Speculators: Good or Evil?

Everybody -- politicians especially -- loves to rail about the evils of "speculators."   They must be the ones driving up the price of oil!  Back in the spring, as gas prices were accelerating toward their current highs, President Obama joined the usual chorus, blaming the price run-up on speculators and proposing new restrictions on oil trading as the fix.

From Business Week, April 19, 2012:

On Tuesday, President Obama announced he wants Congress to increase the amount of collateral that traders have to post to buy a futures contract. (It’s typically around 10 percent of the value of the total contract.) Obama also wants to give the CFTC an extra $52 million to pay closer attention to the oil market and dole out stiffer penalties to those who manipulate it: $10 million instead of the current $1 million. That assumes of course that the CFTC can find those manipulators.

The President isn't alone.  Eliot Spitzer was famous for cracking down on speculators.  And it's not just a liberal disease.  Bill O'Reilly of Fox News, for example, widely considered a conservative (although he would say an independent) regularly rails against speculators, particularly in the oil market.

It's all economic nonsense of course.  Here's a very smart letter that appeared in the Washington Post a few days ago.  The author is Don Boudreaux of Cafe Hayek.

Have you noticed the enormous increase in greedy speculation in the northeast over the past two days? It's quite something! In advance of hurricane Sandy, consumers are now artificially increasing the scarcity today of the likes of bottled water, canned goods, batteries, and medicines by stocking up on these goods.

And all of this self-interested speculation - done merely in anticipation of staple goods being much more scarce after Sandy strikes than they are today - is applauded and even encouraged by the news media and government leaders!

What gives? Many of the same people who today publicly encourage us to speculate ("Make sure your family has ample supplies of batteries!") are among the loudest critics of speculation at other times and in other markets.

But in fact the oil speculator who, say, buys oil today in anticipation of oil becoming more scarce tomorrow does just what a consumer does today in a supermarket in anticipation of a disruptive storm: both persons usefully transfer resources across time. They both stock up on resources that are today relatively abundant in order to preserve these resources for consumption at a time when they are relatively more scarce (and, hence, more precious). Both persons transfer resources from today - when the consumption of any one bottle of water or gallon of gasoline provides relatively less benefit - to tomorrow when the consumption of that same bottle of water or gallon of gasoline will provide relatively more benefit.

Anticipating the future and taking actions to allocate goods and services from times of relative abundance to times of relatively greater scarcity is an immensely useful activity. And we all perform such speculation whether or not we are popularly identified as "speculators."

Just to continue the application of the abstract concept to the more mundane, how do you feel about traders who "go short," that is, sell something they do not own?  Traders who "short" stocks and commodities regularly come in for attacks from politicians and prosecutors.  But every business "goes short" in something or other every day.  For example, consider the contractor you hire to build a new bathroom.  He promises to do the job for a fixed price, and only then goes out and buys the fixtures, hires the plumber, hires the tiler, etc.  Should it be illegal?