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There Was Music in the Cafes at Night and Re-Regulation in the Air

Matt Welch | June 24, 2008, 12:16pm

On the heels of last week's idiotic yet startlingly mainstream call to "re-regulate" the airline industry, comes this week's horror show of a congressional hearing, with the truth-in-advertising title of "Energy Speculation: Is Greater Regulation Necessary to Stop Price Manipulation?" Here's your moment of zen yesterday from Energy and Commerce Committe Chair John "Dingell" Dingell:

[T]he sharp rise in energy prices during the Bush Administration has been outpaced only by the rise in speculation. Energy speculation has become a growth industry and it is time for the Government to intervene.

We need to consider a full range of options to counter this rapacious speculation. For example, we should examine imposing 50 percent margin requirements for financial speculators; setting position limits on transactions across all futures exchanges; requiring full disclosure of all trading by investment banks in all markets; preventing pension funds from using the commodities markets as an investment vehicle; and prohibiting investment banks from owning energy assets. These and other ideas need to be debated, evaluated, and acted on, sooner rather than later.

It's easy to shrug this kind of stuff off, especially with a (newly veto-tastic) former oilman in the White House, but all that will change six months from now, and the Democrats are rubbing their hands at the prospect of unified government. In the meantime, the air is only getting thicker − on both sides of the aisle − with Mahatir/Larouche levels of hostility toward those shadowy bankster types who make money without even manufacturing widgets or tilling the land.

Seriously, did we kick communism to the curb only to suddenly discover, centuries after the French, that a free market will attract (and benefit from!) suspiciously smart people in pinstriped suits who are using their money to − wait for it − make more money? "Speculators" provide crucial liquidity (which is marketese for "money with which to buy the stuff you want to sell"), and perform a valuable function in helping locate assets that are under- or over-valued. Even those nassty speculatorsses at the end of the real estate boom (the evil "flippers" mom told you about) did some good stuff: They allowed people to sell their houses at a tidy profit, and fixed up old properties in preparation for resales that maybe never came. Many gambled and won (as did the people who sold to them), many others gambled and lost (freeing up "winners" who will buy those properties at firesale prices). That's all kind of the point.

Meanwhile, if you want to imagine what a unified Democratic federal government might look like, imagine this week's hearings paired with a sympathetic president:

On Tuesday, the Senate Homeland Security and Governmental Affairs Committee, chaired by Sen. Joe Lieberman (I-Conn.), holds a hearing to discuss legislative options for "ending excessive speculation in commodity markets." I previewed the hearing here last week.

On Wednesday the Senate Small Business and Entrepreneurship Committee will hold a hearing on home heating oil prices.

On Thursday, the topic of a hearing of Congress' Joint Economic Committee will be: "Oil Bubble or New Reality: How Will Skyrocketing Oil Prices Affect the U.S. Economy?"

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Comments to "There Was Music in the Cafes at Night and Re-Regulation in the Air":

Warren | June 24, 2008, 12:26pm | #

John "Dingell" Dingell

HA!

ed | June 24, 2008, 12:27pm | #

I can't help but wonder whether this very same Congress will clamor to bail out the speculators after the oil bubble bursts.

joe | June 24, 2008, 12:29pm | #

I missed the part about the "nassssty speculatorsssss," where anyone talks about speculators themselves being bad people engaged in immoral behavior, like John McCain did in his speech last week.

If I argue that lowering the speed limit would reduce car crashes, am I demonizing drivers?

That's a terrific commie-Godwin you threw in there, but all you're doing by throwing out the same charge in this context is advertising that you're going to accuse people who disagree with you about commodities market regulation of class warfare, whether they're actually engaging in such or not.

Tobias Fünke | June 24, 2008, 12:30pm | #

Oh, my God, we’re having a fire!... sale

Nigel Watt | June 24, 2008, 12:31pm | #

Shit...

C:\Pot> | June 24, 2008, 12:34pm | #

all that will change six months from now, and the Democrats are rubbing their hands at the prospect of unified government.

On this issue at least, it doesn't matter whether Obama or McCain wins, given the latter's denunciation of speculators as well.

Given the percentage of speculators who are Jews, I wouldn't trust a Paul administration either on this.

C:\Pot> | June 24, 2008, 12:36pm | #

I missed the part about the "nassssty speculatorsssss," where anyone talks about speculators themselves being bad people engaged in immoral behavior, like John McCain did in his speech last week.

Hate the speculation, love the speculator?

I don't buy it.

Matt Welch | June 24, 2008, 12:37pm | #

That's a terrific commie-Godwin you threw in there

Huh? I didn't call anyone a commie. I expressed surprise that, after the fall of communism & general triumph of free-market principles (broadly considered), that we'd be back to the 1970s economic rhetoric of wage & price controls, windfall profits taxes, and hatin' on speculators. There's a difference there.

ed | June 24, 2008, 12:40pm | #

Who knows? We might just get a chance to hate Jimmy Carter all over again.

Warren | June 24, 2008, 12:40pm | #

Oh Matt,
When the joe flings his oatmeal on the walls, please don't refill the bowl.

MP | June 24, 2008, 12:41pm | #

Even those nassty speculatorsses at the end of the real estate boom (the evil "flippers" mom told you about) did some good stuff: They allowed people to sell their houses at a tidy profit, and fixed up old properties in preparation for resales that maybe never came. Many gambled and won (as did the people who sold to them), many others gambled and lost (freeing up "winners" who will buy those properties at firesale prices). That's all kind of the point.

None of that denies that speculators played a role (arguably a large one) in the escalation of real estate prices beyond market fundamentals.

It's important to note of course that "speculators" are not some exclusive cabal, but a group of people from joe sixpack to orson wall street who are looking to profit simply by catching a lift on a rising trend line. "Fundamentals" rarely come into play in the decision of a speculator.

It should be clear from the NYMEX volume alone that there's massive speculation now in the oil marketplace. And as the EIA numbers indicate, although there is rising Asian demand, there is also rising supply. The mismatch doesn't appear to be anywhere near enough to explain the doubling in light sweet crude over the past year.

Disclaimer: None of my statements should be construed as a call for action. Speculation is unavoidable in a free market with irrational actors. Attempts to reign it in are doomed to fail.

ed | June 24, 2008, 12:41pm | #

And Nixon.

C:\Pot> | June 24, 2008, 12:41pm | #

joe,

When someone terms an activity "rapacious" they consider those who practice it to be immoral. He didn't say the word "speculators", but he may as well have.

If I decried "diabolical urban planning", for instance, would you not consider that a statement of opinion on urban planners too?

robc | June 24, 2008, 12:42pm | #

Speculation is a civil liberty. Anyone who opposes speculation is anti-civil liberties. And the worst kind too.

Pro Libertate | June 24, 2008, 12:43pm | #

I'm with Matt--years of failure in market meddling seem to have given no one cause for alarm. I say we just jump into price fixing again. What the heck, it failed utterly when Nixon tried it, but he was a Republican.

tarran | June 24, 2008, 12:44pm | #

If I argue that lowering the speed limit would reduce car crashes, am I demonizing drivers?
No, but the guys calling for increased regulation are are not calling for speed limits. Rather they've decided that cars should have governors that prevent them from going above 5 miles an hour, and that allow them to stop all car travel at whim by shutting off all engines remotely. They're also announcing that every now and then they'll pick some unlucky driver at random and beat the crap out of him publicly for driving too fast.

