Comments on: Speculation http://taxesandbudget-blog.ncpa.org/speculation/ Insights on Taxes, Economic Policy, Federal Budget | NCPA Tue, 16 Mar 2010 17:24:04 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Cannon Jacques http://taxesandbudget-blog.ncpa.org/speculation/comment-page-1/#comment-10430 Cannon Jacques Fri, 17 Jul 2009 20:03:25 +0000 http://taxesandbudget-blog.ncpa.org/?p=1067#comment-10430 I would argue that speculation, per se, isn't what causes bubbles, and it's certainly not blind gambling in the same way that the lottery is. Speculators provide a market for non-speculators, or hedgers, to lock in a price for their physical goods, thus allowing them to transfer the risk of a price drop which could occur before the hedger is able to sell that good in the spot market. In this respect, speculators provide an invaluable liquidity for the market in general. Excessive run-ups in prices occur for a number of reasons. Much of it, at least in my opinion, has to do with the irrational actions inherent in frothy markets (i.e. the recent commodity/real estate bubble, internet bubble of the late 90's). At some point a significant group of investors ignore logic and determine that a market in question only moves in one direction. When we talk of some kind of intervention to stop such wild, and maybe unnecessary, swings in pricing, you have to wonder if the medicine is worse than the disease. If you're talking about a large government footprint, I would have to guess that a multitude of negative side effects will arise without even looking at the proposal. Speculators have a purpose. Smoothing out so-called excessive speculation may in fact be a worthy endeavor. However, it's not a problem that should be addressed without a ton of thought in regard to the unintended consequences rendered by the cure. I would argue that speculation, per se, isn’t what causes bubbles, and it’s certainly not blind gambling in the same way that the lottery is. Speculators provide a market for non-speculators, or hedgers, to lock in a price for their physical goods, thus allowing them to transfer the risk of a price drop which could occur before the hedger is able to sell that good in the spot market. In this respect, speculators provide an invaluable liquidity for the market in general.

Excessive run-ups in prices occur for a number of reasons. Much of it, at least in my opinion, has to do with the irrational actions inherent in frothy markets (i.e. the recent commodity/real estate bubble, internet bubble of the late 90’s). At some point a significant group of investors ignore logic and determine that a market in question only moves in one direction.

When we talk of some kind of intervention to stop such wild, and maybe unnecessary, swings in pricing, you have to wonder if the medicine is worse than the disease. If you’re talking about a large government footprint, I would have to guess that a multitude of negative side effects will arise without even looking at the proposal. Speculators have a purpose. Smoothing out so-called excessive speculation may in fact be a worthy endeavor. However, it’s not a problem that should be addressed without a ton of thought in regard to the unintended consequences rendered by the cure.

]]> By: mike norman http://taxesandbudget-blog.ncpa.org/speculation/comment-page-1/#comment-10412 mike norman Tue, 14 Jul 2009 19:25:47 +0000 http://taxesandbudget-blog.ncpa.org/?p=1067#comment-10412 Can't we say the same thing about gambling? A profitable gambler guesses right more often than he guesses wrong. An unprofitable gambler guesses wrong more often than he guesses right. Even if they don't make a profit they are trying. What this misses is hte fact that there are very real and very destructive social consequences to gambling. And there are very real and very destructive consequences to excessive speculation. Markets become distorted and, eventually, broken. Wild swings in the price of oil, from 15 to 150 then back to 30 and up again to 70 is not rational price discovery. It also makes the ability to lay off risk much harder as well. Can’t we say the same thing about gambling? A profitable gambler guesses right more often than he guesses wrong. An unprofitable gambler guesses wrong more often than he guesses right. Even if they don’t make a profit they are trying. What this misses is hte fact that there are very real and very destructive social consequences to gambling. And there are very real and very destructive consequences to excessive speculation. Markets become distorted and, eventually, broken. Wild swings in the price of oil, from 15 to 150 then back to 30 and up again to 70 is not rational price discovery. It also makes the ability to lay off risk much harder as well.

]]> By: Bob McTeer http://taxesandbudget-blog.ncpa.org/speculation/comment-page-1/#comment-10384 Bob McTeer Thu, 09 Jul 2009 14:33:18 +0000 http://taxesandbudget-blog.ncpa.org/?p=1067#comment-10384 Nemo I'll have to read up on it. Thanks for the link. I'm afraid my brief post was a confession that I haven't given thought to the matter for decades. Nemo

I’ll have to read up on it. Thanks for the link. I’m afraid my brief post was a confession that I haven’t given thought to the matter for decades.

]]> By: Nemo http://taxesandbudget-blog.ncpa.org/speculation/comment-page-1/#comment-10382 Nemo Wed, 08 Jul 2009 22:42:29 +0000 http://taxesandbudget-blog.ncpa.org/?p=1067#comment-10382 Not a fan of the Soros <a href="http://en.wikipedia.org/wiki/George_Soros#Reflexivity.2C_financial_markets.2C_and_economic_theory" rel="nofollow">reflexivity theory</a>, then? Not a fan of the Soros reflexivity theory, then?

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