Letters to the Editor
mitch
Published Letters: 42 Editor's Choice: 26
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how deep?
[Read the article: Amaranth's Enron connection]
[Read more letters about this article: Here]There are some interesting connections here, but I wonder how deep they go.
In the oversimplified Econ 1 perfect competition model, attempts at market manipulation don't work out. This appears to form a big part of the rationale for deregulation ("the market will police itself").
Of course, real world markets are never quite like that Econ 1 model. In California's electricity market, for example, maintaining the integrity of the grid made for substantial externalities. The difficulty of storing electricity means that when anyone puts in or takes out large amounts of energy it affects everyone else. Enron exploited those externalities, like with their "Death Star" strategy where they'd overschedule energy deliveries and then get paid by the ISO to relieve the congestion.
My question is, to what extent are OTC commodity markets vulnerable to manipulations like those? Natural gas is hard to store, yes, but it's easier than with electricity. Is it possible for market participants in natural gas to affect some kind of gas "grid"? Or is the short-run price inelasticity of natural gas enough for people to manipulate the market with? Or are there other manipulation possibilities?
Also, one of the main reasons for regulation in equity markets is information asymmetry--if I'm selling you stock in my company, I know more about the stock than you do. Laws that require SEC filings help lessen that asymmetry and limit the extent to which people can pump a bad stock. With commodities, though, the fact that what's being traded is highly standardized means there's less of an information problem. It's easy to define what "light sweet crude" means in a contract--compare that to the nebulousness of shares in Big Stu's Super Duper Corporation.
The opaqueness of hedge funds certainly obscures the relatively-concrete underlying commodity trades, and may create its own information problem. But if that's the real trouble, then the answer is hedge fund regulation, rather than commodity market regulation.
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both
[Read the article: No rest for the richest]
[Read more letters about this article: Here]Recognizing the goodness of enormous gains in wealth over time, and recognizing the badness of current and (if trends continue) future inequality aren't mutually exclusive.
Materially, things are better now than they were in feudal times. Equality-wise, things are better now than they were in the feudal system, as well.
I think there's a causal link there--that more equality helps the material progress side of things. It's like we've taken a big chunk of those serfs and given them (us) access to education and resources, and the fantastic wealth that we enjoy today is one of the results of that.
If we let the current trends of increasing inequality continue, the material progress that we've made is in jeopardy. The more people we freeze out, the more human capital is wasted. So I'd be inclined to read those gee-whiz wealth stories as supporting the equality argument, rather than the other way around. I'd like to see more people making that case in so many words, though.
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:-)
[Read the article: Greenspan and the speculators]
[Read more letters about this article: Here]I think it's amusing that these hedge fund traders were listening to the peak oil crowd. I like to imagine a suited, slick-haired guy wrinkling his nose at a long-haired, sandal-wearing guy as they pass in the street, and then the suit goes into his office and trades based on reading the long-hair's peak oil web page.
Seriously, though, the bottom will drop out of prices only if they're both completely wrong. Oil prices have come down some, but historically they're still quite high, and the current price is still plenty high enough to sustain lots of alt-energy possibilities that weren't viable in the 90s. And the fact that prices were higher over a period of time really has encouraged a lot of research and investment, and some of that increase was due to speculation.
As for Amaranth, I'm glad that it's the aggressive greedy people who took it in the shorts. I'd say that Amaranth took one for the team by spending a lot of money to drive prices up and encourage research into alternatives. Those high prices haven't had much of an effect on the core CPI.
There are a lot of people out there with longer time horizons than Amaranth who are making smarter investments, like this guy:
http://www.wired.com/wired/archive/14.10/ethanol.html
Oil going from $74 to $60 might slow some of these things down, but it's not going to stop them all.
If all of the environmentalists who complain about the short-sightedness of capitalism put their money (and/or time) where their mouth is and invested in their favorite alternative, we'd solve these problems a lot faster. If they make the right bet they can even do pretty well. The problem is that they're mostly technophobes who don't think we're capable of solving our problems.
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hard to do
[Read the article: Pick a winner, any winner]
[Read more letters about this article: Here]Sure, you probably don't want Energy Secretary Samuel Bodman deciding which synthetic enzyme is the best bet for achieving cost-effective cellulosic ethanol, but you probably do want a government that decides that the public welfare requires government incentives for the entire alternative energy sector.
That would be nice, but it's tricky to implement. How do you give incentives to an entire sector, without unduly favoring any of the approaches? If the government is going to do this, someone in government has to decide exactly how the incentives should be allocated, and that decision is hard to make and is often subject to political pressure. We have ethanol subsidies mainly because of farm-state senators.
Point being, "picking winners" is often what ends up happening with incentive programs, even when you try not to.
What I'd like to see is for the price of fossil fuels to reflect their true cost, including global warming and the military costs we've incurred in oil-producing nations. That's politically difficult, especially in the US, but I'm optimistic about getting a legislature and a president in the next few years who'll ratify Kyoto. So we may be able to make some progress.
If that starts to happen, then alternative energy will naturally become more competitive.