Speculators are a force for good. They match current production with future consumption. A speculator buys something now, hoping to sell it for more money later. If he guesses wrong, he will have to sell at a loss and goes broke., If he guesses right, he curtails present consumption and enables future consumption.

Furthermore, it's not like these speculators are stockpiling oil in secret giant underground tanks. The actual oil inventories at storage facilities is pretty constant.

This is just a witchhunt, and one that both the Democrats and the Republicans are engaging in. And this week Obama demonstrated that he's quite willing to stand at the pulpit and to deliver a fulminating tirade against wicked women who cause crops to fail and demand that they be chastised for their wickedness.

Isaac Bartram | June 24, 2008, 12:44pm | #

I missed the part about the "nassssty speculatorsssss," where anyone talks about speculators themselves being bad people engaged in immoral behavior, like John McCain did in his speech last week.
joe, in case you haven't noticed, McCain is even less distinguishable from a Democrat than the rest of his GOPer colleagues.

Ahh, McCain/Lieberman, the dream "unity ticket". Even stinkier bipartisanshiT than we're usually treated to.

joe | June 24, 2008, 12:48pm | #

Chris Potter,

It's not even "hate the speculation," just recognize that it can produce bad outcomes.

It's a "too much of a good thing" argument. I don't expect you to agree with this position, but it would be nice to acknowledge that it exists, rather than making up straw men in its place.

No Name Guy | June 24, 2008, 12:49pm | #

I agree what has been said Re: McCain. His hero is Teddy "Malefactors of Wealth" Roosevelt after all.

Alan Vanneman | June 24, 2008, 12:51pm | #

As with all the prior Democratic threats to "get tough" with oil companies, I think these new attacks are just hot air. The Democrats want publicity, not action. Remember, this is the same party that couldn't get it together to tax hedge fund operators' income as, you know, income. And Obama recently said that he wanted to "reduce" the number of multi-millionaires receiving farm subsidies. Because some of those multi-millionaires really need those subsidies! Besides, with Joe Lieberman leading the charge, I don't think the pinstripe gang has anything to worry about.

ed | June 24, 2008, 12:52pm | #

the guys calling for increased regulation are are not calling for speed limits

Yet. I'm surprised no one has called for a national 55 mph speed limit.
Maybe I should start "speculating" in radar detectors.

tarran | June 24, 2008, 12:56pm | #

MP,

Oil inventories are stable. That's a sign that consumption and production are matched and that the price is a market clearing one.

No what is hapenning is that the guys with lots of dollars are outbidding those with fewer dollars to get at the oil. Hmmm, I wonder where all that money came from?
The most fateful results of inflation derive from the fact that the rise of prices and wages which it causes occurs at different times and in a different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and rise higher than others. Not merely inflation itself, but its unevenness, works havoc.
While inflation is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices for goods and services they buy have not yet risen or have not risen to the same extent. These people profit from their fortunate position. Inflation seems to them "good business," a "boom." But their gains are always derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services or commodities whose prices have not yet risen to the same degree as have prices of the things they buy for daily consumption.

joe | June 24, 2008, 12:59pm | #

This, from McCain, is what demonizing speculators and waging rhetorical class warfare looks like:

And while a few reckless speculators are counting their paper profits, most Americans are coming up on the short end -- using more and more of their hard-earned paychecks to buy gas for the truck, tractor, or family car.

Investigation is underway to root out this kind of reckless wagering, unrelated to any kind of productive commerce, because it can distort the market, drive prices beyond rational limits, and put the investments and pensions of millions of Americans at risk.

You see the way he described the act of speculating as "unrelated to any kind of productive commerce?" You see the way he set up that sentence to suggest that the "paper profits" are impoverishing "ordinary Americans?"

THAT is what anti-capitalist, conspiratorial, class-warfare investor-bashing looks like.

joe | June 24, 2008, 1:04pm | #

tarran,

I can certainly respect an argument that the Democrats are proposing regulation that is much too heavy-handed. My knowledge of investment law is limited, so I'm not going to venture an opinion.

But unless you are inclined to accept that ANY proposal to regulate economic activity is a camel's nose for Bolshevism, and reject out of hand the possibility that there are actually people who genuinely believe that regulation of investment markets can benefit those markets and the economy as a whole over the long term, then your argument doesn't hold.

joe | June 24, 2008, 1:05pm | #

I'm with Matt--years of failure in market meddling

Sure, just look at how the Dow Jones hasn't budged since the SEC was formed.

Warren | June 24, 2008, 1:14pm | #

“For too long, energy markets have operated behind a veil of secrecy,” Dingell said. “I have dark suspicions about the effects that unchecked speculation and possible market manipulation are having on the price of crude oil and petroleum products. Given the record energy prices that are harming businesses, farmers, consumers, and our economy as a whole, Congress should act to determine the precise effects that manipulation and speculation are having on energy prices, and work to identify where there are gaps in regulation that allow this rampant speculation.”
John "Dingell" Dingell
You see the way he described the act of speculating as "dark" and "market manipulation"? You see the way he sets up that sentence to imply rampant speculation is harming businesses, farmers, and consumers?

That's what_____________looks like.

Warren | June 24, 2008, 1:14pm | #

God damned unclosed tag

Abdul | June 24, 2008, 1:14pm | #

THAT is what anti-capitalist, conspiratorial, class-warfare investor-bashing looks like.

I can't believe joe just endorsed McCain!

tarran | June 24, 2008, 1:16pm | #

From Obama's website we learn that:

a) Ooh! The people charging high prices for oil didn't earn their wealth. Obviously ill gotten gains!
However, a significant share of the remarkable profits currently enjoyed by big oil companies has not resulted from their foresight, efficiency or innovation. Barack Obama supports imposing a windfall profits penalty on oil selling at or over $80 per barrel.
b) And look! They're skulking around trying to hide their nefarious deeds!
Currently, about 30 percent of U.S. oil futures trades fly below the regulatory radar because they are transacted on a U.S. exchange that works through a subsidiary in London. Similar arrangements are being pursued by U.S. exchanges in partnership with Dubai as well. Barack Obama would limit the price impacts of excessive speculation by preventing traders of U.S. crude oil from routing their transactions through off-shore markets in order to evade speculation limits and also impose reporting requirements.
c) And the Republicans are letting them get away with it!
One of the reasons our energy market is particularly vulnerable to excessive speculation is the so-called “Enron Loophole.” This provision was slipped into law by Senator Phil Gramm in late 2000 at the behest of Enron lobbyists to exempt some energy traders from the regulations and public protections applicable to exchange-traded commodities. As a result, the Commodity Futures Trading Commission (CFTC) is unable to fully oversee the oil futures market and investigate cases where excessive speculation may be driving up oil prices.
Clearly these people must be stopped! This is demagoguery pure and simple - done politely of course.

Note - he never explains what he considers to be excessive speculation. That's because he can't. One can try to drive up prices like Herber Hoover's FFB tried to do with wheat. And it might work for a month or two. But it will inevitably fail.

troy | June 24, 2008, 1:18pm | #

I thought I read a story about how Southwest Airlines was paying for gas at a rate of $50.00 a barrel. Assuming this is true, or that at least the scenario is possible, then isn't this a positive outcome of using the services of a speculator?

