I have a professor who alleges that the real “culprits” in the falling prices and the financial crisis is the role of stock market speculators. He blames hedge funds, and he has quoted Warren Buffett that they are the cancer of the markets as manipulating market prices especially oil. He likens back the beginning of this crisis to the stock market crash with the Great Depression which he also said was driven by speculation in the markets. According to him regulation is needed.
I disagree vehemently with my professor, who by the way is an engineering professor and has no formal background in economics in finance, in that it is the role of the government particularly the Federal Reserve that has driven this crisis. I am curious though about the role of speculation. How can the price of oil rise and fall so dramatically when over a short time period supply and demand have been pretty steady? Do hedge funds have the clout to swing the market as dramatically as he alleges and bring it down?
Could you elaborate more? What’s causing the drop in demand for oil, the current economic situation? Does speculation and major hedge fund entities have significant clout in moving the market?
I would have to agree with your professor. Hedge funds is nothing more than Las Vegas in Wall Street. No real economy and normal market can swing the price of oil from 147 down to 46. This is only possible done trough the use of “derivatives”…many more times the size of the real economy. About 30-50 trillions were unaccounted for just 3 months ago.
your professor might not be properly educated in economics/finance but sure he does have common sense.
deflation hits hard in a credit tightening scenario such as this. huge amounts of loans (which banks use as money) are going delinquent. when this happens the money that the bank conjured into existence goes poof. all that credit was fuel for people to drive up the prices of commodities. more money in circulation = higher rpices, less money = lower prices.
in addition as caesar mentions: much of this money was highly leveraged against the market, exacerbating the whole process.