Given US President Donald Trump’s fixation on the stock market, it was inevitable that violent stock price fluctuations would push his administration to frantic market support ideas. And here we are now, overwhelmed by proposals from the government to buy shares.

Some of our friends on the right think that now is the time for extraordinary creativity. They point out that buying shares from the government could be an incentive for supply (by lowering the market and reducing the cost of capital for businesses) or it could pave the way for separate social security accounts. The motivation is good, but the result would not be. Japan has been doing this for years, politics is a disaster, and in America, it will be no better.

The Japanese Government Pension Investment Fund (GPIF), the largest pension fund in the world with 1.5 trillion USD under management, maintains several state pension schemes. It was created in 2001 to diversify pension contributions away from Japanese government bonds and has been constantly expanding its mandate so that it now owns large amounts of domestic and foreign stocks.

Later, the Central Bank of Japan became involved. The quantitative easing targeting government bond purchases has prompted the ECB to start buying ETFs from 2010.

Now, these two giant institutions hold significant stakes in almost all listed Japanese companies: A 2016 Nikkei analysis found that they are among the largest 10% of shareholders for 96% of listed companies, either directly or through ETF ownership. – who hold the shares. Their combined holdings exceed 10% for companies such as Honda and Fast Retailing (Uniqlo’s parent company).

The original goal was to increase the return and long-term viability of the state pension system. Over time, this has become an attempt to bottom out stock prices in times of economic stress. The Japanese version of the US supply-side incentive argument was that state shareholders may demand better corporate governance and higher economic productivity.

The main consequence of the government buyback was to make the stock market almost useless as a place to evaluate companies and the economy.

Both institutions claim to be passive investors, but they still choose which index funds to buy. The first series of NFB acquisitions focused on funds tracking the Nikkei 225 index (of the largest Japanese companies) and resulting in a disproportionate share of these shares relative to the rest of the market. When the ECB began to buy funds covering the wider market, it again changed its relative stock prices.

Japanese Government Pension Investment Fund makes very active decisions for a supposedly passive investor. His last fad is “sustainable investment”. Favoring investment funds that meet the current fund’s priorities inevitably affects markets.

Unlike normal investors, government entities also buy shares with much less regard for expected returns. This encourages algorithmic traders to play with BoJ and GPIF instead of allowing the human factor to make reasoned bets. In a self-sustaining cycle, this further discourages traditional investment and makes the market an even worse appraiser of corporate performance. Note to Trump: One effect is to increase volatility rather than suppress it, especially for smaller companies that issue fewer shares.

Other distortions abound. Short selling is a vital market mechanism for pricing. However, GPIF refuses to lend its huge local equity holdings to short sellers, and last year extended that ban to nearly $ 400 billion in foreign equity investments. Smith from the CLSA also found that high-government-owned Japanese industries are less competitive and more hostile to investor activists who want to increase productivity and return.

Don’t think that owning shares in the US government will be better. Imagine that next year, a finance minister named Mike Bloomberg or Elizabeth Warren might dictate to state fund managers what to do.

America’s greatest asset in the midst of the Covid-19 crisis – the advantage that the United States will get through this disaster, if anything, – is the creativity, entrepreneurship, and discipline of the private economy. It would be a huge mistake for Washington to sacrifice this in the name of the short-term market rebound