I mostly lost patience with the Big Dog a long time ago, but this kind of honesty is refreshing:
“On derivatives, yeah I think they (Rubin and Summers) were wrong and I think I was wrong to take [their advice] because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don’t need any extra protection, and any extra transparency. The money they’re putting up guarantees them transparency,” Clinton told me.
“And the flaw in that argument,” Clinton added, “was that first of all sometimes people with a lot of money make stupid decisions and make it without transparency.”
[….]Clinton said he regretted not trying to regulate derivatives, but that Republicans would have stood in the way. “Now, I think if I had tried to regulate them because the Republicans were the majority in the Congress, they would have stopped it. But I wish I should have been caught trying. I mean, that was a mistake I made.”
I’m not a Summers-hater or a Rubin-hater. But there should be a consensus that they screwed the pooch on CDO regulation.
El Cid
Dirty stinking hippie fringe extremist Clinton-hater Bill Clinton. Pffft.
Ron Beasley
Sorry, I am a Summers and a Rubin hater – they are almost as toxic as Dick Armey.
El Cid
By the way,
Isn’t it only a “mistake” when people with a lot of money lose money on a “stupid decision”? If they make an astronomical shitload, whether or not the nation’s or world’s economy tanks, how is that a “mistake”?
sven
MaybeProbably I am just a weirdo but I really would like to see a thread discussing the sudden surge by the Liberal-Democrats in the UK. For the last year have sensed the MSM readying ‘liberalism in retreat’ stories to be published if the Conservative Party won in the UK. (The UK is a centre right nation after all) Now, many polls have the Liberal-Democrats surging and the U.S. media is shockingly mum on the subject. I can’t tell you how happy a surprise upset would make me!Anyhow, I demand thread!
beltane
@sven: Andrew Sullivan has been following this closely. He has been rooting for the Tories, but not with the same amount of passion he reserves for Iran, the Pope Benedict, and Sarah Palin.
I would love for the Liberal Democrats to shock everyone by winning, if only for the opportunity to see our media hustle as hard as they can to downplay it.
DougJ
@sven:
I will do a thread on this later tonight.
Mike Kay
If the Liberal Democrats oust Gordon Brown, that could only be great news for McCain
cat48
Sarkozy’s party was trounced by liberal Soshlists in last month’s elections. Can’t remember the party names.
chrismealy
The first step is admitting that you have a problem. No, really! I’m glad Clinton fessed up.
sven
@beltane: Thanks for the tip, I will check-out Sully’s coverage!
I’m also rooting for LD, especially since recent polling suggests their gains are coming at the expense of the Conservatives not and not Labour. The BBC seems to think the result might be a hung government with no single party holding a majority of seats in parliament. An LD/Labour coalition government might be an interesting experiment, at least for a foreigner like me!
Mike Kay
@El Cid:
Actually, before becoming president, he was head of the hippie-punching DLC.
martha
And I would add to this Martha’s corollary, which is that people with a lot of money assume their buddies will protect them from doing stupid things. I mean, after all, once you’ve made it into the club won’t the good ol’ boys protect you? /snark
I give him credit for saying this, but he drank the Kool-aid that all the Masters of the Universe constantly serve: they’re smarter than we are and they know best. Baloney.
Mark S.
One thing that didn’t get much play from Taibbi’s Goldman Sachs article (which doesn’t seem to be online anymore) was that speculating caused the oil spike in 2008. There seems to be some support for this. I always figured that was the case, since the price of something shouldn’t go up 250% unless there was a sever shock or something.
I don’t read a lot of business and finance stuff, so I don’t know if the financial regulation bill deals with any of this, but it obviously should. Shit, you would think politicians would at least be interested in not having the price of oil double or triple.
mr. whipple
All the financial deregulators are fuckups.
PeakVT
I’m not a Summers-hater or a Rubin-hater.
I hate the fact that they have failed upward. Though, sometimes I’m lazy and just hate them in general.
Pat
So why is Robert Reich still vlogging from his basement?
