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Futures Trading: Out of Control? May 6, 2008

Posted by davidzweig in economics, ethics, food, Oil.
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Indian politicians are almost quaking about civil unrest due to inflation, particularly as it applies to food. India already has banned futures trading on rice and wheat, and is actively considering suspending all trading on contracts for other foodstuffs as well.

As with the housing bubble/securitization collapse, the role of financial speculation ought to be under intense scrutiny. Economics textbooks will tell you that futures play a valuable part in helping producers hedge their potential losses due to price swings. If that were all futures did–help dampen the extremes of the market and make life more secure for producers–we’d be much better off. But any tool can be a weapon, and futures trading is likely wreaking much more havoc than benefit. It’s a lot like the mortgage speculators who haven’t a clue who or what is behind the loans they’re slicing and dicing. How far we’ve strayed from the good old savings and loan! How many of these arriviste wheat futurists have ever driven a combine?

As with municipal bond auctions, mortgage securitization and underwriting, wise guys (a different kind of mafia) got involved and perverted entire classes of financial instruments. In all these markets, to what extent did they inroduce abnormalities? In no case do we really know. How much are they distorting the market now? Again, we don’t know. Who is doing this? We’re not exactly sure. Where will they take the market? We haven’t a clue.

We do know that millions are suffering. From an ethical perspective, driving up the cost of food and oil causes mass misery. It raises the odds of political unrest in a world that sits on dry kindling without the speculators’ flipping lit matches for fun and profit. One suspects at this very moment that speculators reap obscene profits from financial dealing that is well past the inflection point of any positive benefit.

India’s crackdown on the financial markets sound like the banal proposal to suspend of U.S. gas tax–political theater of zero positive value that stalls realistic solutions to serious problems. Around the world, countries are banning and taxing food exports, taking more supply off the markets. In the long run, this cannot beĀ  good.

The world would sleep more safely tonight if we could cancel speculators out of all these equations. We cannnot.

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