THE NEED OF THE HOUR IS A BIT OF IRRATIONAL EXUBERANCE!

What happens when speculators are hurt? Everyone else starts speculating. Because when times are good, it is the irrational exuberance (some times, an excess dose of it) brings the valuations which breach the boundaries of fundamentals, which, in a way, catalyses the market and makes it liquid for several asset classes. Of course, the communities of analysts, rating agencies and regulators are to keep a watch and let the ordinary investor know their perceptions, some of them directly and some of them through the Government and public fora.

So what is new about this? When recession has not slipped into depression, the rational investor with a low appetite for risk is unable to reduce cash levels much and is still on the horns of dilemma. The reasons are two fold: an assured bottoming out is better for him than making the right timing, a little later he can pick up assets, even if slightly higher valuations than in the bottom, as direction would be clearly established. Secondly, when things are hazy for an investor with low risk appetite, it is difficult to decide time horizons for investments. Out of bottom, time horizons come clear, because there are more investors getting in along with whom, one can enter. Without them, it is too much of a traders' market and such a company may go against the grain of the genuine long term investor.

A bit of irrational exuberance may be the right answer for this situation. Just a bit. You need a small section of investors who can hold on with their investments by entering the market now using the attractive valuations and hastening a view of bottoming out and revival of growth in sectors helpful to lift the economy out of the gloom.

Who can be this investor? There was a time when these investors came dime a dozen to the market because of easy and abundant credit - quantitatively as well qualitatively, thanks to the greed of bankers, insurers, analysts and a whole lot of players who could not resist the bubbles that were inevitable with a lower interest regime running longer and longer and with more or less vocal support of Alan Greenspan and the Government who missed the evolving story.

Now, even if Govt pumps in money after money into banks, insurance companies and corporates, these investors are not returning to the market. There is resistance to exuberance. A lot of rationality has now suddenly taken over the sentiment.

Government can just spare a fraction of the money it is dumping in to buy controls into banks and the like, and invest it in the market, with an exuberance that reflects its confidence in the changing economy - whether rational one or irrational one hardly matters.

The money sunk into balance sheets with bottomless pits is not really producing an impact. Government should also be an investor. So, perhaps the regulator. These should enter the arena, not as a trader, but an investor who wants to enter ahead of the institutional and individual investors. An investor who will dare money and time it now and help market bottom out, rather than let people keep speculating about the bottoming out.

This is one contrary view I would love my blog readers to react to. Earlier Governments and Regulators acted pro cyclical and landed where they are. It will take quite some time for a strategy to transition out of the pro cyclical measures into long term counter cyclical measures. During that transition, certain amount of irrational exuberance within dosage permitted and with fiscal and monetary controls synchronizing to gain control over such exuberance, ahead of any new damages to the system start kicking in, does not appear to be a bad idea.