Sly
@sven:
There’s a reason for that. Clegg isn’t your typical hippy Lib Dem. He’s more Ron Paul than Dennis Kucinich, if you want to inelegantly force it into American political terms.
sven
More analysis on the UK parliamentary election.
Daily Telegraph
Poll Tracker Tool
h/t for both links to Andrew Sullivan
and thanks again to beltane for pointing me in that direction.
Loneoak
Since there’s a Beasley on the thread, I should give this a linky:
JK Rowling on why she’ll never be a Tory. Basically, she had enough slut shaming for being a single mother to last a life time, and doesn’t want anyone else to suffer through it even though she’s economically a typical Tory voter now. It’s as solid a defense of liberalism as I’ve seen in a long time.
sven
@Sly: Thanks for the info!
If anyone else has insight or links on the UK elections I’d love to hear them. (If DougJ posts on this topic I will also be following there.\)
Dan
A president hires people that he trusts and would be wise to listen to them. A president can’t know everything. They have to trust advisers. OTOH, whenever there’s money, I think it should be regulated.
handy
@Loneoak: She’s obviously a George Soros/Al Gore limousine liberal type who hates her own class. I bet she flies to global warming conferences in a private jet!
toujoursdan
@sven:
Given that the Tories are currently polling around 33%, that means 2/3rds are planning to vote for the two left-of-centre parties. At best the Tories could have a minority (or hung) government.
Doesn’t sound very centrist to me.
But American MSM doesn’t understand how multiparty democracies work anyway. The U.S. isn’t one.
Sly
@Mark S.:
If it’s not cost-push (a petroleum shortage or OPEC embargo) or demand-pull (a sudden spike in oil consumption), you can bet there’s some funny business going on in terms of speculation. People like Krugman had doubts initially in 2008, but when supplies of oil increased last summer and the price was still going up, a lot those doubts were laid to rest.
hidflect
@sven: Agree. I’ve been suffering from a weird disconnect for some time. All I hear is Labour vs. Conservative when all the time the party I think I like is almost never mentioned. That DC hack Paul Begala wrote an article on The Daily Beast declaring Brown the winner of the debate and got torn apart in the comments for his troubles. He never even mentioned LibDems until way down the piece. The photo was only of Brown and Cameron… talk about clueless and out of touch. It seems to Beltway insiders the issue is celebrity, not representation. “I never heard of Clegg… must be some kinda Ross Perot wannabe..”
hidflect
@DougJ: Good one!
Sly
@sven:
YW.
I’m a bit skeptical of there being a hung parliament. The Lib Dem electorate is pretty evenly spread across the country, and the UK uses a first-past-the-post system. What this has generally meant is that the share of seats the Lib Dems (and other “third parties”) get is disproportionately low to their nationwide vote. They got something like 25% of the national vote in 2005, but only 10% of the seats because mostly what they did was dilute the votes from other parties in each race. They might get 30% in one place, but if Labour gets 50% and the Tories get 20%, that 30% is meaningless. If we had a large third party in the US, the same thing would happen to it.
Which is why the Lib Dems want more proportional representation. If they ever do manage to become a kingmaker, that will likely be the first thing they demand (and which is likely the reason why Brown and Cameron are all complaining about the possibility of a hung parliament right about now).
LongHairedWeirdo
The CDO regulation wasn’t the issue, though it did play into things.
A CDO is just a way of slicing up an investment into bonds. It’s not a big deal. “You lend me money, I invest it.” The problem here was that the CDOs were rated AAA – top notch, like lending money to IBM or Disney – when they were junk. *That* should have been regulated, but it wasn’t CDOs per se, it was debt rating.
It’s the derivatives – the CDSes (Credit Default Swaps) that killed everything. They’re insurance on the bonds. The insurance company promises to pay you in the event of a default (hence, a “default swap” – you swap the default with the insurance company).
The CDSes themselves weren’t the problem. The problem was, essentially, they were too cheap, and were sold too easily.
Someone bundles up mortgages into CDOs; the CDOs are rated too high; people buy CDSes against them, and then, when the CDOs turn out to be crap, the insurance company is on the hook for billions. It doesn’t have the billions to pay out – in fact, it *never* should have sold so many CDSes. If it had been life insurance, they’d have never gotten away with it – the insurance regulators would have said “you’re selling too many policies, and not holding enough assets to cover potential pay outs.” But it wasn’t life insurance – there were no regulations saying how much they had to have in assets to write the CDS policies.
