Political Games at CFTC - Pinning the Tail on the "Speculators"

[The Minsky Moment]

http://www.bloomberg.com/apps/news?pid=20601087&sid=amPhY4F6FFAs

Last year, the CFTC issued a report that said what common sense and basic Econ 101 would suggest - that traders in commodity swaps and futures markets and "index trackers" were not responsible for the run-up in commodity spot prices.

CFTC has a new chairman now, however, and the new chairman doesn't like that answer.  So CFTC is going to gin up a new report that says what its new master wants.  And they are holding a three ring circus of hearings where various cranks and interested parties can air their speculator conspiracy theories.  This is all red meat for the Michael Moore wing of the congressional democrats (and others who should know better) who are itching to slap on some newly minted regulations and crow to their constituents about how they took on the evil speculators who wanted them to pay more for gas.

Of course, because commodities are fungible and global, and because commodities trading requires only a moderately capitalized exchange with good phone and data connections, there is nothing the CFTC or Congress can do to stop speculative trading in commodities markets.   All they can do is influence whether it happens in Chicago and New York where there is at least some transparency, and where American-based exchanges get the benefit of the transaction flow, or whether it moves on to places to Dubai. 

[Jaron]

I found this article utterly uninspiring. When we're in a time in bad need of change and action, why are we squabbling over theory and what if?

[Admiral Yi]

I thought it was understood that speculators drove up the price of oil.

If you want us to get worked up over the CFTC regulating the wrong group of speculators you should probably explain some terms like index tracker Joansky.

[The Minsky Moment]

I thought it was understood that speculators drove up the price of oil.

And then they drove it right down again, those bastards!

If you want us to get worked up over the CFTC regulating the wrong group of speculators you should probably explain some terms like index tracker Joansky.

index tracker = a fund (like a mutual fund) that tracks a basket of commodities prices.  Basically just like you could use a mutual fund to get exposure to and invest in a broad array of stocks, you can buy into a similar fund for commodities.  This makes more sense for a retail investor than buying and juggling futures contracts in various metals, oil types, etc.

[Admiral Yi]

Do you have a different explanation for the spike in crude prices?

[DGuller]

I thought it was understood that speculators drove up the price of oil.

And then they drove it right down again, those bastards!

That can be easily explained.  They drove up the prices in the dying days of the asset bubble, and then the prices plummeted right along with the prices of other assets once margin calls came in.

[alfred russel]

I don't understand the idea that speculators were driving the price up absent an increase in inventory or something really bizarre in futures markets. I read a point of view from a couple months ago that the current price of oil is potentially being inflated by speculators, but there was little evidence the run up was (this was based on inventories).

[alfred russel]

Do you have a different explanation for the spike in crude prices?

Inelastic demand + constrained supply + rapidly increasing demand + expectations of increasing demand continuing long term?

[Admiral Yi]

Inelastic demand + constrained supply + rapidly increasing demand + expectations of increasing demand continuing long term?

Demand didn't increase 100% in a couple of months.

[alfred russel]

Inelastic demand + constrained supply + rapidly increasing demand + expectations of increasing demand continuing long term?

Demand didn't increase 100% in a couple of months.

If demand is inelastic, a small increase in demand can produce a large increase in price.

[KRonn]

CFTC has a new chairman now, however, and the new chairman doesn't like that answer.  So CFTC is going to gin up a new report that says what its new master wants.  And they are holding a three ring circus of hearings where various cranks and interested parties can air their speculator conspiracy theories.  This is all red meat for the Michael Moore wing of the congressional democrats (and others who should know better) who are itching to slap on some newly minted regulations and crow to their constituents about how they took on the evil speculators who wanted them to pay more for gas.

So this appears to be more Kangaroo court type proceedings and direction.   

[Admiral Yi]

If demand is inelastic, a small increase in demand can produce a large increase in price.

If demand and supply are extremely inelastic then what you are describing can happen.  But demand is elastic.  We saw it in the US: prices went up, driving went down. 

And if you want to ascribe the spike to changes in market conditions you can't escape the fact that price rose abruptly whereas demand has been increasing gradually and steadily.  If 500 million Chinese had bought new cars in the summer of 08 you might have something.

[alfred russel]

If demand is inelastic, a small increase in demand can produce a large increase in price.

If demand and supply are extremely inelastic then what you are describing can happen.  But demand is elastic.  We saw it in the US: prices went up, driving went down. 

And if you want to ascribe the spike to changes in market conditions you can't escape the fact that price rose abruptly whereas demand has been increasing gradually and steadily.  If 500 million Chinese had bought new cars in the summer of 08 you might have something.

Demand is very inelastic in the short term: driving miles went down slightly while prices doubled.

[alfred russel]

Do you have a different explanation for the spike in crude prices?

Inelastic demand + constrained supply + rapidly increasing demand + expectations of increasing demand continuing long term?

+ rapid depreciation of the dollar

[Martinus]

Do you have a different explanation for the spike in crude prices?

Inelastic demand + constrained supply + rapidly increasing demand + expectations of increasing demand continuing long term?

+ rapid depreciation of the dollar

Pretty much. Commodity prices in Euro didn't really spike up - they rose but not as dramatically as in US$.