If true, what the fucking problem? But authoritarian types need their boogeymen I suppose.

paraphrasing joe | June 24, 2008, 1:18pm | #

McCain would be worse.

J sub D | June 24, 2008, 1:21pm | #

I can't help but wonder whether this very same Congress will clamor to bail out the speculators after the oil bubble bursts.

Maybe not. Oil investors don't have the innocent home buyer cachet that the previous bubble had. Of course if pension funds get over exposed all bets are off.

Some investors are more deserving than other investors. Good Democrats and far too many GOPers have some sort of morality meter that determines who is doing "good" investing and who is doing "greedy" investing. I'm not privvy to the algorithm that differentiates and quantifies all of this. Perhaps some of our "blue" friends here at H&R can help me out.

Invisible Finger | June 24, 2008, 1:26pm | #

I can't help but wonder whether this very same Congress will clamor to bail out the speculators after the oil bubble bursts.

Congress won't bail them out, that's the Fed's job.

tarran | June 24, 2008, 1:26pm | #

But unless you are inclined to ... reject out of hand the possibility that there are actually people who genuinely believe that regulation of investment markets can benefit those markets and the economy as a whole over the long term, then your argument doesn't hold.
No joe, I accept that there are people who genuinely believe that these regulations will be beneficial - just as there were people who believed that hanging the odd unmarried old woman by the neck until she was dead would end the drought blighting their crops. A monstrous superstition should not be excused merely because its promoters sincerely believe in it.

A speculator who predicts the future accurately provides a valuable service. One who screws it up will punish themselves far worse than anyone else. Chaining the former to prevent the latter is about as wise as forcing all teenagers to wear chastity belts to prevent the odd pregnancy.

joe | June 24, 2008, 1:29pm | #

Warren,

Speculation. Speculators.

Unchecked speeding. Drivers.

Do you really not get the difference here, or do you have to work at it?

Guy Montag | June 24, 2008, 1:35pm | #

Matt,

Any idea which party Energy and Commerce Committe Chair John "Dingell" Dingell belongs to? His own page on the House of Representatives website does not mention it either. Guessing he might be one of those rare Republicans chairing a committee under a Democrat controlled House, since a Democrat would be quite proud of his party these days.

Will continue to research and get back to you since the Republican in the last Dave Weigel article had his party noted, as did the Independant in this one, I know it can't be anything but an honest mistake :)

J sub D | June 24, 2008, 1:35pm | #

Is speculating on the future price of oil morally different than speculating on [pause] oh I dunno [another pause] let's just say [one last pause] cattle futures?

Perhaps the junior Senator from NY could explain the subtle differences but this simple lad doesn't see it.

joe | June 24, 2008, 1:36pm | #

Look, you libertoids are big believers in "spontaneous order." You often quote Adam Smith's pronouncement that we get our bread not from the altruism of the baker, but from his greed. In other words, you are quite capable of understanding that the shape and directions of markets is not a consequence of the morality of those engaged in it.

Why is it so difficult to recognize - not even accept, not even believe, just be aware of - the argument that the actions of investors engaged in perfectly moral behavior can produce a harmful spontaneous order, without there being any bad actors at all?

I think tarran's answer makes it perfectly clear - it doesn't matter whether anyone is calling investors evil, or not. Any statement that the actions of investors can have negative outcomes, that there can be such a thing as a bubble produced by speculation, is going to be treated exactly the same, whether the person making that observation derides investors or not.

THAT, tarran, is demogoguery.

tarran | June 24, 2008, 1:38pm | #

Joe,

Copuld you explain exactly how unchecked speculation causes harm, and checked speculation does not by discussing the effects on the following actors?

A) The producers of oil,

B) Direct consumers of oil,

C) Indirect consumers of oil (they consume things made by group B).

Please feel free to use this blog post to guide you in producing counterfactuals. Please pay close attention to the stuff on Hoovers FFB.

R C Dean | June 24, 2008, 1:38pm | #

That reminds me:

How's that liberaltarian thing working out? Still looking forward to January 2009?

J sub D | June 24, 2008, 1:39pm | #

Guy, I used to live in his district. He's a pro-defense, pro-union democrat from representing Dearborn, Michigan. He doesn't need to camppaign. Absent a dead girl or a live boy ...

Guy Montag | June 24, 2008, 1:41pm | #

Thank goodness we have this Congressional investigation! Perhaps they will immediatly begin a federal program to solve this problem.

Looks like they skipped a crucial item, I hope not on pupose, to outlaw hoarding. If this crutial step is not implimented and the other measures they are considering are put into effect, the only explaination for shortages would be hoarding, which needs to be eliminated before it begins.

Guy Montag | June 24, 2008, 1:43pm | #

J sub D,

Guy, I used to live in his district. He's a pro-defense, pro-union democrat from representing Dearborn, Michigan. He doesn't need to camppaign. Absent a dead girl or a live boy ...

So what is the bet for how long it will take for the "D" to appear behind his name in the post above?

joe | June 24, 2008, 1:43pm | #

paraphrasing joe | June 24, 2008, 1:18pm | #

McCain would be worse.

Perhaps you can quote the part where I commented on McCain's, or anybody else's, proposals are being better or worse?

Yeah, I didn't think so.

Here, let me help out:

joe | June 17, 2008, 11:22pm | #

Wow, there is an angry anti-capitalist tone to McCain's rhetoric that I can't recall ever hearing from a mainstream American politician. I can't believe what a deaf ear McNasty must have, if he thinks this type of rhetoric about speculators is going to endear him to the sort of goo-goos who'd be interested in oil futures regulation. The proposals he actually got to at the end of his little outburst are about fiscal oversight of an investment market, quite at odds with the anti-investor message his rhetoric sent.

I don't think McCain WOULD BE worse. I think McCain IS worse. He is engaging in cospiratorial, investory-bashing, class-warfare rhetoric, in a way the Dingell and Obama are not. They're talking about the market producing negative outcomes, he is talking about a parasitic class robbing "ordinary Americans." Even if their proposals are exactly the same - which they more or less are - whipping people up like this, encouraging them to think in those terms, is dangerous in and of itself.

Nigel Watt | June 24, 2008, 1:44pm | #

So joe, do you think speculation can successfully be regulated to produce a more desirable outcome or not? And whose desires should be taken into account?

joe | June 24, 2008, 1:45pm | #

tarran,

Yes, I could.

But I won't. At least, I'm not going to let you make me change the subject, as I'm more interested in a different one.

I'd rather talk about something else - the investor bashing that McCain is engaging in, the "leadership" he is providing, and how it differs from the criticisms of the market that the Democrats are engaged in.

tarran | June 24, 2008, 1:48pm | #

Why is it so difficult to recognize - not even accept, not even believe, just be aware of - the argument that the actions of investors engaged in perfectly moral behavior can produce a harmful spontaneous order, without there being any bad actors at all?
Joe, I accept that you can have people screw up. However, you don't stop there. You want to force people to do the right thing, even though you are not sure what the right thing is.

So you guys propose some one size fits all rule. It's not like a speed limit on a road, which is usually set by watching how drivers use the rode and takes into account the road shape and traffic.