But you’re right – it’s good to see people admit they fucked up, because, wow, did they ever.
JMY
Is it me or has Summers been relatively quiet for while now, compared to last year? He had a lot of liberals pissed off.
Rubin…he’s just a dick.
Mark S.
@Sly:
Why isn’t this ever an issue? A lot of this stuff make people’s heads spin (it does mine) but everybody notices when they are paying $4.50 at the pump. I’d like to see anyone make the argument that this is just the free market working its magic.
@LongHairedWeirdo:
I can’t believe what AIG was doing wasn’t regulated. Free markets really are magic.
sven
I just skimmed the Pocket Guide to Liberal Democratic Policies which lays out the LD vision of government in a user-friendly form. In the U.S. ‘centrist’ generally means split-the-difference if you are feeling generous or Republican-Lite if you are not. The Liberal-Democrats appear to be picking-and-choosing from more moderate and liberal positions rather than just going down the middle.
I’d love to hear impressions from the folks heading to the polls on how the LDs are perceived in the UK. Do most people think they are secretly more liberal (or conservative) than they are presenting themselves?
Allison W.
@JMY:
It’s not Summers that’s been quiet, it’s the Left that has stopped losing their minds over him as they saw that Obama didn’t give him the keys to the kingdom after all.
Roger Moore
@LongHairedWeirdo:
I think you get to the underlying problem below: CDSes were insurance but weren’t regulated that way (or at all, IIRC). It’s not just that they weren’t properly valued or covered with reserve capital. They were also sold as side bets to people who didn’t hold an interest in the underlying security. At that point, you’re leaving the realm of investment and heading into pure gambling.
salacious crumb
How can one not be a Rubin hater? I mean the guy still refuses to even acknowledge that his advice and financial belief system was one of many reasons that led to the financial collapse. He probably puts more faith and credence into the belief that Alf was responsible for the financial wreckage than the atmosphere of deregulation. He has not changed his thinking even one bit since that collapse and I suspect he is still giving Geithner the same advice is gave to Bill when he was President.
Sly
@Mark S.:
My pat answer is that economics is seen as “too hard” and people generally don’t pay attention when it is taught at the HS and university level. The bigger problem is that a lot of Social Studies teachers don’t know shit about economics when it is well within their discipline (though lots of academic economists might cringe at that notion).
A more complex answer is that the simple axioms that the right likes to employ make an intuitive kind of sense. They “feel” like the correct answer, but aren’t because economics is woven in a lot of counter-intuitive concepts. When everyone saves money, everyone loses money. When you tax everyone evenly, you only grant economic mobility to a few. You can’t predict intrinsic values with much accuracy (if at all), but you can make very accurate predictions on relative values.
I personally don’t blame people for not trying to understanding it. Especially when most economists mask their ideas behind a wall of mumbo-jumbo that is virtually impenetrable against critical analysis (and makes for a pretty decent sleep-aid).
It is the free market, though. Speculators are free to make bets on the prices of commodities (whether physical or financial) and this has the effect of driving up the price when the price isn’t fixed. Buy it all up and wait for a sucker, who thinks the price is going up because of some non-speculative demand, who will take it off your hands. The problem is that this is a bad aspect of the free market, and ideologues can’t accept that the free market produces any liabilities.
Svensker
Don’t think you should be talking about screwing the pooch and Big Dog in the same sentence. It’s just wrong.
J. Michael Neal
@Mark S.:
Fine. For one thing, when Sly talks about, “supplies of oil increased last summer and the price was still going up,” he’s being disingenuous. Between May 1st and the end of August, prices went from about $54 a barrel to about $70. A year earlier, they ranged from $110 to $150. Gas wasn’t $4.50 a gallon last summer.
I won’t argue that there was no speculation involved in the big spike in oil prices, but the evidence is not very strong that it was more than a part of it. It should also not surprise anyone that there is a lot of speculation in oil these days, because it’s guaranteed to be extremely volatile these days. That’s also why a lot of speculators lost a lot of money in oil, too.
