Three Cheers for Speculators!

Location Date: 
November 8, 2011

Last week, Neil Mohindra, the Director at the Centre for Financial Policy Studies at the Fraser Institute, penned an Op-Ed that appeared in the National Post.

In this piece, Mohindra noted the recent “attacks” on speculators (I prefer the term “trader”), particularly in the area of commodities. The recent CFTC rule is an example of regulators attempting to curb “excessive speculation” with a policy that may prove counterproductive. You see, it is the CFTC’s official view that the run-up in 2008 oil prices to all-time highs was the result of those nasty speculators. It is clear that this piece of Dodd-Frank is politics for the sake of politics. Anybody with a modicum of sense could tell you that oil and virtually all commodities served as outlets for the “paper-driven” financial crisis. Nevertheless, over the course of this year, margin requirements have been continually changed in a haphazard way – mostly to the detriment of the impact the change was to achieve. Much like the ineffectiveness of short-selling bans, liquidity is actually reduced.

The recent case of MF Global is a good example of excessive speculation and poor management. The company goes bust and we move on. Not surprisingly everyone turned their attention to Jeffries forcing the company into unprecedented disclosure – good news! This is the market’s way of handling the situation and ferreting out issues. Of course, when it comes to the “too big to fail banks”, tighter and more effective regulation is likely needed. This is unfortunate. Wall Street clearly let down virtually all of its stakeholders, save for a few at the top of the pyramid. With Bank of Canada Governor Mark Carney now in charge of the Financial Stability Board, look for the U.S. and global banks to press their case once again. Indeed, New York City Mayor Bloomberg and others are promoting the idea that the banks and investment dealers were merely victims of the crash!! Bloggers like Barry Ritholtz are posting on this misperception, reminding everyone that there is plenty of blame to go around.

My view is that Glass-Steagall worked - bring it back – and separate the banking (my deposits) from trading. Leverged trading is the domain of hedge funds, investment banks, private investors, etc. You know, the ones, like MF Global, that do not get a bailout. At the very least, the Fed and others will need to monitor the big banks much more closely. Mr. Carney will have a tough job. Nissim Taleb, in the New York Times today, suggests that “it’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever.” He goes on to quote Hammurabi’s code, which specified this: “If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”

Wow - that is a tough bargaining position!

Jim McGovern

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