GOVERNMENTS´ NOT-SO-INVISIBLE HAND / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

HEARD ON THE STREET

JUNE 24, 2011, 2:29 P.M. ET.

Governments' Not-So-Invisible Hand .

By ANDREW PEAPLE

Governments have lost any compunction about intervening in markets—and investors need to get used to it.

The International Energy Agency's decision to release some of its strategic oil reserves, for only the third time in its 37-year history, is the second time this year global policy makers have taken extraordinary coordinated action to calm markets. The Group of Seven intervened in March to cool the yen's rise against the dollar, its first such move since the mid-1980s. Meanwhile, Group of 20 agriculture ministers have been meeting in Paris this week to discuss ways governments can tame food prices. Central banks have been trying to prop up the global economy for some time through quantitative-easing programs, and of course they intervened heavily during the financial crisis with bank and other bailouts.


The trend away from the prefinancial crisis orthodoxy that governments should leave markets alone as far as possible is clear. Faced with rising prices for key commodities at a time of high unemployment, politicians have ample temptation to lay market principles aside. That is especially true when relatively small interventions, such as the IEA's decision to release a fraction of its total stocks, can have an impact as considerable as Thursday's sharp oil-price fall.


The risk for governments is that if markets are manipulated enough, interventions become more frequent and costly, and carry diminishing returns. And that they trigger unintended consequences. The IEA's move might work well because oil prices were softening anyway on signs of slower global economic growth. The success of the G-7's currency intervention is more debateable, with the yen still trading around the same level against the dollar as in March.


Still, for investors, there is a clear message: In a growing number of markets, the wild card of government intervention is a big part of investment decisions. If that means some market speculators get burned, few politicians, or their voters, will shed a tear.


Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved