Speculators Don’t Drive

A couple of years ago a friend of mine told me he was selling his house in Irvine and buying a bigger nicer house in Villa Park.  The price tag?  2.3 million dollars.

I was quite certain the real estate market was overheated and believed housing prices were going to go down.  I warned housing would drop 30-40% and explained many people were getting into expensive homes seemingly beyond their means.  At the time I did not know that stated income loans were driving the phenomenon, but I did know people with less financial ability than I had were purchasing homes I could not afford.  My friend assured me real estate would never experience such a drastic drop as I had prognosticated.

I was speculating property values would drop; my friend was speculating that they would not.

Months ago our politicians and some media anchors began attacking oil companies for fixing the market and sticking it to the folks.  Today it seems that tack has given way to vilifying oil speculators who have driven the price of oil up to today’s criminal and arbitrary levels.

Congress is currently debating legislation to reign in speculators, ostensibly to control fuel prices.  If history is any teacher, these measures may very well exacerbate problems or become implemented long after the crisis has subsided, in both instances promoting unintended consequences.  U.S. policies have already had deleterious effect on almost all aspects of American manufacturing; is trading commodities another business we would prefer to take place in some other country beyond the reach of political legislation?

If speculation is bad shouldn’t it be eliminated completely?  If not, what specialized knowledge do legislators possess to effectively manage its course?  Why is a little speculation healthy, but a lot is not?

Speculators affect prices by anticipating what might happen in a market.  Anticipating market scarcities increases prices now so that there might be supply in the future.  Is this a mechanism we want to eliminate?

We all speculate.  I am speculating that I can buy a 5000 square foot house in California for less than a million bucks if I wait another year.  Futures traders speculate that our tumultuous world situation will cause a greater scarcity in the availability of oil.  Bill O’ Reilly speculates his attacks on oil speculators will reward him with better ratings, and Washington Congressmen are speculating if they can pin America’s energy mess on anyone other than themselves they might maintain their incumbencies.

If my speculation is driving down the cost of homes maybe Congress should legislate to make predatory buyers like me illegal!

Legislating over futures traders makes no economic sense, it only makes political sense.

While Congress debates the best legislative remedies for our housing crisis and the best legislative remedy for our energy crisis, home owners who acquired loans they couldn’t afford, and consumers irate over their fuel costs are clamoring to these lawmakers for answers.  These same lawmakers who demanded lenders loosen up their lending policies to help minorities and who demanded we don’t develop more energy production facilities here at home.

Speculators don’t drive crises but legislators do.  How crazy are we to expect the people who built our economic woes have the ability to lift us from them?

If there ever was an argument for smaller simpler government, this ought to be one.

Copyright 2008 Jim Pontillo