Tuesday, July 15, 2008

Ode to the Speculator

Somebody in the Democratic Congress distributed talking points to the caucus, instructing them to blame speculators for high gasoline prices. This was good politics: most voters don't understand the function of a speculator, and it's always cathartic to blame someone one doesn't understand for events beyond one's control.

Not everyone, of course, is fooled as easily as the Democratic base. Robert Novak and many others in the MSM have called Harry Reid's bluff: all the experts they talk to affirm that forces far bigger than speculation are at work, and the prices we see are a product of rigid supply and growing demand.

But there's more to the story. Speculators are not merely uselessly annoying profiteers: they're very valuable profiteers, who do the rest of us a great service. They love risk (relatively) and they are willing to buy it on free markets. Their trading implicitly prices the risk, and tells the rest of us what to expect in the future. Obviously, their predictive power is imperfect, but it's better than other so-called experts': the speculators let their money do the talking, and stand to lose millions if they are wrong.

A Midwest farmer must decide in spring what grains to provide six months later - he can't change his mind at harvest time. Effective futures markets let him know that the world expects cheap wheat and expensive soy (for example) in the fall, and he plants soy. He benefits from higher profits, and consumers benefit too.

Likewise a Texas oilman may wonder whether it's worth plumping for new pumps - oil futures can help him make the most informed decision possible. If oil's going up, we'll appreciate the Texan's well-oiled machinery, and profit from a transaction that might not have been possible without futures speculators.

Suppose there were future markets on the homes in your neighborhood. You could check the prices and see what people expect a home to be worth 5, 10, 20 years from now. You could even decide to get "real estate insurance" by forward-selling your home. But you'd need a speculator - somebody willing to buy a house in the future for a payment today.

So don't blame speculators for problems you don't understand. Instead, thank them that gasoline isn't even more expensive - if it weren't for yesteryear's speculators, we might be paying $5 at the pump already.

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