No, what is proposed is generally a rule more aking to the 55 mile rule. And even worse, the rules are not clear. If I set a speed limit of 55 miles an hour throughout the U.S, no more or no less, then people obeying the law outside my house would legally be allowed to travel at a speed that would cause them to wreck, while people living in Montana would face agonizingly slow trips. If my rule didn't exempt emergency vehicles, I might even cause a few deaths.

You are right, markets need rules. The participants or the owners of the market will work out what rules work for them just as drivers will work out the appropriate speed limit during repeated travel over a road. These rules are not ones they want. They aren't asking for it. These rules aren't like a road owner publishing regulations on its use. These regulations are the equivalent of the local strongman going through people's books and threatening to beat the crap out of them if they make too much money.

MP | June 24, 2008, 1:52pm | #

Please feel free to use this blog post to guide you in producing counterfactuals.
OK

From the link:
They have purchased oil today and stored it, hoping to sell it tomorrow for a much higher price.
This shows a fundamental misunderstanding of the futures marketplace. Futures are not tied to inventory unless they are held to expiration. Oil speculators are under no obligation to hold actual inventory. They need only to close out their position before expiration.

Now, to explore a statement you raised earlier:
If [the speculator] guesses right, he curtails present consumption and enables future consumption.
What? Enables future consumption? That implies that without speculation, future consumption would be hindered. What is the basis for such a statement? Try putting this into a real world context. Explain the benefits that speculators brought to the real estate market this decade. And then explain away the drawbacks.

joe | June 24, 2008, 1:53pm | #

tarran,

I haven't proposed any rules, not commented on any rules anyone else has proposed.

I've been commenting on the rhetoric that the politicians have been using, just like Welch did when he wrote, with Mahatir/Larouche levels of hostility toward those shadowy bankster types who make money without even manufacturing widgets or tilling the land.

Guy Montag | June 24, 2008, 1:53pm | #

When they are done with this windmill can the Congress joust with a real problem where they can draw serious revenue?

Lottery Winnings Tax, of course. A 100% tax on all lottery winnings in the USA would solve so many problems and may even balance the budget. Especially of States would increase their payouts with some voluntary federal guidelines.

tarran | June 24, 2008, 1:55pm | #

I'd rather talk about something else - the investor bashing that McCain is engaging in, the "leadership" he is providing, and how it differs from the criticisms of the market that the Democrats are engaged in.
From the excerpts from Obama's website I posted above, I conclude that while the tone is much more genteel, the content is frighteningly similar.

These guys are going to use a ... I can't even call it an economic theory - it's an insult to real economics - ... an ecologic - no econological superstition that will have real world consequences. Oh, producers and consumers will figure out how to route around these regulations too should they prove to onerous, it's not the end of the world.

However, I care not a whit how genteelly they phrase their ideas. The content is essentially the same.

Guy Montag | June 24, 2008, 1:57pm | #

These guys are going to use a ... I can't even call it an economic theory - it's an insult to real economics - ... an ecologic - no econological superstition that will have real world consequences.

Think about the Polar Bears would you!?!?

PFJ | June 24, 2008, 1:57pm | #

http://krugman.blogs.nytimes.com/2008/06/23/speculative-nonsense-once-again/

Joe, Paul Krugman said in that link that speculation is not the issue. When Krugman takes the right win issue, I think that shows that shows something.

joe | June 24, 2008, 2:02pm | #

tarran,

I disagree that the content is similar.

McCain is singling out investors as bad guys, and attributing the problems we're facing to their evil acts.

Obama is doing two things - talking about unchecked speculation creating negative outcomes (there is not moral approbrium towards anyone) and talking about other actions, such as shell companies set up to evade taxes and regulation, in moral terms.

You are simply reading moral denunciations into Obama's comments about speculation, for exactly the reason you admitted to in your 1:48 post - because you put your hostility to regulation first, and then just assume black motivations on the part of those who disagree.

joe | June 24, 2008, 2:04pm | #

PFJ,

Why are you addressing me with that comment? I've written not a word offering my opinion about whether speculation actually is driving up prices.

MP, on the other hand, has made such comments, yet you don't address him.

And, is some bizarre coincidence, I also happen to be the only admitted Democrat or liberal on the thread.

tarran | June 24, 2008, 2:10pm | #

Futures are not tied to inventory unless they are held to expiration. Oil speculators are under no obligation to hold actual inventory. They need only to close out their position before expiration.
Fine - however, the cost of the oil is going to be set by actual purchases of the stuff. You can't drive up the price of oil significantly unless you are putting physical inventory in tanks.
What? Enables future consumption? That implies that without speculation, future consumption would be hindered.
If the speculator is holding inventory and sells it it increases the supply available for consumption in the future.

If on the other hand he's merely purchasing a contract to deliver X amount of oil for Y price at time T and he plans to get the oil he is going to sell at some future date, it complicates matters somewhat.

However, we must not lose track of the fact that the price of a good is set by the purchasers. The producers can alter the price by controlling the quantity made available on the market, but in the end it is the consumers who dictate the price at which the produced amount is purchased.

The speculator can only drive prices up by offering to pay more for some good than other would be consumers.

Guy Montag | June 24, 2008, 2:14pm | #

Fine - however, the cost of the oil is going to be set by actual purchases of the stuff. You can't drive up the price of oil significantly unless you are putting physical inventory in tanks.

And the purchasor is the one who sets the price at which it sells.

Guy Montag | June 24, 2008, 2:14pm | #

oops, you covered that

tarran | June 24, 2008, 2:24pm | #

Obama is doing two things - talking about unchecked speculation creating negative outcomes (there is not moral approbrium towards anyone) and talking about other actions, such as shell companies set up to evade taxes and regulation, in moral terms.
Bullshit.

He's talking about a levying a tax as a penalty on those who sell oil above $80.00 a barrel. He's demanding that criminal investigations be carried out.

Last time I checked a penalty was something done to someone as a punishment for wrongdoing (note the words come from the Latin verb to punish). And, since there is no metric that differentiates between a legitimate guess that prices are going to rise from an attempt to trick people into thinking the price is going to rise, these criminal investigations will turn into witch-hunts - how can one refute spectral evidence?

His language is more temperate. I'll allow that. But he's still trying to invent crimes where none exist and threatening to punish people for daring to trade in a manner that he disapproves of. He is engaging in demagoguery, pure and simple.

Yes, McCain has a nasty streak of spiteful hatemongering in his pronouncements. Yes, the man is as mean as a snake and the American people would be fools to put him in charge of anything more dangerous than a spitball shooter. But he's not the only one talking about punishing people.

PapayaSF | June 24, 2008, 2:28pm | #

Joe, I doubt if anyone here thinks that the free market never creates a bad outcome, just that 1) such outcomes usually self-correct (e.g. bubbles pop), and 2) government "fixes" for such things often turn out to be worse than the disease: price controls, windfall profits taxes, etc. etc.

And your argument that McCain would be worse on economic matters than Obama is unconvincing. Let me know when McCain says good things about "comparable worth" legislation, or wants to do away with secret ballots for unionization elections.

brotherben© | June 24, 2008, 2:29pm | #

Mr. Typical Voter was quoted as saying, "I am paying way too much for gas just to make the rich folks richer and I don't care what ya'll has to do to make the price go back down. JUST DO IT!"

