Do You Still Believe?

Email Print posted by ihavenobias 08/12/2008 05:57:42 PM EST

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Do You Still Believe it Wasn't Speculation?
By Jeff Madrick

With crude oil prices now twenty percent below their levels of just a month ago, and other commodities down as much or more, it's time for the countless economists who told us the rapid prices increases had little to do with speculation to stand up and explain themselves.

Now, anyone writing about or discussing economics is going to make mistakes.

But this claim was a whopper. More to the point, and the reason it brings out this writer's passionate anger, is that the rapid rise in prices has caused so much pain for the world's poor.

The simple fact is that prices for any commodity can be moved by speculation about the future. When they are financialized, as is crude oil, it means non-users can make easy bets on future prices that require only a small down payment.

It's just like the stock market. Do stock prices reflect only rational projections of corporate earnings and dividends? We've had enough of irrational exuberance and its opposite to know better now. Then why should oil futures prices reflect only genuine shifts in supply and demand?

The fascinating question is why all these economists were so anxious to deny speculation an important role.

There are two answers.

One is the persistence of a view that financial markets are efficient and mostly rational. Many economists, not only Friedmanite conservatives, like to believe that. It makes doing economics a lot easier to assume most of the time that prices accurately reflect the real world supplies and demands of goods and services, including financial assets, and that market participants always have their wits about them.

The second answer is that if the financial community admitted oil price speculation was a major problem, regulation of trading might likely follow...

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Do You Still Believe? | 3 comments (3 topical, 0 hidden)
Just don't be surprised... (none / 0)

 

...when the price starts creeping back up during October so McCain can get a boost with his nonsensical "plan."

We knew that prices would get lower before the election to lull people - been saying that more'n two years - but now there's a nice little conflict in an oil rich region to add a lemony twist.

I told a friend months ago I expect gas to be $5.50 (varies in your area) per gallon by years end. Despite the slide, I see no reason to alter that prediction yet.

by MedfordTim on 08/14/2008 12:44:59 PM EST

Yep (none / 0)
You were right.

by ihavenobias on 08/14/2008 01:58:56 PM EST

[ Parent ]
Daydream Believer (none / 0)
This has a lot to do with the price fluctuation.

by Twba on 08/16/2008 03:25:21 PM EST

Do You Still Believe? | 3 comments (3 topical, 0 hidden)
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