Stock market confessions, chaos, complexity and the illusion of control
In the old days of the Chinese Cultural Revolution those who said or did something perceived by the Chinese authorities to be counter-revolutionary were forced into public confessions–and then humiliated, imprisoned or even put to death.
It seems that old ways die hard. Last week the new China–the one that had thrown off the yoke of the Cultural Revolution–televised forced confessions by people who dared to say that the Chinese stock market may not be a great place to put your money these days.
In addition, Chinese government officials are cracking down on short sellers–those who borrow stock to sell, hoping to buy it back at a lower price. Officials are prohibiting large holders of stock from selling for six months, and they are flooding brokerages with easy credit to encourage those brokerages and their clients to buy stocks with borrowed money. Who would have guessed that still nominally communist China would go to such great lengths to protect the most prominent symbol of out-of-control capitalism, a stock market bubble?
It seems that the government has forgotten the essence of a marketplace of stocks, namely, that for every buyer there must a seller. When those wishing to sell shares are denied the opportunity, they are likely to become increasingly doubtful that the denial is for their own good. The whole point of a stock market is to lessen the risk of investing in a company by making it possible to sell one’s shares at a moment’s notice when the need for cash or the opportunity for a better investment arises.
Marketplaces for investments are inherently unstable. The participants react to constantly changing conditions and perceptions. If markets were entirely predictable and transparent, there would be very little money to be made since everyone’s perception of the risks they were taking and the rewards they might reap would be identical.
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