Will RM20 bil stock market bailout make a difference?

By Medecci Lineil

When the Special Economic Committee decided to inject RM20 billion into the stock market via ValueCap, I viewed it as a desperate act of bailout.

Compared to other economic stimulus measures announced by Prime Minister Najib Razak recently, RM20 billion is the biggest amount and this must be questioned seriously.

One, why did the committee choose to bail out the undervalued stocks rather than real economy?

I mean most Malaysians don’t have any stocks to their name right?

In fact many Malaysians don’t even have enough savings. I wonder if this incredible amount of money will produce anything for most Malaysian families.

If the committee really believes this policy is correct, it should ask every Malaysian to invest every spare sen that he or she can come up with in shares of stock. It’s quite easy to do, no?

Or if you are still studying in university and want to enhance your income that you will earn over your lifetime, you should immediately quit college in order to invest in stocks and business start-ups.

The reason given is based on the fact that ValueCap has generated returns of 15 per cent per annum within 10 years and generated about RM8 billion in profit. This is profit without prosperity, to be sure.

Two, where does this money come from? Yes, I know Minister in the Prime Minister’s Department Abdul Wahid Omar already told us that the money will come from its shareholders Permodalan Nasional Bhd, Kumpulan Wang Amanah Persaraan Diperbadankan (KWAP) and Khazanah Nasional Bhd.

Whatever his answer is, the money will be sucked right out of the private economy by these giant government-owned enterprises.

One way or another they will get it from us, whether through taxes, raising debt payable later or inflation.

As many Austrian economists explained a long time ago, such big money disregards the alternative uses to which the resources might have been put had the economic committee not decided that it needed scarce resources more than we do.

This is true regardless of whether they think such a bailout is justified.

Three, buying undervalued stocks? I believe there must be a reason why stocks are undervalued.

The committee probably ignored the fact that undervalued stocks are driven by investors who think money should be invested elsewhere with better prospects.

We are living in an era of an artificial low interest rates environment with the cheapening of borrowed money created by central banks in the first place, remember?

Since the stock market is supposed to be an open place for trading and anyone can buy shares in it, I do not think government action is necessary to enable a third party such as ValueCap to be part of the group of people who own stocks.

Additionally this intervention is always counterproductive. The market capitalisation of Bursa Malaysia is RM1.55 trillion as of end of June 2015. So, what makes the committee think a RM20 billion bailout can make a difference to the exchange?

My point is an increase in money and credit in stock market and real economy is not driving us out of economic woes. What we need now is a full market correction.

Let scarce resources be rearranged for more productive uses. Do not exacerbate the problem by pumping more money whenever things go bad!

First published in The Ant Daily on Sept. 22, 2015.

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