Are falling market values and capital flight ever a useful or even a positive sign? Sure. Bad investments need to be cleared out and avoided. When it comes to policy, the market is fully capable of sending appropriate signals to regulators and the government about what looks too risky or financially unattractive. Consider recent experiences in the Russian stock market, for example.
By some accounts, part of what is happening in Russia is market feedback in response to the Russian government’s recent military actions in Georgia. Total capital flight from Russia’s financial markets is now in the tens of billions of dollars. Trading has been suspended at some points, and may be again.
Some analysts believe that the precipitous loss of investment and stock values on the Russian market shortened Russia’s military excursion into Georgia. If so, more power to the influence of the market. It would be an example of how fighting fire with equal fire may not be necessary–if there are other weapons that can inflict the kind of pain that powers that be must pay attention to.
The purpose of pain (physical, financial, or other) is to get you to stop doing the wrong thing. The purpose of the brain is to help you correctly figure out what that wrong thing is. So thank goodness for negative market feedback; it can be an extremely valuable part of that rethinking process when it’s really, really required.
