Notes toward what will become my chapter 16.
1. speculative bubble in crude oil
a. spring and early summer -- Masters' testimony
b. late summer and fall -- why the bust?
c. what policy consequences?
2. history of ethanol subsidies
a. broad coalition forms by 2010
b. Grover Norquist
3. peak oil? plateau oil? abiogenic oil?
4. realities and fantasies
Back to 1a above.
There was a bubble in crude oil prices in the summer of 2008. Some observers thought this may have tipped the US into the financial crisis of that autumn. Let's discuss this.
One school of thought in May 2008 (expressed by witnesses in hearings that month before the Senate Committee on Homeland Security and Governmental Affairs) was thgat institutional investors and commodity-price indexes had just recently become important factors in the determination of commodity prices, including those for food and fuels.
The chain of cause and effect would then be this. Various Wall Street entities such as Dow Jones, Goldman Sachs, Standard & Poors, created innovative commodity futures indexes. This allowed people or institutions to bet on an increase in commodity prices without actually having to buy something specific like cotton, or to trade even in specific derivatives such as cotton futures. No, the "index speculators" preferred to bet on the whole asset class at once, seeing it as "uncorrelated" with either bonds or stocks, and thus as a valuable addition to the portfolio.
As Michael W. Master, managing member of a long/short hedge fund, told the Homeland Security Committee, what was new about the index speculators was that they weren't concerned with traditional notions such as price per unit. They had made a portfolio allocation decision, and would "buy as many futures contracts as they need[ed], at whatever price [was] necessary," until all of the portion of their money that they had allocated to the commodities asset class was at work there. Thus, this was a form of demand separate from physical or commercial demand/supply calculations.
On January 2007 the Commodity Futures Tradings Commission changed the way it broke down its "commitment of trader" numbers, creating a new category for the newly-prominent index funds.
It is possible, then, that the sharp rise in certain prices beginning that spring owed something to the new indexes and to the rise of a new class of index speculator.
It is also possible, and I suspect probable, that the sharp rise combined a small effect from the rise of index speculators and a larger rise from old-fashioned directional speculators who thought that the index speculators would be a huge factor and who wanted to be on the same side as them.
But ... what about the sudden decline?
Showing posts with label Commodity Futures Trading Commission. Show all posts
Showing posts with label Commodity Futures Trading Commission. Show all posts
06 May 2011
02 April 2011
Commodities and Their Derivatives
You'll remember that my March 12 blog entry consisted of a discussion of what is to become the fourth chapter of my proposed book as represented in the table of contents I provided in this blog on December 10, 2010. Now I move to the fifth chapter, about commodities and their derivatives.
This will make five points.
1. definition of terms
A commodity in the sense significant for this book is a physical (and usually a fungible) item of commerce. It is distinct from intangible goods such as patent rights, or a share of equity in a company. It is also usually distinct from any complicated manufactured item, such as a custom-built hot rod. Foods, metals, and natural fibers are all commodities.
2. Brief history of the derivatives exchanges
Commodity futures are the paradigmatic "derivatives." Birth of the Chicago Board of Trade. The CME and a cross-time rivalry. Imitators and developments.
3. Federal regulation up to 1974
Federal regulation of futures contracts began with the Futures Trading Act of 1921. Declared unconstitutional by SCOTUS later that year. How this decision was circumvented and the regulatory system established. Why it took another 50 years for the system to crystallize into the CFTC.
4. the OTC derivatives market and its challenge to the exchanges
One distinction between OTC and exchange trading involves the margin requirements of the latter: performance bonds that market participants must post, in amounts that vary in a way based on the risk and volatility of the product. In the OTC market there have long been no rules, so the parties negotiate their own collateral arrangements. Dodd-Frank. What happens next?
5. It is time now to deal with the spectre of speculation.
Speculation is not gambling. Why not? Because gambling creates its own risk for the sake of the game. A gambler puts money on how a pair of dice will land. Nobody would even bother rolling those dice unless somebody was putting money on them.
What about sports gambling? The game exists independent of the risk. We might suppose that basketball games will continue to take place even in a (hypothetical) world in which gambling on basketball comes to a quick and complete end. But the game itself is not a risk for the folks in Vegas putting their money on the line. It becomes a risk when they decide to accept that risk, both for the chance of profit and for the thrill.
How is that different from financial and commodity speculation? Consider orange juice futures, the subject of a memorable Eddie Murphy and Dan Ackroyd collaboration. These risks are not optional. Anyone investing in an orange grove, in the expectation of selling the fruit of his labors to the OJ market is taking enormous risks. The “dice” are meteorology on the one hand and fickle breakfasting-consumer preferences on the other. The producers can only hedge these risks to the extent that speculators are willing to take it from them.
6. Our first look at the CBOT/CME merger of 2007. We'll come back to this.
This will make five points.
1. definition of terms
A commodity in the sense significant for this book is a physical (and usually a fungible) item of commerce. It is distinct from intangible goods such as patent rights, or a share of equity in a company. It is also usually distinct from any complicated manufactured item, such as a custom-built hot rod. Foods, metals, and natural fibers are all commodities.
2. Brief history of the derivatives exchanges
Commodity futures are the paradigmatic "derivatives." Birth of the Chicago Board of Trade. The CME and a cross-time rivalry. Imitators and developments.
3. Federal regulation up to 1974
Federal regulation of futures contracts began with the Futures Trading Act of 1921. Declared unconstitutional by SCOTUS later that year. How this decision was circumvented and the regulatory system established. Why it took another 50 years for the system to crystallize into the CFTC.
4. the OTC derivatives market and its challenge to the exchanges
One distinction between OTC and exchange trading involves the margin requirements of the latter: performance bonds that market participants must post, in amounts that vary in a way based on the risk and volatility of the product. In the OTC market there have long been no rules, so the parties negotiate their own collateral arrangements. Dodd-Frank. What happens next?