Guy Montag | June 24, 2008, 2:31pm | #

PapayaSF,

Don't we need open ballots of Unionization elections to ensure fairness?

Guy Montag | June 24, 2008, 2:33pm | #

brotherben©,

If the President would stop charging the Congress so much for gasoline then the Congress could give it to us a lot cheaper. Isn't everything else we get from the Congress high quality and inexpensive? We should get everything from the government, so things will be fair.

robc | June 24, 2008, 2:34pm | #

What this debate here has proven is that Obama is a better public speaker than McCain (duh). His rhetoric sounds prettier and less threatening, so much so that even joe gets fooled by it. But, he is just as much a anti-market hatemonger as McCain is.

robc | June 24, 2008, 2:36pm | #

PapayaSF,

I doubt if anyone here thinks that the free market never creates a bad outcome

I will say it: Markets never create a bad outcome. They may create an outcome I dont like. They may create an outcome that causes me or others financial pain. But, those are all correct outcomes.

There are no "good" or "bad" results from the market. There are just results.

brotherben© | June 24, 2008, 2:37pm | #

GM, I have been speculating awhile that it was Bush's fault. Thank you for conformation.

Guy Montag | June 24, 2008, 2:38pm | #

robc,

We need a system that creates better outcomes, all of the time. Like the Lottery Winnings Exise Winners Fee. If everybody in America wins $1 Billion dollars then they will all be happy and the national debt will be all but eliminated.

robc | June 24, 2008, 2:40pm | #

joe,

You often quote Adam Smith's pronouncement that we get our bread not from the altruism of the baker, but from his greed

Guy Montag | June 24, 2008, 2:40pm | #

GM, I have been speculating awhile that it was Bush's fault.

Be careful, there might be a Congressional Committee just for you by election time.

Talking points follow:
Bush did it!
Bush made me do it!
Cheney!

robc | June 24, 2008, 2:41pm | #

Trying again, this time with closed quotes.

joe,

You often quote Adam Smith's pronouncement that we get our bread not from the altruism of the baker, but from his greed.

Bullshit. Smith wrote "with regard to their own interest". Nothing about greed.

self-interest != greed

joe | June 24, 2008, 2:45pm | #

tarran,

He's talking about a levying a tax as a penalty on those who sell oil above $80.00 a barrel. Which has nothing to do with investors, but oil companies.

He's demanding that criminal investigations be carried out. Where? I didn't see anything about criminal investigations. Did you mean, As a result, the Commodity Futures Trading Commission (CFTC) is unable to fully oversee the oil futures market and investigate cases where excessive speculation may be driving up oil prices. That sort of investigation is not typically criminal, but an administrative study aimed at understanding how the market is functioning. The SEC does that all the time.

You are a deeply paranoid person.

Guy Montag | June 24, 2008, 2:45pm | #

robc,

But greed is good. I saw it in an Oliver Stone documentary. It even had that Mr. Sheen fellow who later became President and is a friend of the little people.

joe | June 24, 2008, 2:47pm | #

Papaya SF,

Joe, I doubt if anyone here thinks that the free market never creates a bad outcome Perhaps not, but everyone except MP seems to think that speculation never causes the price of a commodity to skyrocket, and that anyone who says it can is a wealth-hating Bolshevik.

And your argument that McCain would be worse on economic matters than Obama is unconvincing. Perhaps that's because I haven't made any such argument. I've discussed nothing about McCain except his rhetoric.

joe | June 24, 2008, 2:48pm | #

robc | June 24, 2008, 2:34pm | #

What this debate here has proven is that Obama is a better public speaker than McCain (duh). His rhetoric sounds prettier and less threatening, so much so that even joe gets fooled by it. But, he is just as much a anti-market hatemonger as McCain is.

Shorter robc: I can't refute joe's argument on the facts, so I'll make a bald assertion.

robc | June 24, 2008, 2:49pm | #

joe,

Perhaps not, but everyone except MP seems to think that speculation never causes the price of a commodity to skyrocket, and that anyone who says it can is a wealth-hating Bolshevik.

Bullshit again. I never said that. Speculation clearly caused prices to skyrocket. I just dont think that is a bad thing. Which is what others have been saying too.

joe | June 24, 2008, 2:50pm | #

Here's me: 1

































































Here's caring about the semantic difference between "greed" and "self-interest:"








1

robc | June 24, 2008, 2:50pm | #

joe,

What is your argument? That we arent allowed to read into Obama's words his real meaning? I dont even know what your argument is in this thread other than "McCain Bad!!!" which I think everyone agrees with.

robc | June 24, 2008, 2:51pm | #

joe,

Fine. I just better never see you drawing a distinction of others' word choices. Ever. Any thread. I will call you a fucking hypocrite if I ever do.

joe | June 24, 2008, 2:51pm | #

OK, robc, if you're breaking from the party line on the relationship between speculatin and rising oil prices, good for you.

robc | June 24, 2008, 2:53pm | #

joe,

What breaking from the party line? Everyone here thinks speculation is causing the rising prices, I think.

Guy Montag | June 24, 2008, 2:53pm | #

It sounds like there is a lot of hate on this thread. We should have more love and less hate, then we will have a nicer environment.

MP | June 24, 2008, 2:54pm | #

tarran said:
Fine - however, the cost of the oil is going to be set by actual purchases of the stuff. You can't drive up the price of oil significantly unless you are putting physical inventory in tanks.
Yes you can. The futures market is unbound from physical inventory. If 71% (sourced below) of futures go undelivered because the positions are closed out before expiration, and only 29% are actually physically transacted, why is it so hard to believe that the 71% of pure speculative activity can drive up the price of the 29% of actual delivered product? That 29% is still purchasing on the same marketplace that the other 71% is transacted on.

From this article:
Since September 2003, traders holding crude-oil futures contracts jumped from 714 contracts traded to more than 3 million contracts traded in May 2008, said Rep. Bart Stupak, D-Mich., who chairs the House Energy and Commerce Subcommittee on Oversight and Investigation. His panel held its second hearing on energy speculation Monday.

Speculators now account for 71 percent of the oil-futures market, up from 29 percent in 2000, he said, citing data from the CFTC. Overall, commodity index speculation has jumped from $13 billion in 2003 to some $260 billion today.

tarran | June 24, 2008, 2:55pm | #

Speculation cannot cause prices to skyrocket for a significant length of time.

The only think that can cause prices to skyrocket is if product is kept off the market.

So unless the speculators are pumping oil into secret tanks to keep it off the market - they are not behind the rise in prices.

When specualtors try to cause prices to go up, they inevitably fail. Even the hoover era agriculture dept found that out when they attempted, with tax-payer backing to corner the world wheat market to keep the price high.

Half a billion dollars later the price was just as low as ever - and wheat farmers were still going broke - and the government storehouses were over-flowing with wheat that eventually they had to give away to the Red Cross.

Nigel Watt | June 24, 2008, 2:56pm | #

Joe, what the hell was that screen-long post supposed to be?

joe | June 24, 2008, 2:57pm | #

Stop swearing. Deep breaths.

robc | June 24, 2008, 2:50pm | #

joe,

What is your argument?

Here:

joe | June 24, 2008, 1:36pm | #

Look, you libertoids are big believers in "spontaneous order." You often quote Adam Smith's pronouncement that we get our bread not from the altruism of the baker, but from his greed. In other words, you are quite capable of understanding that the shape and directions of markets is not a consequence of the morality of those engaged in it.

