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That's the argument I hear from trader friends, to which I respond, the people who produce wheat/iron/cheddar and the people who consume wheat/iron/cheddar can

That's the argument I hear from trader friends, to which I respond, the people who produce wheat/iron/cheddar and the people who consume wheat/iron/cheddar can figure that out perfectly well in the absence of speculators and high frequency trading. Your other points are well taken, but I do think Krugman is largely referring to equities, and I sort of parrot part of the argument made by Mark Cuban in the following link without sharing how I got to that line of thinking: http://blogmaverick.com/2008/09/08/talking-stocks-and-money/ http://blogmaverick.com/2008/09/08/talking-stocks-and-money/

tptacek 16y ago
There are tens of thousands of consumers and tens of thousands of producers for many commodities. Each of them have different cash flow demands and different tolerances for risk. All of them operate in a world that creates risk. Sure, products could still be moved without all the market's actors. But they'd move at inferior prices, jackpotting some producers and bankrupting others by sheer chance with little opportunity for smart producers to mitigate (or even profit from) risks. Even pure speculators serve a purpose in the market; if nobody wants to hedge a risk or lock in a price by dealing with them, they can't succeed; if people do want to do that, the speculator is providing a service to them. This, by the way, isn't any great insight on my part; it's the first chapter in any book that explains futures and options.
- joshklein 16y ago
  Absolutely agreed - speculators make the market more efficient. But why is it that this is the only half of the equation included in the chapter? All the negative impacts of speculators are left out of chapter one, the rest of the book, and the next twenty more advanced texts? For such a clever & informed group, finance types like to quantify their positive contributions and qualitatively dismiss their negative contributions ("there are -some-inefficiencies when...") We lose a lot of peak potential value when we depress high finance's ability to leverage and exploit markets, but we also shave off the deepest parts of the trough we inevitably fall into when the "markets" swing back the other way. History suggests we shouldn't consider the boom-bust cycle as part of our inevitable march forward; sometimes, you bust big enough and you reach your day of reckoning. Why is it a given that this cycle needs to be so dramatic?

tptacek 16y ago

There are tens of thousands of consumers and tens of thousands of producers for many commodities. Each of them have different cash flow demands and different tolerances for risk. All of them operate in a world that creates risk. Sure, products could still be moved without all the market's actors. But they'd move at inferior prices, jackpotting some producers and bankrupting others by sheer chance with little opportunity for smart producers to mitigate (or even profit from) risks. Even pure speculators serve a purpose in the market; if nobody wants to hedge a risk or lock in a price by dealing with them, they can't succeed; if people do want to do that, the speculator is providing a service to them. This, by the way, isn't any great insight on my part; it's the first chapter in any book that explains futures and options.

joshklein 16y ago
Absolutely agreed - speculators make the market more efficient. But why is it that this is the only half of the equation included in the chapter? All the negative impacts of speculators are left out of chapter one, the rest of the book, and the next twenty more advanced texts? For such a clever & informed group, finance types like to quantify their positive contributions and qualitatively dismiss their negative contributions ("there are -some-inefficiencies when...") We lose a lot of peak potential value when we depress high finance's ability to leverage and exploit markets, but we also shave off the deepest parts of the trough we inevitably fall into when the "markets" swing back the other way. History suggests we shouldn't consider the boom-bust cycle as part of our inevitable march forward; sometimes, you bust big enough and you reach your day of reckoning. Why is it a given that this cycle needs to be so dramatic?