Wednesday, February 29, 2012

Quote of the Week

For this week's Quote of the Week, I was tempted to pull something from a terrific guest post on Barry Ritholtz's Big Picture blog on the myth of "liquidity" in capital markets, especially as it pertains to high-frequency trading. It's a must-read if you have any interest in financial markets (these days, it's frankly irresponsible not to), and I suggest you take a minute to peruse it--it's short.

But I'm going to turn my attention elsewhere, namely Washington, where the drumbeat of election season is getting louder by the day (which generally means truth is in short supply). You may have noticed that oil and gas prices are on the rise lately (I wonder why?), which of course is threatening to become a pretty big campaign issue. Enter Nancy Pelosi, that brilliant financial mind, with your Quote of the Week.


"Wall Street profiteering, not oil shortages, is the cause of the price spike... Unfortunately, Republicans have chosen to protect the interests of Wall Street speculators and oil companies instead of the interests of working Americans by obstructing the agencies with the responsibility of enforcing consumer protection laws."
                          - House Minority Leader Nancy Pelosi

Sigh... here we are again, blaming those faceless "speculators" for ruining the economy. You see, the problem with this whole line of reasoning is that we only vilify so-called "speculators" (they're usually hedge funds, but since the biggest funds are trading with primarily pension fund money, it's really your pension fund doing the speculating... but that's a discussion for another day) when they cause markets to move in ways that we find inconvenient.

Nobody's blaming "speculators" for doubling the price of the S&P 500 in two years, because we generally like that outcome. But when those same investors (I refuse to actually call them "speculators", because it's just so intellectually dishonest) put their money into commodities like oil, corn, sugar, and wheat, it's suddenly a huge economic problem that requires swift action.

The problem is, it's Fed policies that caused all of this--pension funds need to consistently meet overly rosy annual return assumptions in order to remain solvent, and when you drive interest rates low enough, they therefore need to pile into any and every other asset class in order to attempt to meet those assumptions. Sometimes they pile into equities, which our economic central planners love. Other times, they pile into commodities, which those same planners vilify. BUT THEY'RE THE SAME PEOPLE.

When you choose to inflate the money supply as a way to "stimulate the economy" (read: bail out reckless fiscal policy), you will inflate all asset prices. Ultimately, you can't pick and choose which assets appreciate and which don't, and it becomes a bit of a zero-sum game economically speaking. This is why I've spent so many words here railing against Fed policy, but government hacks like Pelosi still don't get it and choose instead to fall back on stale campaign rhetoric. This is gonna be a long and frustrating year for me, isn't it?

[The Hill]

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