Other than killing Osama bin Laden, President Obama seems
incapable of taking responsibility for anything. Blaming
speculators is the latest iteration in his ongoing crusade to
escape responsibility and to change the subject. He has added
speculators to a long list that includes George Bush, insurance
companies, greedy physicians, big oil companies, “fair share”
fugitives, and Republicans in Congress. He should change his name
to Barack Oblama.
Obama’s specific charge is that speculators are the reason for
rising gasoline prices. Robert Reich, who for some unknown reason
claims to be an economist, says that “speculation by U.S. index
fund traders has been raising prices by up to $1 per gallon.”
Speculation can mean many things and take many forms. Basically,
it is the attempt to profit from price changes.
Confusion about the role and impact of speculation has been
common and recurring throughout history. Take, for example, the
accusation that speculators artificially increase the price of the
commodity in question.
It’s true, of course, that speculators can contribute
to an increase in the market price of something by adding to
the demand for it. What’s important to keep in mind, however, is
that’s only half the picture. A speculator cannot make a profit by
simply buying something. There’s no profit in hoarding. There has
to be a round trip of both buying and selling. The main
objective is to buy at one price, and then to
sell at a higher price.
The impact of buying pushes prices up, the impact of selling
pushes prices down. There is absolutely no reason to assume that
speculators permanently increase the price of anything.
Speculation can benefit the economy in a number of ways, one of
which is to allocate resources between time periods. An economy,
like everything else, exists in time and space. The value and
usefulness of something can be increased by changing the time
and/or location it’s made available to users.
The supply of no commodity is constant over time. Prices tend to
be low when supply is abundant and high when it’s not. The supply
of corn is highest right after harvest time. If all of that corn
were dumped on the market at the same time the price would be
extremely low. The incentive to use it efficiently would be weak.
Months later we could expect a shortage of corn and the price would
spike. Speculators anticipate this dynamic. They buy when the
supply is abundant and the price low, pushing up the price, and
sell when the supply is low, pushing down the price. The net result
is that both market prices and available supply are moderated.
Speculators, as such, are not philanthropists. They don’t wake
up in the morning asking themselves, “How can I benefit humanity by
stabilizing prices and supply over time?” Their actions are
motivated by self-interest and profits. In the words of Adam Smith,
“It is not from the benevolence of the butcher, the brewer, or the
baker, that we expect our dinner, but from their regard to their
own interest.” The societal and economic value of speculators is
not as obvious as for butchers, brewers, and bakers, but it
can be every bit as real.
The information and incentives provided by the price system are
crucial to the efficiency of how and when resources are employed.
Speculation helps short-term prices conform to long-term realities.
The economy functions best when we don’t allow temporary abundance
to give false signals about what will be true in the long run.
Speculation is one of the factors that lead to what economists
call “price efficiency,” meaning prices that reflect all available
information. Such information includes expectations about future
conditions. For example, if a stock’s price is expected to be
higher tomorrow, it will be higher today.
Speculators assume the risk other economic players would rather
avoid. A farmer can sell his crop even before he plants it. The
farmer essentially transfers the risk (uncertainty) of price
fluctuations to someone else. He can focus his efforts on farming
and not worry about the vicissitudes of the market.
Speculators usually face intense competition with other
speculators. The current price will be bid up until the anticipated
profit is roughly equal to the average of other investment
alternatives. At a minimum, the expected price change has to
cover the costs of storage if they are to make a profit.
Furthermore, speculators are not assured a profit. When their
predictions are wrong, they lose.
Blaming speculation for high prices reflects the rawest kind of
economic ignorance. I couldn’t begin to count the number of times I
have been stunned by the utter lack of economic understanding
demonstrated by Barack Obama.
Obama and his ilk are willingly and deliberately ignorant of
economics and economic realities. Economics is an annoying
impediment to their utopian belief system and their political
objectives. Obama doesn’t understand how a market economy works,
and doesn’t want to know. If he could he would criminalize the free
market. He is as clueless as the worst economics student I ever
taught, even at the beginning of the class. Obama never lets
ignorance slow him down and we all suffer as a result.
Regulations against market “manipulation” already exist and are
enforced by the Commodity Futures Trading Commission. President
Obama has recommended increasing fines tenfold to a maximum of $10
million per violation, as well as more enforcement funding for the
CFTC.
According to the Wall Street Journal, “In the past 35
years, the CFTC has brought dozens of cases of manipulation in
energy markets. It was successful in proving only one in court.”
Besides prohibitions on manipulation, the regulations also prohibit
“recklessness” and the creation of prices that are “artificial” (in
contrast to being determined by supply and demand). The CFTC
has the all but impossible task of proving that one firm has the
ability to affect prices on the multi-billion-dollar commodities
markets. No wonder the agency has such an atrocious track
record.
More regulations and more bureaucracy will not stop imaginary
problems that are impossible to define or enforce. They may help
Barack Obama distract attention from his disastrous first term, but
otherwise they are a counterproductive waste of time and
resources.