Why is it so difficult to recognize - not even accept, not even believe, just be aware of - the argument that the actions of investors engaged in perfectly moral behavior can produce a harmful spontaneous order, without there being any bad actors at all?

I think tarran's answer makes it perfectly clear - it doesn't matter whether anyone is calling investors evil, or not. Any statement that the actions of investors can have negative outcomes, that there can be such a thing as a bubble produced by speculation, is going to be treated exactly the same, whether the person making that observation derides investors or not.

John McCain is denouncing speculation qua speculation, and speculators qua speculators, in a manner that Barack Obama is not. He is whipping up hostility towards people, where Obama is not. McCain's bit about wagering, unrelated to any kind of productive commerce reveals an opinion about speculation itself being parasitical and dangerous, which is significantly different from Obama's argument about the markets working better with proper oversight.

joe | June 24, 2008, 2:57pm | #

Uh oh.

Better put on the Saf-T-Taint. I screwed up the tags again.

Guy Montag | June 24, 2008, 2:59pm | #

Sounds like speculators are haters and need to be killed.

robc | June 24, 2008, 2:59pm | #

joe,

I think I answered your argument (what I could figure without the tags) and ignoring the McCain parts as unrelated to anything because I dont give a damn about McCain (or Obama, for that matter) in my post above in which I said something along the lines of "no bad results, only results we dont like".

joe | June 24, 2008, 3:00pm | #

robc, have you been reading tarran's comments about speculation and price? Take it up with him.

robc | June 24, 2008, 3:01pm | #

joe,

As often as I screw up tags, you screw them up about 5 times as much. Maybe you should just use quotes from now on. :)

MP | June 24, 2008, 3:01pm | #

tarran said:
Speculation cannot cause prices to skyrocket for a significant length of time.
Define that. I'd say you can have speculation for 2-3 years. And the Internet bubble and the Real Estate bubble are current evidence of my timeframe.

Yes, eventually, there will be a market correction. But we're only six months into this oil bubble. It still has a lot of potential life left in it.

Who, BTW, is claiming that speculative bubbles last forever? The issue is the damage they do in the short term, not the fact that they are naturally self-correcting.

robc | June 24, 2008, 3:03pm | #

joe,

Doesnt look like tarran is arguing anything different than me. Im not sure about his present v future consumption, but ignoring that sentence, his first few posts seem dead on. He even agrees that big money is outbidding small money (ie, speculators are driving up prices). He also agrees with me that that is just the market working. As he said, creating a market clearing price.

Nigel Watt | June 24, 2008, 3:04pm | #

Define that. I'd say you can have speculation for 2-3 years. And the Internet bubble and the Real Estate bubble are current evidence of my timeframe.
At the root of each of those is Fed idiocy, not speculation.

robc | June 24, 2008, 3:05pm | #

MP,

What damage? Didnt you properly hedge your gas puchases prior to the bubble starting?

Guy Montag | June 24, 2008, 3:06pm | #

MP,

A good example of the life of a speculative commodities bubble would be the silver futures market in the 1980s (late 1970s?) ref. the Hunt brothers.

Forgot how long that lasted, but I missed out on it and it did dive the price of real silver pretty high.

joe | June 24, 2008, 3:07pm | #

Will somebody please throw Guy Montag a bone?

His puppyish whining for attention is heart-rending. I'd do it myself, but he just scrolls right past what I write without reading it.

As he keeps reminding us, whenever I write something about him.

That he doesn't read what I write.

Fluffy | June 24, 2008, 3:07pm | #

Joe, come on.

Basically you're saying that McCain is worse than these Democrat statements because McCain is saying,

"Let's hang those fucking kulaks, take their shit for ourselves, and burn their fucking houses down!"

and the Democrats are saying,

"The time may have arrived in the evolution of our society when it is necessary to move to collectivize agriculture, despite the presence of antisocial traditionalist elements in the countryside."

McCain and the Democrats have different modes of expression because they are aimed at different audiences.

There really isn't much difference between McCain deriding speculation "unrelated to productive commerce" and Dingell saying, "We must prohibit investment banks from owning energy assets" other than the mode of expression and different preferences for tropes.

MP | June 24, 2008, 3:08pm | #

robc said:
What damage? Didnt you properly hedge your gas puchases prior to the bubble starting?
I fell behind on payments to my Oracle, so I missed the window.

Nigel Watt said:
At the root of each of those is Fed idiocy, not speculation.
Fed idiocy only provides the fuel for the speculators. It thus helps to determine the size of the bubble, not its existence in the first place.

Guy Montag | June 24, 2008, 3:10pm | #

Fed idiocy only provides the fuel for the speculators. It thus helps to determine the size of the bubble, not its existence in the first place.

Did not look to be the case in the examples you gave. In both cases federal policy seems to have created the environment that allowed speculation to be lucrative.

robc | June 24, 2008, 3:12pm | #

MP,

I fell behind on payments to my Oracle, so I missed the window.

You insure your house even when you dont expect it to burn down, just in case, right?

Whats the fucking difference (other than the obvious, that unless you are a trucker or an airline, you can sell insure against gas prices)?

Having a few hundred shares of XOM stock has come in handy the last few years.

atrevete | June 24, 2008, 3:14pm | #

"Any idea which party Energy and Commerce Committe Chair John "Dingell" Dingell belongs to?"

Isn't he the cop with the short shorts in Reno 911?

Guy Montag | June 24, 2008, 3:16pm | #

Isn't he the cop with the short shorts in Reno 911?

Idunno, I hardly watch that show but it sounds familiar for some reason.

MP | June 24, 2008, 3:19pm | #

Guy Montag said:
Did not look to be the case in the examples you gave. In both cases federal policy seems to have created the environment that allowed speculation to be lucrative.
Fed policy didn't cause speculators to pick the Internet or Oil. Those bubbles were primed by factors that existed outside of the money supply. The money supply expansion simply poured gas on what only might have been small brushfires and turned them into blazing infernos.

Real Estate is more debatable. I think that bubble was caused by the change in the tax law, which eliminated capital gains on many real estate transactions. That coupled with the cheap money started the bubble's major expansion.

But in any event, I think that bringing up the Fed angle doesn't dilute the speculator argument. Speculator deniers such as tarran and Paul Krugman simply don't want to deal with the evidence at hand.

(And tarran, don't take it personal for lumping you in with Krugman. Not my fault that he's writing what you are.)

joe | June 24, 2008, 3:19pm | #

Fluffy,

Nice Commie-Godwin.

The two are really only equivalent if you consider the SEC's adminstration of the stock market to be equivalent to the Red Terror and the Ukraine famine.

I guess if you consider that to be a fair comparison, than McCain is being straightforward and Obama is being sneaky. Those more grounded in the reality of the past 70 years would see it more as Obama's rhetoric being in line with his proposals, and McCain sounding like the Daily Worker while proposing centrist regulation of the investement markets.

There really isn't much difference between McCain deriding speculation "unrelated to productive commerce" and Dingell saying, "We must prohibit investment banks from owning energy assets" other than the mode of expression and different preferences for tropes. As long as you keep telling yourself that only class hatred aimed at investors can lead one to think regulation is a good idea, that is a fine argument.

