President
Obama's re-election prospects rise and fall with the price of oil. Yet
he clings to policies that have caused prices at the gas pump to
skyrocket. Our President's response to this crisis which reaches into
every American home is his typical one to any adversity: find someone to blame. This time, the villains are "big oil" and "speculators."
Obama does not know his onions, according to Bruce Bartlett (staff director of the Joint Economic Committee of Congress and deputy assistant secretary for economic policy at the Treasury Department under Bush). In 1958, Michigan farmers successfully lobbied Congress to ban future trading in onions. Onions, it turns out were driving farmers crazy by doubling in price one day and then dropping below the cost of growing them. Onions are the only commodity for which trading is banned.
So what happened to the price of onions? Without speculators, their price swung even more wildly. This makes complete sense according to how markets work, as Bartlett explains:
Obama does not know his onions, according to Bruce Bartlett (staff director of the Joint Economic Committee of Congress and deputy assistant secretary for economic policy at the Treasury Department under Bush). In 1958, Michigan farmers successfully lobbied Congress to ban future trading in onions. Onions, it turns out were driving farmers crazy by doubling in price one day and then dropping below the cost of growing them. Onions are the only commodity for which trading is banned.
So what happened to the price of onions? Without speculators, their price swung even more wildly. This makes complete sense according to how markets work, as Bartlett explains:
This stands to reason. Speculators make their money by anticipating price changes. If they anticipate future shortages, they will buy now and bid up prices. If they anticipate a future surplus, they will sell now and put downward pressure on prices. Thus the whole purpose of commodity speculation is to moderate volatility -- raising prices when they would otherwise be lower and reducing them when they would naturally be higher.
As the famous economist Milton Friedman once explained, the only way speculators could possibly increase commodity price volatility is if they are systematically wrong -- buying high and selling low, which is the opposite of how they try to behave and make a profit. If they were wrong too often they would lose money and go out of business.
Said Friedman, "Speculation is stabilizing rather than the reverse.... People who argue that speculation is generally destabilizing seldom realize that this is largely equivalent to saying that speculators lose money."
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