5. It is time now to deal with the spectre of speculation.
Speculation is not gambling. Why not? Because gambling creates its own risk for the sake of the game. A gambler puts money on how a pair of dice will land. Nobody would even bother rolling those dice unless somebody was putting money on them.
What about sports gambling? The game exists independent of the risk. We might suppose that basketball games will continue to take place even in a (hypothetical) world in which gambling on basketball comes to a quick and complete end. But the game itself is not a risk for the folks in Vegas putting their money on the line. It becomes a risk when they decide to accept that risk, both for the chance of profit and for the thrill.
How is that different from financial and commodity speculation? Consider orange juice futures, the subject of a memorable Eddie Murphy and Dan Ackroyd collaboration. These risks are not optional. Anyone investing in an orange grove, in the expectation of selling the fruit of his labors to the OJ market is taking enormous risks. The “dice” are meteorology on the one hand and fickle breakfasting-consumer preferences on the other. The producers can only hedge these risks to the extent that speculators are willing to take it from them.
6. Our first look at the CBOT/CME merger of 2007. We'll come back to this.
29 March 2008
Filling the SEC posts
By statute, there are five SEC commissioners, and no more than three of them are supposed to be members of the same political party.
At the moment, there are three commissioners, all Republicans. Presumably, the President could name a Libertarian and a Green Party member to fill the vacant spots, just so long as he doesn't name any more Republicans.
Of course, the two major parties have an implicit compact to ignore the existence of any others, so given that pact it was always a near certainty that Mr. Bush would nominate two Democrats. The open question was one of timing -- how long would he let the SEC drift along understaffed rather than nominate Democrats? The second of the two Democrats to depart, Annette Nazareth, has been gone since the end of January.
The White House answered that question yesterday, naming Elisse Walter and Luis Aguilar as its nominees. Although anything is possible -- some skeleton could pop out of a closet -- there seems no great difficulty barring either of these nominees from a quick confirmation.
With due respect to Mr. Aguilar, Ms Walter is the more interesting of the two to me just now. She's a career regulator. She's been working of late at the NASD, which of course is a private organization. But her job there is to head the "regulatory policy and programs." So she's one of the securities industry's primary "self regulators," the folks who try to prove to the SEC that "everything's under control over here -- no need to make a fuss over us." That makes her a government regulator by proxy.
She was a full-fledged government regulator for two years, roughly the second half of Bill Clinton's first term, when she was a member of the SEC's sister agency, the Commodity Futures Trading Commission. That's the job she left in 1996 to take the post at NASD.
So what? As I've mentioned here a time or two, I'm an anarcho-capitalist. I'm no fan of either the CFTC or the SEC. They tend to cause the problems they pretend to cure. I say this not in a dogmatic ideological way but as a pragmatic conclusion from my understanding of the course of human history.
Thinking "within the box" though, I'd just as soon if we have to have regulators we take somebody right out of a trading pit, somebody who's career has been spent in a colorful jacket jumping up and down shouting "BUY! Soybeans BUY!" or whatever exactly they yell. Or that we pluck somebody from behind a computer screen where he's been doing the same thing without the pantomime.
Or (poor third best) if we must have lawyers in these agencies, we have lawyers who've spent their careers concerning themselves with the interests of the folks in the trading pits.
It distresses me that regulators spend their whole career as such, shuffling around from one regulatory agency (or its proxies) to another.
Bah, I say. Bah and humbug.
At the moment, there are three commissioners, all Republicans. Presumably, the President could name a Libertarian and a Green Party member to fill the vacant spots, just so long as he doesn't name any more Republicans.
Of course, the two major parties have an implicit compact to ignore the existence of any others, so given that pact it was always a near certainty that Mr. Bush would nominate two Democrats. The open question was one of timing -- how long would he let the SEC drift along understaffed rather than nominate Democrats? The second of the two Democrats to depart, Annette Nazareth, has been gone since the end of January.
The White House answered that question yesterday, naming Elisse Walter and Luis Aguilar as its nominees. Although anything is possible -- some skeleton could pop out of a closet -- there seems no great difficulty barring either of these nominees from a quick confirmation.
With due respect to Mr. Aguilar, Ms Walter is the more interesting of the two to me just now. She's a career regulator. She's been working of late at the NASD, which of course is a private organization. But her job there is to head the "regulatory policy and programs." So she's one of the securities industry's primary "self regulators," the folks who try to prove to the SEC that "everything's under control over here -- no need to make a fuss over us." That makes her a government regulator by proxy.
She was a full-fledged government regulator for two years, roughly the second half of Bill Clinton's first term, when she was a member of the SEC's sister agency, the Commodity Futures Trading Commission. That's the job she left in 1996 to take the post at NASD.
So what? As I've mentioned here a time or two, I'm an anarcho-capitalist. I'm no fan of either the CFTC or the SEC. They tend to cause the problems they pretend to cure. I say this not in a dogmatic ideological way but as a pragmatic conclusion from my understanding of the course of human history.
Thinking "within the box" though, I'd just as soon if we have to have regulators we take somebody right out of a trading pit, somebody who's career has been spent in a colorful jacket jumping up and down shouting "BUY! Soybeans BUY!" or whatever exactly they yell. Or that we pluck somebody from behind a computer screen where he's been doing the same thing without the pantomime.
Or (poor third best) if we must have lawyers in these agencies, we have lawyers who've spent their careers concerning themselves with the interests of the folks in the trading pits.
It distresses me that regulators spend their whole career as such, shuffling around from one regulatory agency (or its proxies) to another.
Bah, I say. Bah and humbug.
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