Note: I'm not an economics expert by any means, so go easy on me :)
I'd just like to ask why in situations like this, governments tend to intervene? In the long term, wouldn't it actually be better to let the market just naturally figure itself out? That way the end prices reflect the real value.
> Note: I'm not an economics expert by any means, so go easy on me :)
That's fine - I have a degree in economics, so let me take a stab at explaining this!
> why in situations like this, governments tend to intervene? In the long term, wouldn't it actually be better to let the market just naturally figure itself out?
As Keynes said, "In the long run, we're all dead".
The problem is that the "long run" doesn't actually correspond to any specific duration of time or point in the future; it describes the aggregate, idealized behavior over time. There may actually never be any point at which the trading price of $XYZ[0] actually matches the underlying value, as long as the price over time tends to track the fundamental value[1].
On the other hand, an overfocus on optimizing for the short term causes stunted economies that never reach their full potential (in the best case) and a downward spiral with a negative feedback loop (in the worst case).
> That way the end prices reflect the real value.
By the way, there's actually no such thing as the "end price", because nothing happens in a vacuum. Let's say Google launches a new product today. It may take two years to figure out whether or not that product is going to be a success[2]. If they did nothing else in that time, then yes, there would be an "end price" after this event, but the real world is a series of overlapping events that are all playing out simultaneously[3]. So the market never has the chance to converge towards the "end" value after event A, because by that time, events B, C, and D are all having an effect on the system as well. That doesn't mean that A's effect is negligible; it just means that it's never observed directly.
[0] By the fundamental theorem of calculus we would be guaranteed this at one moment, but prices aren't actually continuous so this doesn't apply
[1] The fundamental value, of course, can never be directly observed, as is often the case in statistics.
[2] Or even ten years, if we're talking about self-driving cars.
> I'd just like to ask why in situations like this, governments tend to intervene?
I'm not an economist either, so consider this a case of blind leading the blind.
My interpretation is that market crashes lead to public turmoil; and given China's history of revolutions, the government isn't too keen on a large, unhappy public. I've read that a lot of people entered into the market late, and often borrowed funds to do so (I have no citation, unfortunately). I bet those people would be pissed if they lost all their money and then some.
Reminds me of the last dot-com crash. As the saying went, when grandmas start jumping into the market chasing hot stocks, it's time to get out. (No offence to any grandmas out there!). I have a feeling the same was happening in China recently.
> I'd just like to ask why in situations like this, governments tend to intervene?
Because ordinary people likely gambled with their savings, and since they're not as savvy as the hedge-funds and professionals, they stand to lose quite a bit.
But yes, it would be better to let the market figure itself out. Valuations did get a little out of control, hence the large crash.
A free market can't handle limited liability. It's only government intervention that can provide things like orderly bankruptcy proceedings. If the government is obliged to be a lender of last resort then it seems reasonable for it to take less binary steps before that eventuality.
> A free market can't handle limited liability. It's only government intervention that can provide things like orderly bankruptcy proceedings.
Obviously. And it's the government that actually establishes the free market, regulates it, and provides all the surrounding infrastructure (roads, police, courts, ...).
A "free market" doesn't mean that you can do whatever you want - the name for that is "anarchy". Free market only means that everybody is free to compete under equal terms. Additionally, governments would step in if a single player got too powerful and would exert its power in ways that would undermine competition.
I'd just like to ask why in situations like this, governments tend to intervene? In the long term, wouldn't it actually be better to let the market just naturally figure itself out? That way the end prices reflect the real value.