When economic change starts hurting people, dry analyses about market forces and supply and demand are not appealing. But a narrative about how some greedy people caused the problem for their own benefit grabs us by the throat and forces us to pay attention. We are wired to form mental models of economic problems in which there is a simple storyline. A sad or happy ending needs to be a direct effect of good or bad behavior by a cast or recognizable characters. Stories like that are much easier to understand, and gives us villains to blame just when we feel like blaming someone.
So few people think of the recent financial crisis as caused by general institutional features of markets, such as a regulatory environment and incentives that promoted excessive risk-taking. But many people think it was caused by greedy financiers who then turned around to take government money and pay themselves big bucks.
A venerable villain in pop economic understanding is the speculator. And the old guy's being frog-marched out again. On Tuesday news arrived that the CFTC (a government agency that regulates commodity trading) is putting out a report blaming speculators for the big rise in gas prices that occurred a year ago, and the volatility in oil prices since.
Politicians and commentators loudly blamed speculators for driving up the price of gas during its rise, but did not laud speculators for the later fallback. Back when he was only the presumptive Democratic presidential nominee, Barack Obama attacked market players who "artificially jack up the price of oil in order to secure short term profits." He proposed, according to his campaign, to "crack down on excessive energy speculation" through new regulation.
No surprise, perhaps, but how about populist conservative commentator Bill O'Reilly, who attacked speculators and `big oil' for playing a `rigged game' to rip off working Americans. O'Reilly endorsed proposals to virtually ban oil speculation (take that, free markets!), and Senator Joe Lieberman has proposed to ban futures trading by institutional investors. The "Stop Excessive Speculation Act," introduced by Democrats in Congress was designed to introduce various new restrictions on oil trading. And yesterday CFTC Chair Gary Gensler has called for new limits on speculative trading.
Last year the eagerness to blame everything bad on speculators reached the point where the SEC, in an emergency order, placed new restrictions on certain forms of short selling just in case they might be used to manipulate markets. Never mind that market manipulation is already illegal, and that long-trading can be used to manipulate prices too; the speculative flavor of short selling makes it an easy target for blame.
Watch out: scapegoating is the first refuge of a failed argument.
‘Speculation' in energy is just an unpleasant word for making deals to trade oil. How would blocking such deals make us better off? The public debate gives only the most simplistic answers to this question, based upon a morality play in which ordinary folks are hurt by greedy speculators who must be reined in and scolded.
To his credit, as Republican candidate for President, John McCain, was willing to attribute high oil prices to supply and demand conditions more than speculation, but even he called for "a thorough investigation."
Conspiracy theories and spasms of anger against speculators are of course as old as markets. During bear markets for stocks and bull markets for commodities, investors and consumers assuage their pain by finding someone to blame. During bad times, conspiracy theories often take on a xenophobic flavor, as with the rumors in the U.S during the 1930s that the U.S. stock market was brought down by a conspiracy of foreign speculators, and the 1997 condemnation of George Soros as a Jew by the Malaysian government and newspapers for his currency speculation during the Asian financial crisis.
Right now feelings of malice toward speculators will, most likely, cause bad policy and inefficiency, as discussed, for example, by Robert Murphy at EconLog. Bad enough. At other times in history it has helped contribute to ethnic hatred and murder.
Next time: the medieval history of vilification of speculators; speculators as the bearers of ill tidings.
