jayjayjay1212

New Game, New Rules

The US government was caught up in a losing proposition, that is choosing between a potential financial collapse or taking on an insane amount of risky debt (with taxpayer money and without their consent) by bailing out the big banks that might cause ''systemic risk'' if they were allowed to fail.

No matter what the government did, it would have faced strong criticism. The problems is in the savage capitalism system advocated by Milton Friedman. Each firm has so much pressure to exceed profit estimates that OF COURSE they will take on more risk (CEOs also get bigger bonuses when the profits are record-breaking). Had Friedman gotten his way, there would probably be no government to bail out the Wall Street fat cats, and we'd be plunged in a fear-induced negative spiral that could lead to something as bad as the 1930s.

The assumptions behind the pure market theory (RATIONAL economic agents and PERFECT information, for example) are flawed, and let's hope the government realizes that and goes for a better capitalist system like the one they have in Scandinavia.

Now the government is forced to socialize all the losses to the common taxpayer.

The Oil Bubble Will Meet the Same Fate as Tech, Housing

Very good article.

I don't agree with the 40$ oil statement about industry insiders (Boone Pickens, an insider, sees it at 100$), but still the article is very insightful.

Speculators have an essential role in the oil market, but the so-called index investors (mostly large passive pension funds who look for the diversification benefits of investing in commodities) do not. Index investors do not serve a specific purpose on the market; they only put upward pressure on the price of the barrel that is unfortunately not always corrected by speculators. This has the effect of transfering wealth from net oil importing countries to net exporting countries.

Explanation:

The portfolio of the pension fund that invests in oil will get greater benefits from diversification, but it comes at the expense of its clients (us, individuals) paying significantly more at the pump. Therefore it's actually a very unprofitable and short-sighted strategy by pension funds to invest in oil futures, since their clients lose a lot more than they gain from it!

It would be nice, but unlikely, to see the US government regulate the index investors, and letting speculators do their job.