Our new blogging talent, Tanner Emkhe, sees right through the mess at the commodity exchanges. And he is not shy about explaining it to old cowboys like Steve Cornett.
And his answer is exactly the kind of free-market theory that prompted dismay at the Bear Stearns bailout and various mortgage crisis solutions being proposed. Interestingly, the over-regulated European markets are not seeing the damage we are. Could it be that government interference isn't per se bad?
It is instructive to compare the American financial mess with the economic situation in nations that resisted deregulation. Old Europe tends to get a scornful press in the United States. But Europe is not suffering a financial meltdown today - mainly because Europeans (with the exception of Britain and Switzerland) took only a few sips of the financial Kool-Aid so heavily promoted by US banks.One odd thing in this debate, however, is the unique focus on agriculture that ignores the larger economic trend. Tanner's solution - "force" banks to lend more - is based on a kind of dollar-for-dollar armaments race. What it ignores are a few tiny obstacles. First, I don't want to be the bearer of bad news, but there seems to be a bit of a GLOBAL CREDIT CRUNCH rumored to be going on. Banks cannot lend because their balance sheets are so impaired. Try selling some municipal bonds, for example. Let me put it simply - there is no money to lend.
A few European banks did get into trouble last summer, because they bought some toxic subprime securities made in America. But the European Central Bank, in its first real test since the Euro made its public debut in 2002, has performed well and the crisis has largely passed. Here, the Fed keeps lurching from bailout to bailout. [More]
So even if throwing "big money" is the right thing to do, the only place to get that kind of cash is from the government. Oh wait, that besmirches the purity of the free market with government interference. So Tanner's suggestion is a bit ingenuous. No government regulation, just government money. Sounds familiar.
Second, even if we could throw money at it, if the numbers are so huge behemoths like Cargill are simply saying "no", maybe we should respect their judgment. I'll bet they have a few finance and economic eggheads shouting "Stop digging the hole deeper!"
Tanner's solutions look good on a term paper, just like letting housing prices deflate 40% strikes many purists as the tough love needed for economic virtue to be reestablished here in the US. But it turns out the enormity of of economic system and the recovery time from such a debacle could be decades. Theoretical economic systemic solutions are crisp, elegant, and utterly oblivious to their collateral damages. Those of us with a horse in this race see it otherwise.
The commodity markets are not sacrosanct institutions ordained by Providence. They are man-made constructs with arcane and less than perfect rules. If we can adjust the rules to compensate for for economic conditions we have never encountered and never imagined, why shouldn't we?
Talking tough is easy, but insisting on arbitrary regulations simply because "rules are rules" while the walls are collapsing is not an optimal solution. That's why the Fed is acting in imaginative new ways, and why I support equal innovation in a market that is clearly laboring to function. Letting the chips fall where they may works for routine economic problems, but crises of this magnitude need to be handled with more attention. Often the chips are bigger and fall in unexpected places.
Steve's position strikes me a guy who has seen and felt a few chips, and watched other friends do so as well. Tanner's answer is politico-economic scripture. There are more choices between them than they might suspect, I think.