The reason that it’s so volatile is the same reason that we can get huge price swings in a free market: we’re pumping the stuff at pretty much maximum capacity, while demand hovers in the neighborhood of that supply. It takes only very small shift in demand to produce enormous swings in price, since the elasticity of demand is small over the short run, and supply can’t increase in response to prices in the short run, either.
Welcome to peak oil. It’s going to be like that every time demand creeps up. There’s going to be a lot of speculation that goes along with it, and it’s going to be difficult to determine which is the cart and which is the horse.
Then again, there’s nothing contradictory between a free market and speculation. The fortunate thing about oil is that speculation can’t prop prices up forever, because you have to take physical delivery eventually.
DougL (frmrly: Conservatively Liberal)
@LongHairedWeirdo:
The selling and bundling of a product that was known to be crap and the rating of that crap as triple-A allowed Goldman and their types to rape the buyer while betting on a sure win via the insurance they paid for on something that they knew would flop.
They created worthless paper, sold it to unwitting buyers and insured it knowing it would fail. They knowingly ripped people off at both ends of the spectrum and proudly paid themselves handsome bonuses, end of story.
Oh, they infiltrated and bought off our government to do it. Too.
J. Michael Neal
@DougL (frmrly: Conservatively Liberal):
This is wrong. The paper put together by Goldman wasn’t sold to unwitting buyers. Your average investor couldn’t get anywhere close to it. Neither could most atypical investors. Overwhelmingly, it was purchased by banks, insurance companies and other professionals. They don’t get to claim that they were unwitting. They were colossally stupid, I agree, but they don’t have a valid excuse. Goldman didn’t have any more information about the state of the housing industry than they did. There may have been fraud with regards to specific assets, but the general problem was that everyone, including people who should have known better, bought into the hype of housing never goes down.
DougJ
@salacious crumb:
Well, I think it’s complicated. The Clinton economy was pretty damned good. I don’t know how much credit Rubin gets for that. Maybe it’s none. But until I sort that out, I’m not a Rubin-hater.
DougL (frmrly: Conservatively Liberal)
What I have read about this ‘scam’ is not what you are claiming. What about the pension monies invested? What about large private investors? Regardless of that, it is clear from the suit that the SEC is bringing against GS, they KNEW the crap was crap. They KNEW that insuring it was a sure bet. They LIED about how it was assembled. They FAILED to disclose to the investors that Paulson & Co. specifically built the package with the intent of shorting it.
This was a total failure that was sold to the buyers as a safe bet. GS found a way to profit while nearly everyone else lost. The whole thing was a LIE from start to finish.
I am sure that there were many who knew that the whole thing was a game of musical chairs and still kept playing even while the chairs were nearly all gone. But I am just as sure that there are a lot of innocent investors who got their asses deliberately handed to them.
The whole thing was little more than a giant Ponzi scheme using the housing and CRE markets to rip the public off, of course it was going to fail. It was orchestrated theft that got horribly out of hand.
Ron Beasley
@Loneoak: I saw that and you are
right correct. She actually remembers that she wrote the first book on “the dole”, she’s now richer than the queen and doesn’t mind paying the country back. In other words she’s not a sociopath.Sly
@J. Michael Neal:
I didn’t say the price was going up relative to the year before. Of course it wasn’t. I said the price was still going up relative to recent spikes in supply:
“People like Krugman had doubts initially in 2008, but when supplies of oil increased last summer and the price was still going up, a lot those doubts were laid to rest.”
I might not have been crystal clear, but it’s probably best to check first before making accusations like “disingenuous”.
And, to be explicit, if the CFTC regulated the futures market in oil like it did with every other commodities market, I don’t think that the PPB would go down to its marginal cost. Since they’ve introduced new rules on “illegitimate” hedgers back in January, we’ll probably get some idea of how big a chunk the price increases are due to speculation when the summer hits.
J. Michael Neal
@Sly: Define a “recent spike in supply.” Consider me skeptical that the new rules are making much of a difference given that we have oil in the mid 80s range during April of a recession.
