Posted on 07/08/2008 12:29:07 AM PDT by gpapa
Congress is back in session and oil prices are still through the roof, so pointless or destructive energy legislation is all but guaranteed. Most likely is stiffer regulation of the futures market, since Democrats and even many Republicans have so much invested in blaming "speculators" for $4 gas.
Congress always needs a political villain, but few are more undeserving. Futures trading merely allows market participants to determine the best estimate – based on available information like supply and demand and the rate of inflation – of what the real price of oil will be on the delivery date of the contracts. Such a basic price discovery mechanism lets major energy consumers hedge against volatility. Still, "speculators" always end up tied to the whipping post when people get upset about price swings.
As it happens, though, there's a useful case-study in the relationship between futures markets and commodity prices: onions. Congress might want to brush up on the results of its prior antispeculation mania before it causes more trouble.
(Excerpt) Read more at online.wsj.com ...
Sorry, WSJ -- that's in a perfect world. Here in the real world you left out a few motivating factors, such as fear, nervousness, the power of rumors, and "price momentum" of the sort that fueled the dot-com bubble and the current mortgage problems. And, of course, there are some big players in the market with huge exposure, whose only hope is in trying to keep futures prices rising.
It's one thing to want to avoid Congressional meddling in the futures market; but quite another thing to suggest that the current futures market is not seriously askew.
Right.
But when the market, oblivious of the fundamentals, drives the prices outside the supply/demand curve’s pricing, then the market can crush the producers and consumers.
Before the CFMA in 2000, we had commodities markets. The markets worked just fine. The energy futures markets worked just fine prior to 2000, and prior to ICE, et al.
People who want to say that eliminating ICE or the CFMA would bring about dire consequences are talking through their hats. We’d just return to a pre-2000 world, when energy futures were regulated. No big deal. The markets worked then. There were speculators, but their position sizes were limited.
The WSJ is always the last to admit that free markets don’t work, and then only with a snarl and a grudge.
They’re nothing if not dogmatic.
For apples and oranges. The oil market was in a long bear that destroyed domestic production. Odd though, as the current bashers were basking in cheap oil then, they weren't bashing the speculators for making it too cheap.
Well, free markets do work, by and large; in much the same way that a free society works, by and large.
What the WSJ and other free market types fail to acknowledge, however, is that an economy is more than just a financial thing; it's also a moral thing. The conesquences of a free market are in large part dependent upon the moral foundations of those who take part in it. John Adams' famous quote applies here:
"We have no government armed in power capable of contending with human passions unbridled by morality and religion. Our Constitution was made only for a religious and moral people. It is wholly inadequate for the government of any other."
As it applies to the government (and the laws promulgated and enforced thereby), it also applies to the economy. Adams knew that limited government only works when "We the People" are individually self-policing.
The same goes for an economy. If "making money" outweighs any moral considerations about how that money is made ... then free markets have a problem.
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