Business

Thursday February 26, 2009

Curbing excessive speculation

Making a Point - B Jadev Singh Sidhu


Ultra speculative elements have festered in the financial world

AMID the worry of further economic deterioration and huge sums of money being spent to combat the global economic crisis, baby but important steps are being taken to make sure there is no recurrence.

The European Union has moved to regulate hedge funds, rating agencies and other important financial market players, which may seem like a draconian step against free markets but is no different than what law makers have wanted to do from time to time.

Enacting legislation against hedge funds and curbing on speculation is not new. Cries to do something echoed loudly when prices of commodities skyrocketed as the world was told we would be running out of food and oil fast.

Seeing crude oil price at nearly US$150 a barrel just seven months ago, and hearing talk that it’s going to US$200 a barrel, was scary. But today’s oil price of below US$40 a barrel just shows how ridiculous prices of commodities were and how rampant speculation was.

And what purpose was there for hedge funds, speculators or “market makers” to buy tens of thousands of barrels of oil on the futures market when they are not the user or producer of that commodity? If there are limitations on what ordinary people can get access to or able to do, there should be curbs on financial intermediaries too.

However, urgency to act back then was not overwhelming as the world’s economy was going through a purple patch and was able to withstand such high prices.

Well, fast forward to today and the reasons for curbing ultra speculative elements stem from how they have festered in the financial world and created the financial bubble.

The repercussions are only now beginning to unfold and the cost - both financially and socially - is huge.

And this time, the stakes for inaction are much higher. Limiting speculative elements will ensure that households will be able to withstand another economic shock. High prices of essential goods now at a time when people’s wallets are squeezed could have catastrophic results.

Curbing speculation altogether will be detrimental as there needs to be a little room for such activity. Speculation in moderation maintains a balance but when money is being created out of thin air and the weight of leverage increases at the same time, like in the case with some of the financial instruments bankers on Wall Street were peddling around, then the balance of risk tips over.

Furthermore, the nature of hedge funds too has evolved over the years and taken a more speculative short-term thrust than say 10 or 20 years ago.

More regulations are being put in place to check financial activity is increasing. The investment banking model on Wall Street has been scaled back and governments are putting their financial systems under more regulatory scrutiny.

Putting the brakes on excessive speculative activity will steady the global economy once it recovers from its current shock and give the recovery a more stable foundation.

·Jagdev Singh Sidhu is a deputy news editor at The Star. He thinks that freedom to do anything, even to make money, will have its consequences.

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