Econ Club: It's about logic, not emotion.

Under the guise of Econ Club, I have sat in many of bars alongside peers and professors, attempting to solve the world’s problems with economic logic. Couched primarily in economic topics, attendees are encouraged to be blunt, using logic not opinion to discuss current events. It is because of the success of these meetings and encouragement from past participants that I am moving Econ Club into blog form. As such, post articles, comment on them and of course keep a refreshing beer nearby.

Sunday, July 20, 2008

Op-Ed Contributors
Futures Imperfect
By DWIGHT R. SANDERS and SCOTT H. IRWIN
Published: July 20, 2008
There is no historical evidence that curbing speculation has been effective at lowering commodity prices.

http://www.nytimes.com/2008/07/20/opinion/20irwinsanders.html?ex=1374206400&en=28e47116b01da28b&ei=5124&partner=permalink&exprod=permalink

4 comments:

Angel said...: I don't know enough about the futures market to make any comment about this article, but was wondering if anyone else might. You hear a lot about speculation in the news, and my guess is that speculation is a topic of attack when prices increase regardless of if it is justified (as the authors seem to argue). However, can anyone add to this, or disagree?; July 20, 2008 at 9:51 AM
Kevinsix7 said...: I agree with the overall message of the article; that futures markets (and the processes therein) are an important tool in maintaining stability, especially w/ respect to "harvest-industries."

I also agree that the commodity futures market (specifically, the people trading w/in the market) are receiving more criticism than they ought.

However, I think the authors go too far in redirecting blame for high prices away from futures markets.

I mean, what do futures markets engage in if not price-setting at a macroeconomic level? Of course their actions affect prices. If the commodity-futures market didn't work (at price setting), people would have stopped utilizing it decades ago.

Ultimately it always boils down to expectations. Whether or not a shortage of any particular commodity exists, if the market perceives scarcity, prices will behave accordingly (i.e. a bubble).

Is speculation in the futures market solely to blame for high commodity prices? No. Can the futures market contribute to high prices, and can it exacerbate a bad situation? Absolutely.

But hey, that's why macroeconomics is so much fun. The whole bloody thing is recursive in nature; with everything reacting to the reactions of everything else. And thankfully so! If it was easy, economists would all be out of work (instead of just most of us being out of work). :); July 20, 2008 at 1:11 PM
KLR said...: Speculation can cause prices to go up or down. Speculation is just betting and I can bet on a horse to win or lose. To the degree that speculation affects price it is only toward making the market móre efficient by injecting more information into price. The only way speculators could change price for the worse is if they were collectively biased toward the same false beliefs orif they were colluding. The latter seems implausible. If you believe the former, I suggest you start trading immediately.; July 23, 2008 at 12:04 AM
Mike said...: I'll bet Krugman has a total hard-on for this article.; July 23, 2008 at 1:42 AM

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