This post is in response to a question posed by @mackenziejones: Post Source
"One of the main fallacies of society during this large economic downturn was the innate characteristic to panic. Once news spread that the economy was crashing and money would be lost, people began pulling their money out of different stocks and accounts, which ultimately was the last nail in the economy’s coffin. What could the government have done to prevent such occurrence?"
For the sake of clarification, I am interpreting this question as the more general "what could the government have done to prevent hysteria within the stock market?"
I do not think there to be something the government could have done as the panic was occurring, but I do believe that there could have been tactics in place to prevent this from happening in the first place. I believe the stock market to be an inaccurate representation of the larger economy due to the speculation, manipulation, and forward-thinking that regularly takes place on the platform. Therefore, it should be recognized at an institutional level that we should avoid the chance of rigidly connecting the stock market to the overall economy. This could be done by limiting both sell and buy orders of institutions and large position holders (particularly entities like hedge funds) to decrease liquidity. One could also make the system graduated, where one could sell more and more of their position as time went on. There are many issues to this (one of which being increased volatility from more prominent retail investor activity) but it is a possibility.
I think a more plausible option would be to not actively try to prevent this kind of thing from occurring but instead to be prepared for it when it inevitably does. When people are involved in any kind of system, there is bound to be dramatic fluctuations in it--especially when emotions like greed are concerned. By creating policies that might prevent this, you are limiting freedom of trade and the market and inhibiting development. This may have larger long-term economic implications than a relatively temporary recession. I do believe that a stronger disconnect should be made between the market and the economy but, after much consideration, I am having difficulty coming up with a solution with little compromises.
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