Thursday, July 17, 2008

Don't Blame the Speculators

According to Neal Wolkoff, chairman and CEO of the American Stock Exchange, writing in the Financial Times:

I am extremely sceptical that speculators are behind high energy prices. My reason for writing is driven by my concern that in hunting the monster in the closet, we will end up adopting legislation and new regulations that will harm our public markets, which are essentially the work of my life. Government has a poor track record in market design.

You might ask, what would be the harm in this case of regulating speculative energy market participants? This is not just an energy issue. Markets are intended to reflect full-throated opinions, and they depend on the liquidity provided by different points of view, and varied risk profiles participating all at once to reflect the best, most accurate available price. When markets lose liquidity because some participants are not allowed to remain due to irrational mistrust the markets become more volatile, more difficult to enter and exit, and less reliable tools for price discovery.

Without a clear reason to impose new rules, other than hating high prices – and I count the months of lease payments remaining on my V8 – we need to keep from lashing out in ways that will hurt us later. We have policy alternatives available to us without harming the greatest system of organized markets the world has known.


At 7/17/2008 9:43 PM, Blogger Subba Muthurangan said...

Great one. I touched this subject a long ago
Thanks for your inputs.

At 7/18/2008 10:17 AM, Blogger the buggy professor said...

Wolhkopf, the chairman of the stock exchange, is right to caution against new and over-zealous, rapidly instituted financial regulations.


Fortunately, Ben Bernanke --- the Federal Reserve chief --- has the exact kind of knowledge-in-depth that 99% of all other economists, however prominent, lack: detailed historical work in the financial accelerators of business cycle disturbances . . . going back to his impressive studies of what prolonged the Great Depression of the 1930s. By contrast, judging whether new regulations are needed or whether they would likely help or do the opposite cannot be inferred deductively from basic theoretical economic principles or modeling.

The economic world simply changes way too fast for such simple-minded deductions.

Virtually every big disturbance to the US economy since the end of the 1981 recession has either been sparked or aggravated by unforeseen financial innovations or hanky-panky that 99% of economists or financial specialists never anticipated.


And so? And so we're fortunate to have a different sort of economist, with practical experience matched by profound case-study knowledge of how to help guide the economy --- and any new regulations that Congress or the new president will try to implement --- to deal with our existing financial problems: the mortgage crisis (sparked by stand-alone mortgage firms without sound credit-analysis of their clients and snapped up by financial institutions as a brainstorm), the credit crunch, and commodity prices . . . the latter at least reflecting real economic problems, not innovative financial hari-kari.


It would help the world if there were hundreds of other gifted economists who --- instead of endless statistical modeling that requires even those of us well-grounded in statistics to spend 2/3 of the time reading a journal article to look up the new-fangled interstellar statistical skyhootings --- emulated Bernanke and did a lot of concrete, in-depth study of various aspects of our and the global economy and financial sectors.


Michael Gordon, AKA, the buggy professor:


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