Paul Gottlieb
As Clinton himself says, it was a mistake not to regulate the derivatives market. But to be fair, the notional value of derivative being traded it 1995 was much less than 1% of the notional value being traded in 2006.
J. Michael Neal
@DougL (frmrly: Conservatively Liberal):
Yes, this is why I said that fraud was a factor in individual deals. However, it does not explain why so many people were so eager to buy crappy mortgages as late as 2007.
You MUST keep in mind who was actually making these trades with Goldman. I have a hard time seeing the trading desk at Deutsche Bank as a bunch of innocent investors. The people who run pension funds are supposed to know what they are doing, rather than being led like lambs to the slaughter.
Goldman wasn’t ripping off the public. They were ripping off other banks, and insurance companies, and other people who have ZERO business claiming that they had no idea what was going on. They should be prosecuted as hard as possible, but spare me the victimology of a bunch of people who ought to know what they were doing. Yes, there was the odd small town in Scandanavia that got hammered, but that simply wasn’t who bought most of what Goldman, or others, was selling. The people who run CALPERS aren’t a bunch of victims here. The people depending upon CALPERS to pay their pensions are, but their very first beef should be with the clueless morons that were in charge there, because they were grossly incompetent in ever chasing the returns into mortgage backed securities. They are fucking professionals, and should be able to analyze the state of the housing market themselves. If they can’t, they have no business running a giant pension fund, and, if they can, they had no business buying into those securities, even if they were exactly what Goldman was marketing.
If you are someone who can get that kind of a job, and you invest in risky securities, don’t start bitching that you’re a victim when it turns out they have risk in them. Start with not deluding yourself as to how much risk you should have known you were buying. When people in this positions start behaving as if they can get big returns with minimal risk, they’ve set themselves up. They would have gotten killed even absent fraud.
These idiots killed themselves, and now have you believing that, if only Goldman hadn’t been a bunch of thieves, they’d have been fine. Bullshit. Goldman is a bunch of thieves, but that wasn’t their underlying problem. They were trying to load up on toxic mortgages after getting themselves to believe that they weren’t toxic. No one who wasn’t lying to themselves, which is, admittedly, a despairingly small percentage of the professional investor class, should have been buying the securities described in Goldman’s marketing materials unless they had an extremely high risk tolerance. In other words, a pension fund or an insurance company shouldn’t have gotten anywhere near them. But they did.
And now you’re falling for their sob story, and calling them a bunch of innocent investors. It was their job not to be so damned innocent. That’s why *they* were collecting money from CALPERS, or AIG.
Sly
@J. Michael Neal:
I’m referring to the approximately 90 million barrels that investment banks purchased the spot market in the fall of 2008 after the price dropped, kept it in tankers while the price was in contango, then sold it last summer.
I have to dig up a few of the articles (they were all from a year ago, so forgive me if I don’t know them all off the top of my head), but I think that this was actually what convinced people who believed oil speculation was impossible. I know for a fact that Krugman stated, flat out, that hoarding oil through futures couldn’t be done and wasn’t being observed. But there it was, in a string of tanker ships that stretched close to 30 miles long, making a beeline for the eastern seaboard.
My point, however, is that this sale had no discernible impact, IIRC, on the PPB. 90 million barrels is not lot in terms of world petroleum consumption, but no impact at all? That seems incredibly fishy to me.
As for the CTFC, I don’t think we’ll see anything major in terms of results until the summer, for a variety of reasons (the biggest being is thats when the price between spot and futures traditionally starts moving into backwardation).
Sly
@DougL (frmrly: Conservatively Liberal):
I’ll echo what J. Michael Neal said, and add that the herd mentality plays a huge role among professional investors. If someone is putting their money in a particular instrument and it appears that they’re either getting or bound to get a safe and large return, they’ll be a feeding frenzy. And they’ll lie to themselves to justify it. “Housing prices will always go up.” “The Tech Boom will never subside.” “It’s 1924 and I have a lot of money… I think I’ll do what everyone else is doing and buy Florida real estate. What could go wrong?”
