As the euro continues to hobble along, some bittersweet vindication for the economics profession in this story by Eduardo Porter. An excerpt:
Some two decades ago, when Europe’s leaders worked out the details of their grand vision to connect the European Union with a single currency, virtually every economist on this side of the Atlantic — and most of those on the other — figured out that the euro would be fatally flawed. What took economists some time to understand was that Europe’s leaders didn’t much care what they thought.
Virtually all economists – except for Robert Mundell, of course – as David Warsh points out here.
From Carpe Diem:
Since oil speculators got the blame for rising prices in February, do they now get the credit for falling oil prices in May? How exactly does the “speculators cause high oil prices”crowd now explain the falling oil prices? Do speculators somehow contribute to only rising prices, but not to falling prices? Do speculators only trade when prices are rising, but somehow exit the market suddenly when prices are falling? To be fair to speculators, it seems like the popular press should be giving them credit now for the falling oil and gas prices.
Via Greg Mankiw, an interesting remembrance of Milton Friedman including “the world according to Milton Friedman”. Here’s a sample:
1. Concentrated power is not rendered harmless by the good intentions of those who create it.
2. With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.
3. The case for prohibiting drugs is exactly as strong and as weak as the case for prohibiting people from overeating.
4. If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.
Let’s take a look, for example, at NYMEX trading in the May crude oil futures contract. A single contract, if held to maturity, would require the seller to deliver 1,000 barrels of oil in Cushing, OK some time in the month of May. Last Friday, 227,000 contracts were traded corresponding to 227 million barrels of oil, which is indeed a large multiple of daily production. But it is worth noting that at the end of Friday, total open interest– the number of contracts people actually held as of the end of the day– was only 128,000 contracts, much smaller than the total number of trades during the day, and not much changed from the total open interest as of the end of Thursday. Many of the traders who bought a contract on Friday turned around and sold that same contract later in the day. If the purchase in the morning is argued to have driven the price up, one would think that the sale in the afternoon would bring the price back down. It is unclear by what mechanism Representative Kennedy maintains that the combined effect of a purchase and subsequent sale produces any net effect on the price. But the only way he gets big numbers like this is to count the purchase and subsequent sale of the same contract by the same person as two different trades.
President Obama today proposed new measures to curb oil speculation, which he seems to believe will help “protect consumers.”
Unfortunately, that dog won’t hunt; there is little chance that any such crackdown will have any material impact on gas prices.
As Paul Krugman once explained:
Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?
The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.
Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.
Some hopeful news regarding the education system back in my home state:
Louisiana’s new laws will essentially give all parents an average of $8,500 to use for their child’s education as they see fit. They can keep their child in their local public school, but they can also try to get Johnny into a more demanding charter school, or a virtual school, or into special language or career-training courses, among other options.