Wednesday, July 14, 2010

Oh, snap!...

(FWIW, I'm trying to litter my conversation with up-to-date conversational aphorisms)

So economists at the Universities of [Areas of] Illinois produced a report for the OECD showing speculators were not guilty in the commodity 2008 markets, and that regulation would cripple their essentially beneficent presence in the marketplace.
Professors Scott Irwin, of the University of Illinois, and Dwight Sanders, of the University of Southern Illinois found the amount of money flowing into commodity index funds increased substantially in the period from 2006 to 2008. But although this increase represents a major structural change in investor participation in agricultural commodities futures, it has not increased price volatility, according to the study.

The paper said there is “no convincing evidence that positions held by index traders or swap dealers impact market returns.


“These results tilt the weight of the evidence even further in favour of the argument that index funds did not cause a bubble in commodity futures prices.” [More]
Then an economist bar brawl breaks out.
Last week, OECD published a report co-authored by two Illinois professors, Scot Irwin and Dwight Sanders. The report, entitled Speculation and Financial Fund Activity, purports to find statistical evidence that speculation played no role in generating the damaging volatility in food and energy prices witnessed during 2008-9. In fact, it claims that speculation by long-only index investors with no understanding of underlying supply and demand conditions actually helped reduce volatility, by providing liquidity.
The study and its findings can be disregarded for three reasons:
  1. The statistical methods applied are completely inappropriate for the data used.
  2. The study is contradicted by the findings of other studies that apply more appropriate statistical methods to the same data
  3. The overall analysis is superficial and easily refuted by looking at some basic facts. [More]
[Note: This is the economist equivalent of "Yo Mama!".]

But without trivializing further, it does strain credulity to suggest the immense wealth pouring into our relatively small markets did not distort the price-determining function.  The comment about the price of oil is telling, IMHO.

Worse by far is the idea that this study, even if flawed will be used as criticism against derivative market regulation which has widely been considered lacking.  Overall, it appears nobody know what the new regulations will mean to farmers.
The question for these farmers is whether such rules will make hedging more expensive. Some say new requirements on big players will create higher costs for small players, including the cash dealers will have to put aside to enter into private derivatives transactions. Some brokers think restrictions on big-money banks and investors will drain the amount of money available to the everyday deals farmers favor.
Others predict the opposite effect, pushing money from the private market to the exchanges and creating more competition that will benefit farmers. [More]
This account as well is open to valid criticism
It gets worse. For all the apparent handwringing about farmers and feedlots, the story then slips in this show-stopper:  "Faced with intense lobbying, Congress partially exempted businesses that use derivatives for commercial purposes. So, farmers and co-ops probably won't face new collateral requirements."
Say what?  Farmers and other end-users are exempt from the new rules?  Then why are we being subjected to this article?
The truth is that the only players who most certainly stand to lose are the big banks, like JP Morgan Chase and Goldman Sachs, that will have to either spin off their derivatives-trading operations or put them into separate subsidiaries that require higher capitalization.  [More]
 But here is my beef. If the criteria for good regulation is lower transaction costs for farmers, why not simply state that as the primary goal?  If it is for efficient markets, maybe it should cost more.

God knows, we've paid plenty for CDOs and other derivatives.

(I'll try to follow this contretemps and see if any light is shed)

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