Nigel Watt | June 24, 2008, 3:23pm | #

The money supply expansion simply poured gas on what only might have been small brushfires and turned them into blazing infernos.
Right, so in the interest of preventing this from happening again, you'd rather try and run around with a singed towel hunting down minor brushfires instead of easily stopping the one organization pouring gasoline on them?

MP | June 24, 2008, 3:24pm | #

robc said,
Having a few hundred shares of XOM stock has come in handy the last few years.
CVX was my choice until recently.

But regardless, it's unrealistic to hedge on every commodity. And then there's the question of how much you commit to your hedge. If it's a pure hedge, it needs to be in proportion to expenditures...but for what length of time?

BTW, did you read my initial disclaimer where I said that Dingell and his regulator pals can piss off? Analyzing a situation doesn't imply a response to that situation.

MP | June 24, 2008, 3:24pm | #

Nigel Watt said:
Right, so in the interest of preventing this from happening again, you'd rather try and run around with a singed towel hunting down minor brushfires instead of easily stopping the one organization pouring gasoline on them?
Did I say that?

Nigel Watt | June 24, 2008, 3:26pm | #

Did I say that?
No, but if that's not what you're trying to imply then I'm confused as to why you're spending so much time that when fueled by the Fed speculators can cause problems without mentioning the Fed.

Nigel Watt | June 24, 2008, 3:27pm | #

*time saying that when

joe | June 24, 2008, 3:27pm | #

Did I say that?

According to the Libertransitive Property of Logic, you did.

And because the Libertransitive Property works both ways, I'm sorry MP, but you have also now stated that you hate investors.

Guy Montag | June 24, 2008, 3:28pm | #

MP,

Fed policy didn't cause speculators to pick the Internet or Oil.

I was talking about Internet and Real Estate.

In the case of internet company speculation, that industry was not heald to the same rules as anybody else and violated all sorts of financial rules that other industries were sticking to. Pretty much the same general thing happened with Enron, of course, until the feds finally decided to examine them and enforce some rules, taking them down and Arthur Anderson down with them.

Real Estate had a similar problem, with mortgage brokers not fully vetting their customers, alleged collusion with appraisers to inflate property values, etc.

If the government is going to have transaction rules in place then they need to enforce them equally.

MP | June 24, 2008, 3:35pm | #

Nigel Watt said:
No, but if that's not what you're trying to imply then I'm confused as to why you're spending so much time that when fueled by the Fed speculators can cause problems without mentioning the Fed.
For a bubble, you need both. You need excess liquidity, and (to borrow from big Al) you need irrational exuberance. Right now, we have people in full denial that irrational exuberance is having a role in setting the market price of oil. I'm fighting that perspective. And consider this, once you deny that irrational exuberance fuels bubbles, then the fact that the Fed fuels irrational exuberance becomes irrelevant.

That's not to discount the Fed's impact on general inflation. But that's not what we're talking about here. We're talking about bubbles, which have two components. Deny one, and the other becomes meaningless.

robc | June 24, 2008, 3:36pm | #

MP,

But regardless, it's unrealistic to hedge on every commodity. And then there's the question of how much you commit to your hedge. If it's a pure hedge, it needs to be in proportion to expenditures...but for what length of time?

Of course. You only need to hedge those that would greatly affect your bottom line if they went up ginormously. If you live in NYC and dont own a car, hedging fuel isnt as necessary as it is for an airline. You and me probably fall somewhere in between, maybe closer to the guy in NYC. I buy about 600 gallons a year, so the fuel runup has added about $1500/yr to my expenses (depending on where you put the baseline). Im not sure what other commodities I spend as much on.

My house and car and health are insured because they are significant assets of mine. Fuel is hedged (although that wasnt necessarily the reason for buying the XOM stock, it just worked out that way). I guess I could have/should have hedged against grain prices. Hard to give up grains.

Analyzing a situation doesn't imply a response to that situation.

I was just snarking at your damage comment. One man's damage is another man's profit.

Fluffy | June 24, 2008, 3:36pm | #

The two are really only equivalent if you consider the SEC's adminstration of the stock market to be equivalent to the Red Terror and the Ukraine famine.

That's actually not necessary at all. We're comparing two ways of expressing the same political sentiment - one of which waves a bloody shirt, and one of which is couched in bureaucratic and academic jargon. I'm comparing the language gap, and not analogizing the policies themselves. Obviously these regulations are not the equivalent of the Ukrainian collectivization. What is equivalent, however, is the way that jargon can be used to express the same sentiment as open demagoguery.

I guess if you consider that to be a fair comparison, than McCain is being straightforward and Obama is being sneaky.

Not at all, since no one is being tricked. They're merely using the language that best communicates with their respective audiences. An audience of semiliterate McCainite bluehairs would be put off by the sort of jargon that a Democrat audience would eat up with a spoon.

As long as you keep telling yourself that only class hatred aimed at investors can lead one to think regulation is a good idea, that is a fine argument.

It is strange how quickly regulation becomes "a good idea", quite distinct from the political advantage of appealing to the economic illiteracy of the electorate, when the price of an important commodity rises.

Silly me, doubting the sincerity of the Democrat rhetoric on this issue! What a misanthrope am I!

adrian | June 24, 2008, 3:36pm | #

So ~70 posts later and 99% talk about how to lessen the effects of speculation on commodities without ever looking at the cause.

---

How is it that bubbles keep being created in very different industries?

Why are speculators in commodities now?

Where is all this money coming from?

What do real negative interest rates have to do with this?

Hopefully i didn't lead on too much...

Fluffy | June 24, 2008, 3:40pm | #

With regard to the "How do you hedge every commodity" question - wouldn't simply purchasing gold have worked?

Nigel Watt | June 24, 2008, 3:40pm | #

For a bubble, you need both. You need excess liquidity, and (to borrow from big Al) you need irrational exuberance. Right now, we have people in full denial that irrational exuberance is having a role in setting the market price of oil. I'm fighting that perspective. And consider this, once you deny that irrational exuberance fuels bubbles, then the fact that the Fed fuels irrational exuberance becomes irrelevant.

That's not to discount the Fed's impact on general inflation. But that's not what we're talking about here. We're talking about bubbles, which have two components. Deny one, and the other becomes meaningless.
Sorry, I was focusing on solutions instead of tangential issues.

robc | June 24, 2008, 3:44pm | #

Fluffly,

Except for gold.

Erÿk Boston, J.D. | June 24, 2008, 3:51pm | #

Out of respect for George Carlin, can we start this debate by injecting some linguistic honesty?

Neither "Gambling" nor "Bet" should ever be used to refer to any legitimate investment. Gambling is what happens in Vegas were the payoffs are determined by a artificial, random and meaningless variable.

Investments are based on the value of underlying commodities. Success is based, not on meaningless chance, but upon accurately investing in a manner which will produce wealth.

I understand that referring to an investment as a bet is a convenient shorthand when discussing economics but the suggestive power of the term feeds directly into the mindset of those who hate free markets.

adrian | June 24, 2008, 3:56pm | #

ok obviously i was a little behind and didn't see all the Fed posts before writing mine.

ed | June 24, 2008, 3:58pm | #

injecting some linguistic honesty

Good luck with that one.

