Tuesday, April 3, 2012

Wyden Reveals Ideology Rather Than Competence

Recently, Senator Wyden press released on his "concern" about crude oil futures and other derivatives trading. I know the Senator has been in Washington for a long time, and thinks he is a Master of the Universe. And, living in the Senate, which has refused to pass a budget in three years, there's reason to believe that the Democrat Senators are in fact, our Masters. 

Yet, his lack of understanding of how markets work is illustrated by his own bold text, in the referred to press release:

In their letter, the lawmakers express concerns that commodity index funds, are “disrupting both our commodities markets and our economy.” They note that, “Commodity index funds are a relatively recent creation, but they are already having an outsized impact on our commodity markets,” and that “Through its control of commodity index funds, Wall Street is driving up gas and food prices and playing a sadly familiar game with the American consumer and small-business: heads I win, tails you lose.”

If only.

Speculators are horned deamons when it comes to Democrats. Not understanding how markets work, or how markets attempt to work, gives us monstrosities like Frank-Dodd. (Or, in Oregon, absurdities like Community Care Organizations, whose mission it is to decrease costs, by increasing the bureaucracy.)

Here's a quote from Macroeconomics: Theory and Policy (Macmillan Publishing, 1978, p. 301.)

"Speculation in the wheat market not only smooths out prices and consumption over the course of the year but over longer periods, too. A bumper crop in one year, due to unusually favorable weather, will lead to some price decline. But speculators, sensing (or guessing) that prices will be higher in subsequent years, buy wheat and thereby prevent as large a price decline as would otherwise have occurred. In the year of relatively small crop or unusually large consumption, prices rise: but, to the extent that stocks exist, the rise will be moderated by the release of inventories, to get the benefit of the higher-than normal prices * And so long as inventories last, prices will not rise above an upper limit beyond which no market participant believes the price can remain. It can go on higher--so long as price expectations are unchanged."

Gardner Ackley. 

This isn't some Spencerian social evolution devotee. Regulation, outlawing markets don't create market efficiencies. Sensing that there are some who are afraid of living their own lives, making their own businesses, taking responsibility for their own investments doesn't make highly touted law. This is pettifogging of the worst degree: taking a hard to understand concept, and making it the enemy.

Shame on Ron for doing this. Markets don't need shepherding of this type. This is populism writ large. What they don't understand, condemn.

But he's a Duck. What would you expect. (Give them books, and all they do is eat the covers.)

His full letter can be found here (.pdf.).

*"It is probably unnecessary to remind the reader that the wheat "speculator" ordinarily is a person who also has other interests in the wheat business--a farmer, a dealer, or a flour miller, for instance--who needs to hold inventories of wheat in connection with his other activities but can easily alter the size of his inventories in response to speculative conditions."


g said...

Scare the sheeple.

How else would a liberal sell their agenda.

Ten Mile Island said...

There are a lot of factors that can drive costs up. Excessive regulation is one of those cost-drivers.

Does someone need to explain to the Senator that purchasing certain intangibles is risky?