past few weeks, Chinese government tried very hard to stop the fall and prevent a crash - preventing selling by large stock holders, criminalizing short-selling, ordering stock buybacks, outright buying stocks, relaxing margin requirements, stopping IPOs, ...
Obviously, that's not a viable long term solution.
The Fed and ECB's goal is not to prop up stock market valuations, but to help the economy by encouraging spending and investment through moderate inflation. The banks are tightly bound by inflation targets. Arguably, the ECB has done too little QE since nominal GDP has barely (or hasn't) recovered in most of Europe since 2007, and inflation has been way under target since the crisis.
It seems like China's reaction is more panic-driven, and doesn't have a framework such as inflation targeting to constrain it. In addition, this intervention is just to prop up stock asset prices; encouraging spending and growth in the whole economy is not the primary goal.
[1] http://uk.reuters.com/article/2010/08/06/us-eu-shortselling-...
It remains to be seen to what affect recent US Fed policy will do long term, however, I would argue that it was definitely a panic driven reaction.
I provide this not in support of China's policy but for context.
Excess Reserves https://research.stlouisfed.org/fred2/series/EXCSRESNS
Overnight Rate https://research.stlouisfed.org/fred2/series/FEDFUNDS/
Federal Reserve Balance Sheet https://research.stlouisfed.org/fred2/series/WALCL
The US government was primarily trying to keep some big companies and banks that were caught in a liquidity crunch from going bankrupt, because them all going under would likely be a spiraling problem. The crisis solution was also rather simple in aggregate...loan them a bunch of money temporarily until they could free up the assets to repay it.
China is currently trying to prop up a stock market that is STILL (even with today's decline), up 50% in a year for no reason. And most trading in the market is done by very jittery small investors (who are also overleveraged and now desperate to get out) rather than big firms and funds. Said small investors are unlikely to be reassured by anything the Chinese government can possibly do. I don't see great chances for the government to be able to stop this from returning to a more realistic valuation.
>In 2008, U.S. regulators banned the short-selling of financial stocks, fearing that the practice was helping to drive the steep drop in stock prices during the crisis. However, a new look at the effects of such restrictions challenges the notion that short sales exacerbate market downturns in this way. The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011—another notable period of market stress—stocks subject to short-selling restrictions performed worse than stocks free of such restraints. [0]
Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster. Also, allowing the short sale of a stock incentivizes research that bring new less favorable information to public view. For instance, ability to profit off the decline of a stock may result in market participants in uncovering and reporting fraud or helping to pop bubbles.
Often times government interventions and restrictions in the market fuel panic.
[0] http://www.newyorkfed.org/research/current_issues/ci18-5.pdf
Thanks for the correct. Unfortunately too late to edit my original comment.
Did you accidentally a word?
For genuine science you'd have to have a control group. "The same group two weeks later" is not a control group.
>Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster.
This is story-telling. What happens has more to do with barely sentient flocking behaviour than "reaching equilibrium." There is no "equilibrium" to reach. There are only more or less naive and information-poor actors looking at each other and trying to out-guess the movement of the flock centroid.
It's like running an economy on the basis of a ritualised spot-the-ball competition.
If markets had any real interest in equilibrium or efficiency, bubbles wouldn't happen. But markets don't - mostly they have an interest in short-term gain, which makes the whole system as predictably unstable as any other system driven by positive feedback.
Of course some agents profit very nicely from bubbles, and politically bull markets are a useful way to create an illusion of shared prosperity. So it's in their interests for the manic-depressive nonsense to continue.
So Astronomy isn't a science?
Maybe the second part of my sentence about short-selling was a bit of a reach, but short selling does provide downward pressure on prices which would (in theory) more accurately reflect the actual value based on what other market participants are willing to pay for it.
Prices are not arbitrary and are the best way to convey information. Trying to control markets by controlling prices is like trying to control the weather by controlling thermometers.