Do they make markets more efficient, allow buyers and sellers to hedge risks, iron out huge price fluctuations etc?
Consider the price of NYC Crude oil, which has fluctuated from around $148 a barrel in July, to a low of $48 this November. Is this the result of speculators, and how can these huge oil price fluctuations be good for the Economy or businesses?
Then you have the collapse of Lehman Brothers and people blaming short sellers. Surely short sellers are not entirely to blame for plummeting Lehman’s share price?
Speculators try to guess future prices of commodities as accurately as possible in order to be able to trade commodity futures and other means of exchange for a personal profit. By doing that, they’re doing exactly what you’ve described: hedge risks, iron out price fluctuations and allow for more effective future planning.
It’s a result of the commodity bubble that had been created by a low interest, easy credit monetary policy of the Federal Reserve. As you may have noticed, commodity prices in general have been dropping for months. It’s not a flaw, but an achievement of the market to eventually wisen up to unsustainable investment practices and withdraw funds accordingly, causing prices to drop sharply.
Short sellers merely tried to make a profit in a very bad business situation. They utilized market information that indicated a rapidly plummeting business value to gain profits, thereby drawing attention to the miserable state of business LB was in, thus preventing bad investments.
Responsible for this bad situation are not short sellers themselves, but the management staff of Lehman Brothers and the Federal Reserve.
Oil didn’t cost $148 because of speculators. It cost $148 because of basic supply and demand. All of these people claiming that oil speculators have caused the price surge never provide any evidence showing that the inventories of speculators have increased. In fact, they never increased significantly, so they couldn’t have been the cause of the price surge.
That said, speculators provide a crucial service. They buy scarce resources now that will be scarcer in the future. When that resource is scarcer, they sell it. Thus, they are able to balance out price fluctuations and to control the rise in price of certain products.
I think the tendency of a free market is to make the economy more efficiant and do good for the economy as a whole. But I think it is wrong to point out one profession and ask “is this good for the economy?” since there are going to be some things that are just better and are just worse for the collective economy. Organic tomato growers might be better for the economy than oil speculators and I suspect that if I worked for ten years on a monograph I might just be able to prove that fact.
But the point is freedom. Freedom to speculate on oil and freedom to grow and sell tomatos that have not been touched with pesticides.
We need to predict future prices in order to be able to plan. By raising prices today they can prevent future shortages, or by lowering prices they can prevent over production.
Twirlcan, speculators are vital for the economy. Imagine what would happen to the poor in the winter if there was no speculation on corn, beans, wheat, barely, etc.