MP | June 24, 2008, 4:05pm | #

Nigel Watt said:
Sorry, I was focusing on solutions instead of tangential issues.
Attacking the Fed to address speculative bubbles is the wrong approach, because it assumes that Fed liquidity injections are a net loser. That's an assumption I'm not willing to make (although I do tend to lean that way). Since the fuel for a bubble has (+/-) economic effects beyond the bubble, getting rid of the fuel is not as straightforward an answer as it may seem.

R C Dean | June 24, 2008, 4:10pm | #

And, of course, everyone just ignores the inevitable outcome of trying to control the futures markets:

Even more business goes to the London exchanges. Nothing changes in the markets themselves, really, although some American jobs are lost and even more assets get exported overseas. Good policy, no?

Of course, Obama's seizure of revenue derived from the sale of oil above $80.00/barrel is a different kettle of fish, since it isn't really directed at the futures markets. It might, however, drive Exxon and its brethren in the oil business overseas, since its impact on them would be catastrophic. I'm sure there are plenty of countries that would be happy to have Exxon domiciled there instead of in the US.

tarran | June 24, 2008, 4:14pm | #

OK.

MP - perhaps I'm missing something.

I purchase a futures contract to purchase 1,000 barrels of oil from you at a guaranteed price of $300,000 (300 per barrel) total one year from now.

How does that affect the spot price now? How would it affect the spot price one year from now?

I'm just not seeing it. To me the spot price is set by the consumers who are purchasing the physical product and using it/storing it for later.

I would expect that if speculators are driving the price up, we would see increasing inventories somewhere in the system as the price rise pushed the marginal customers out of the market, either that or falling production.

My understanding is that there is no sign of such a mismatch between world production and consumption. Which means that the price is being set by how much consumers are willing and able to pay.

To be honest, I think the rise in oil prices is a classic example of a phenomenon that occurs in periods of inflation -> the posessors of the newly created money bid up prices on the stuff they want, and the prices of stuff they don't want are not immediately affected. The end result is that the price of something like oil shoots up while the price of something else like the hourly wage of a computer programmer does not. And the programmer observes that an hour of work buys him less oil than it did before and gets pissed off.

And yes, my argument about the capabilites of speculators assumes that they have limited money at their disposal. So long as buyers have enough money on hand to sustain a high price, a price rise will continue. In the real estate bubble, loose bank lending policies meant that people gambling on future price rises could afford to buy a great deal of house.

But, unlike silver, gold, houses, or stocks, people don't buy oil intending to hold it for a time and sell it later for a higher price. The purchases are primarily intended for immediate (or as much as is physically feasible anyway) consumption. Thus, I don't see the conditions that facilitate a bubble.

BTW this is my last post for a while - I have a pile of work and need to get busy. I am however interested in your answer or to see you point me to a (preferably online) text that would show me where you think I am going wrong.

Nigel Watt | June 24, 2008, 4:16pm | #

Attacking the Fed to address speculative bubbles is the wrong approach, because it assumes that Fed liquidity injections are a net loser. That's an assumption I'm not willing to make (although I do tend to lean that way). Since the fuel for a bubble has (+/-) economic effects beyond the bubble, getting rid of the fuel is not as straightforward an answer as it may seem.
The Fed uses debases the currency, which makes its actions a net loser. Kill it with fire.

Patrick D | June 24, 2008, 4:19pm | #

"Speculators" have driven up crude prices to create a bubble, eh?

Well, why ya'll wasting time yammering about it?

Sell! Sell! Sell!

Short crude, pick up that money that's just sitting on the floor and punish those speculating idiots. This is rare opportunity.

Paul | June 24, 2008, 4:20pm | #

"When politicians control buying and selling [fill in the blank]..."

Invisible Finger | June 24, 2008, 4:21pm | #

Even if we bought the "speculators are causing oil prices to skyrocket" meme, all it does is beg the question "WHY do speculators exist?"

joe | June 24, 2008, 4:22pm | #

Fluffy,

We're comparing two ways of expressing the same political sentiment

My point is that they are not the same sentiment.

"Speculators are bad and speculation is just unproductive paper shuffling" is a very different political sentiment from "Speculative bubbles are dangerous, and using gimmicks to evade taxes and oversight is bad."

One of these is hostile to the very idea of speculation, and betrays an ignorance about economics and how the economy functions, and the other does not.

The only way they could possibly look the same, as I wrote, is if you consider any statement about there being dangers from speculative bubbles in basic commodities, or any statement in favor of SEC-style regulation, to be inherently hostile to the existence of investors - in other words, by assuming your conclusion.

PC | June 24, 2008, 4:22pm | #

Maybe Congressman Dingell should get together with more representatives in the house. I hear Congressman Berry in Arkansas is watching the situation closely. They should work together to pass a bill.

joe | June 24, 2008, 4:24pm | #

RC,

Oil futures markets WERE so-regulated before the Enron loophole was inserted.

Did the oil futures market move to London?

How about the NYSE? There have been regulations on that since the 30s.

How about the Chicago Mercantile Exchange?

Invisible Finger | June 24, 2008, 4:25pm | #

If the government is going to have transaction rules in place then they need to enforce them equally.

Something that's never happened in the history of mankind.

Paul | June 24, 2008, 4:26pm | #

I haven't read all eleventy-billion comments on the thread, but does it really take an advanced economics degree to understand that speculation is a market fundamental?

Somehow-- and even libertarians are guilty of this, I suspect-- but somehow we've come to believe that the "market" only abides one widget seller, and one widget buyer, and that buyer intends to use his widget until it wears out, or a newer model becomes available-- at which point he will seek out another widget seller and buy a new widget with this tax rebate cheque.

Guy Montag | June 24, 2008, 4:26pm | #

PC,

He has some like-minded potential allies in the Senate too. Just scan above, I think one of them (perhaps two) is running for President.

Guy Montag | June 24, 2008, 4:27pm | #

IF,

I meant in the sense of not ignoring a whole sector of industry, not in the sense of microscope on every single firm out there.

Guy Montag | June 24, 2008, 4:29pm | #

I haven't read all eleventy-billion comments on the thread, but does it really take an advanced economics degree to understand that speculation is a market fundamental?

No, but I suspect that there will be serious calls for over regulation from the ones who just won't bother to understand this.

Paul | June 24, 2008, 4:29pm | #

I would also like to remind everyone, that the Oil market (another disappointment to some libertarians and many Republicans) is a global market. There is no 'discreet' localized oil market. Meaning if we boost domestic production, and ramp up off-shore drilling, the price of oil is still set globally. The bad news for Democrats is that localized market regulation will have little effect, and at minimum, a negative effect on global oil prices.

tarran | June 24, 2008, 4:30pm | #

Oh and I missed this:
That sort of investigation is not typically criminal, but an administrative study aimed at understanding how the market is functioning. The SEC does that all the time.

You are a deeply paranoid person.
Well, let's see what Obama had to say from mey previous link:

The Obama Plan to Crack Down on Excessive Energy Speculation
...
Ø Fully Close the “Enron Loophole”: One of the reasons our energy market is particularly vulnerable to excessive speculation is the so-called “Enron Loophole.” This provision was slipped into law by Senator Phil Gramm in late 2000 at the behest of Enron lobbyists to exempt some energy traders from the regulations and public pro