Maude
Clinton isn’t fessing up. He is blaming Rubin and Summers for giving him bad advice. Oh, and that mean and nasty Congress that would have prevented him from doing the right thing.
He only talks about it now because he doesn’t want any of the blame for the suffering so many people are going through.
He was supposed to be so smart.
He has a photographic memory and yet, he didn’t remember the S&L crisis.
He didn’t remember that Congress allowed S&Ls to speculate, something that they had never been able to do before the 1980’s.
The timing on this non apology is interesting. Nothing will happen to Clinton as a result of this. He’s made his millions.
The legislation now being discussed in Congress is going to undo most of the damage that Clinton signed into law.
DougL (frmrly: Conservatively Liberal)
@J. Michael Neal:
Ok, if I understand what you are saying it is that they didn’t get ripped off because they should have known better. Is that right? When GS failed to tell the investors that Paulson & Co. had selected the package with the intent of it failing, that was ok because the investors should have known better because the deal was too good to be true. Or something like that.
I guess that’s one way to look at it. Everybody was doing it so they were all equally guilty. Or at least guilty to some degree, thus they deserved what they got (or didn’t). I don’t agree but we are allowed to differ on interpretation of events.
Regarding my use of “they” in the Ponzi scheme line above I meant “they” as everyone who had a hand in this clusterfuck, not just GS. The banks, mortgage brokers, ratings agencies, investment firms and such. I shouldn’t have use a broad-brush line when the subject was on what one company has done.
HeartlandLiberal
Larry Summers.
Ah, that would be the Larry Summers from Harvard who managed to so totally screw up finances at Harvard that their endowment lost $1.8 million in value.
How Larry Summers Lost Harvard 18 Million
Harvard Ignored Warnings About Investments
Summers also has gained many close friends among those of the female persuasion with his remarks while at Harvard.
Honestly, Obama’s appointments to handle the fiscal crisis have been his greatest shortcoming, as far as I am concerned.
They seem to have basically been an act of putting the foxes in charge of the hen house, as my Granddaddy would have said.
SRW1
@cat48:
Sarkozy’s party (UPM) was crushed by REGIONAL COALITIONS of parties to its left, not by a single party. The French election system, while also based on first past the post, is usually carried out in two ballots, unless one party or candidate manages an outright absolute majority in the first ballot. If, as most often happens, that is not the case, there is a second ballot one week later.
In between the two ballots, parties are allowed to form coalitions by merging their lists. The biggest party in the regional coalitions beating Sarkozy’s UPM and its allies were the socialists, but as a party, support for the socialists remains below that of Sarkozy’s UPM.
El Cid
On the relation between oil price and speculation, House and Senate investigators have a view, and have fairly consistently concluded that speculation is a major factor in determining the price of oil:
Brien Jackson
@PeakVT:
In what way did Rubin and Summers fail upwards?
As for derivatives, I don’t know about Rubin, but Summers has acknowledged that he was wrong about them in the late 90’s, for what that’s worth.
Pat
Ah, that would be the Larry Summers from Harvard who managed to so totally screw up finances at Harvard that their endowment lost $1.8 million in value.
That anecdote from Salmon makes it sound like Summers was in complete control of the endowment while the committee stood by and wrung its hands, “talking him down” to 80%. I find it hard to believe that a bunch of super-rich venture capitalists would take a university president’s advice let alone put him in charge, former Treasury or no.
Redleg
And at least Clinton will own up to some of his mistakes.
J. Michael Neal
@DougL (frmrly: Conservatively Liberal):
No, that is absolutely wrong. Goldman did rip a bunch of people off. My point is that the ripping off was secondary to the real problem. Even if Goldman had NOT ripped them off, and delivered exactly what was described in the marketing materials, those investors would have lost a ridiculous amount of money. Maybe not quite as much, but more then enough to cause a crisis. The ripping off was real, but it was neither necessary nor sufficient to create the financial collapse.
