Engineering Stock Market Stability with Auto-Loan Margin Borrowing

A simple and elegant way to significantly lower the probability of a stock market crash.

Up is good, but some down is inevitable.

One thing that afflicts stock markets is the possibility of a sudden and severe drop in valuations, charmingly referred to as a crash.

Given the psychological and herd imperatives of human behaviour, these crashes will inevitably occur. The best we can do is remove the structural elements that promote the crashes.

One obvious and well known catalyst of crashes is buying stock on margin.

Margin, as you likely know but I am writing this for a wide audience, is borrowing money based on the value of your stocks to buy more stocks.

This works out nicely when the stock market is going up. When it is going down and the securities pledged for the margin loan are no longer adequate for the loan, the borrower is required to make up the difference in value.

If the borrower sells stock to meet the requirements, that puts further pressure on valuations which causes more investors on margin to sell. This can snowball into a severe crash.

This is a self inflicted injury by the markets.

A simple and elegant way to remove this dynamic is to legally mandate that margin calls cannot require that stock be sold to meet the call.

The alternative is to automatically convert the shortcoming into a long term lowest interest personal loan.

Now the investor finds himself in a position where he only has to make small monthly payments instead of having to produce a large lump sum. This gives the investor the opportunity to hold onto the stock.

This dynamic can be buttressed by requiring two additional constraints.

First, the outstanding amount of the margin call, and therefor the loan, would automatically adjust based on the current stock valuations, moving forward. Thus you would have a loan whose whose amount would change daily, based on stock market valuations.

Second, payments on the loan would not be required for an interval of time, to give the stock market time to regain its previous valuations. If payments were not required for a year, the market would likely recover and the investor would only owe the interest that accrued.

These small changes would make crashes less frequent.