Position limits – have we learned nothing?

I can’t put my finger on it, but I know it’s all related. Writing about it definitely helps clarify, but then again, it makes me more flabergasted. I’m speak of the direction our policy – on multiple fronts - is headed.

From healthcare to contract law to trading, policy makers seem to believe that government and bureaucracies are the best allocators of resources, best sources of price discovery, and most efficient providers of services, while at the same time believing that increased regulation can encourage wage growth, competitiveness, and productivity. For fun, here’s an article, sent by a friend on the impact of some of these policies: http://victorhanson.com/articles/hanson071809.html.

Today, I won’t go into healthcare (although for those interested, there’s an interesting interview with Daniel Palestrant, CEO of Sermo, an online physician’s community, about the fact that the AMA is not accurately representing the doctors of this country: http://www.cnbc.com/id/15840232?video=1196233131&play=1. I spoke to Daniel and the interview doesn’t do their research justice, and his attack on Howard Dean only scratched the surface of the hypocracy of the current leadership.) Instead, I’ll mention that the current debates on The Hill about speculative limits in commodities scare me. In the 1970′s, with inflation running rampant, the Nixon administration, in its misdirected brilliance, decided to place price controls on everything from meat to lumber. Well, the small time players got hurt and the guys who were smarter went around the price controls and played in the futures markets. Now, we have a new administration thinking they need to control prices and better yet, control volatility. Well, someone should point out that speculators play on both sides; they provide better liquidity, more price discovery, and smaller spreads. Without speculators, hedgers wouldn’t be able to trade and everyone from small time farmers to large conglomerates like General Mills would face increased costs of business. In and of itself, more players do not lead to increased volatility – quite the contrary.

http://www.marketwatch.com/story//spotlight-on-goldman-as-commodities-hearings-begin-2009-07-28

So GS is on the hotseat again, this time for being too large a player in the hedging space. But that’s what they do. They provide an investment opportunity to pension plans and institutional players and then hedge. Should you place speculative limits? Fine, but let’s define speculation and hedging differently. Not all natural hedgers are pure hedgers. For example, many oil companies and airlines and producers take speculative risk beyond the positions their hedging. Same is true for “speculators”, some of whom are actually hedging different risks in their portfolios. The definitions, in my opinion, actually become so nuanced and convoluted as to be virtually irrelevant. I wish someone from GS would get up and say that and more importantly that someone in DC would listen.