People who focus on making systemic changes to prevent Goldman from ripping anyone off again are completely and totally missing the point. If ripping people off were the only problem, then the litigation system would be sufficient to deal with it. If Goldman Sachs sells a fraudulent deal, then the SEC investigates, as it has here, and brings action. There may be a huge problem for some players in the market, but there isn’t a systemic problem that crashes the world economy, or even the local one.
The changes we need to make are the ones that will prevent a large number of idiots who completely underprice risk from turning their stupidity into our problem. The crisis aspect of all of this wasn’t caused on the sell side; it was almost entirely a buy side issue. That’s where the fix needs to be.
Of course, the people on the buy side don’t want you to do that. They want to sell you a story that they were just the innocent dupes of fraudulent sellers, and you’re more than happy to believe them. So, apparently, is everyone else. Compare the number of posts we get in which the host screams about how evil Goldman is compared to the number we get screaming what a complete moron any professional who decided to buy endless amounts of this crap was. The stories about the small towns in Norway who went bust only feed into this. Yes, those people are legitimate victims, but the big problem there wasn’t so much fraud as that they had no idea what they were doing. They were also only a very small fraction of the buyers, and are not at all representative of what happened. It’s a case where focusing on the human interest part of the story means you completely lose sight of what happened.
What really happened was that a lot of sophisticated people, who were paid large sums of money to be sophisticated, turned off their critical faculties and decided that they’d found a way to make high returns at low risk. It’s EXACTLY the same problem as with the folks who invested in Pets.com. They were just as wrong, but for higher stakes. They aren’t victims, except of their own hubris.
J. Michael Neal
@Sly: The big problem with your story isn’t that 90 million barrels isn’t a lot of oil. It’s that the timing is all wrong. Your evidence for price speculation driving the oil market is that prices went up when speculators were selling. That doesn’t make any sense. Far from showing what you claim, it just shows that, IF speculators were driving up the price, they had to buy an additional 90 million barrels to do so.
I see two possible sequences of events, neither of which support your thesis very well. The first, and I think less likely, is that these particular speculators did help drive the oil spike of 2008 by buying up this supply and stashing it on tankers. The reason this doesn’t support your thesis is that it’s something of a self-correcting problem. In this hypothesis, you have a bunch of speculators who bought north of $100 a barrel, and sold at about $50, while paying a year’s worth of tanker fees in the process. It isn’t very often that someone gets rich this way, and it’s probably a cautionary tale to the speculators rather than the rest of us.
The other possibility is that they bought the oil over the winter of 2008-09 after the price had tanked and the recession started to drive down what it cost to rent the tankers. If they timed it right, the speculators made money this way, though not a whole lot, unless their timing was exquisite. The problem for your thesis is that it provides evidence that speculation is not what drives oil prices. If speculators are buying while the price is going down, and selling while the price is going up, any effect that they are having on the market is clearly overwhelmed by other things. It would mean that any effect that they have on prices is only on the margin.
As I said, I suspect that speculation did play a role in the late stages of the big, multiyear run up in prices. As with fraud in the securities market, though, I think it was far more effect than it was cause. Absent some evidence of people taking tankers off the market for years long stretches, the boom lasted far too long for it to have been primarily speculative in nature. I don’t know exactly what Krugman said about oil speculation, but my claim is that it isn’t possible over the long run. Yes, it is possible in the short run, but the only way it can continue to be a driver is if someone is taking physical oil off the market, and not just bidding up prices. I haven’t seen anything indicating that people were doing that near the peak, rather than as a bright idea once the price to rent tankers had already collapsed.
If speculators played a key role in the price of oil over the summer of 2008, I don’t think it really mattered all that much in the big picture. In and of itself, $4.50 gas doesn’t bother me that much, since I think we need higher prices to encourage conservation. Any damage to the over all economy caused by high oil prices was probably already baked in over the previous five years, rather than happening because of four months of an even higher spike. Any worries about speculators being rent seekers collecting money off the rest of us by driving up prices is largely alleviated because most of these same people, unless they’re really good at market timing, gave that money back to the rest of us in the form of losses when the price collapsed.
Making money speculating in oil is hard. I’ve done it, and probably come out slightly ahead overall, but it’s not for the faint of heart. I was trading vol as much as I was trading delta, but the same rules apply.