Is it legal for the government to buy futures?

Is it legal for the government to buy futures?

A friend of my rants that it is illegal, but they do it anyway.

Don’t know who is right!

Geeze, I dunno.

The Federal Government does so many serious un-Constitutional things that I wouldn’t worry about “futures.” Instead, ask where the government gets its Constitutional authority for creating a Department of Education, or where it gets the Constitutional authority to force me to pay SS tax. That’s what **I[/] want to know.

I cannot see why it would be illegal. Another thing is whether it would be a good idea and in this I think it depends. Generally it is not a good idea for the government to be interveneing in the markets because they are not guided by the sound judgment of private investors, rather by political concerns. This is why it is not a good idea for the government to be investing SS money in the stock exchange.

At the same time, sometimes (seldom but sometimes) the government is justified in intervening. After all agriculture is totally intervened by the government even though I believe it should not be.

But I cannot see why it would be illegal for the government to buy stocks, or futures or $600 hammers.

Is this a rhetorical question, or do you really not know?

Article I, Section 8:

This is known as the “Elastic Clause” because of how far it’s been stretched. The 10th Amendment lost most of its bite during the Civil War:

I think we may be dangerously close to having a debate here, but WTH.

Being a strict constructionist, I interpret the so-called “Elastic Clause” (and the rest of the Constitution, for that matter) to mean that the federal government is allowed to make laws which are applicable only to those duties specifically enumerated in the Constitution. In other words, “if it doesn’t say you can, then you can’t”. Today, it seems as if 95% of people believe “if it doesn’t say you can’t, then you can”.

I find this to be quite troubling. So did James Madison.

I know…if you have to ask, but I must: Pardon my ignorance, but seriously, what is a “future” and where do you buy one? I guess it has something to do with future earnings? …of which I know not what I speak.

(The only future I had has since been sold out.)

I don’t mean to debate you, I’m just stating where the Feds claim to get the Constitutional authority to do what they do. AFAIK, the Supreme Court has upheld this view, so in practicality, that’s the way it is.

As I’ve read here recently (I think it was CKDextHavn), the US has far different governmental requirements than it did at inception. Our Federal Government has evolved slowly over the past 200 years to handle our demands, from a back-water nation on the fringes of “civilization” to a country of our size and complexity, and realistically a strict interpretation of the 10th Amendment would require some revolutionary changes, changes that most Americans would be unwilling to risk. Try running on a platform that eliminates Social Security and see how far you get…

Jinx: Futures are commodities, like gold, wheat, pork bellies, etc.

Let’s say you think oil is going to be worth $30 a barrel on March 1st, 2001.

You can buy that oil now before it even exists.

If the oil is then worth $35 dollars a barrel, come March 1st, you make $5 on each barrel you bought ahead of time.

You can buy futures on almost anything these days, even the entire market.

Some people in some economic forums I’ve seen have alleged the government is coming in and buying futures in order to manipulate the market, and they claim that this is illegal, not just unconstitutional, but that there are laws on the books that are supposed to prevent government agencies from doing this.

Still wondering…

Thanks, jmullaney. Goodness! As if the stock market and such isn’t confusing enough! So, in your example, do you own shares of this “commodity” before the March 1st date?
How is this any different from buying stock? Isn’t one simply betting the purchased stock is going to appreciate in value by a certain, undetermined date? Seems almost the same to me!

Also, if you buy a “future”, are you affected by whatever happens between the date of purchase and the future date? I mean, if oil drops -$5 (below the original purchase price) before March 1st and then rebounds +$5 on March 1st…do you take the loss in the interim, or are you “not in the game”, so to speak, yet?

It’s only money…

I’ll take a stab at making this clearer

No, a future is typically a contract to buy X amount of Y at price Z on the date(s) specified. It’s a form of risk management. Futures may be speculated on – make that commodities future prices may be speculated on but it is really a device to smooth out risk – for both the seller and the buyer.

Say you have a future contract to buy 100 mb of Petrol at $25/b. You entered into that contract a year ago and payed a premium over the extent price at the time (how much depends). That’s what you get now, regardless of subsequent changes. You don’t own a piece of that (a stock), you own (upon delivery of course) the petrol.

Why do it? Well, perhaps you need to supply your factory or whatzit for a certain time period and you’ve planned a certain cost. But you’re worried about volatility in the oil market and can not or do not want to chance significant deviations in the price. Paying a small (or modest) premium over the then current market price allows you to lock in a price, and merrily plan ahead without fear. Of course, when things hit $34/b you’re happy. If they hit $9/b then perhaps you’re a bit annoyed but, hey at least your production is not disrupted.

Not the best example in the world but…

Oh boy. Speculation.

All you are affected by is your price. Of course you may wish to have taken advantage of changes, but the original purpose of futures was to smooth out such gyrations.

Not always true: most futures exchanges issue margin calls which require you to pay a portion of your losses as you go, for the simple reason that losses can rack up rather fast and (unlike stock markets) your losses are not limited by your initial investment.

I thought your example (of what is known as a hedge) was pretty good Collounsbury. Some use the futures market to reduce the volatility of their expected returns, others speculate.

Note also that delivery never actually takes place in most cases, since all you do is buy the opposite instrument to your holding when your reason to hold it expires, and close out the transaction.

picmr

The question of legality is a moot one. If the government decided to sell futures, Congress could pass a law to allow it.

Consider what could be done in the current oil situation. Suppose that the government announces that it will sell x million oil futures contracts for delivery in, say, January. Immediately, the price of that contract will drop as speculators try to unload their contracts before the government shorts millions of contracts. Viola! Now the government announces that whenever the futures price of oil reaches a predetermined point, say $20/barrel, it will short that contract. From this point on, it will be impossible for oil to trade over that point. This is much more effective than tapping the petroleum reserve for a measly five million barrels. This is such a radical idea that the government wouldn’t ever consider it. Both parties would be against it, but it would get the price of oil down.

This technique can be useful to rein in other rogue business or sectors. Take Charles Hurwitz’ Maxxam Corporations rape of some of the last virgin redwoods. He is trying to extort billions from us to prevent him from doing so. It would be so much easier(and cheaper) if the government began intervening in his stock. Buy it up and vote the stock in favor of the trees. Announce that the stock will be shorted in massive quantities from time to time with out any warning. Immediately, Maxxam stock will be dumped into the toilet and no one would dare to buy it. See what I mean. Call it enlightened trading. Or suppose the whole logging sector refused to act responsibly. Hah! Go short on billions of board feet of lumber, or only threaten to do so. Drive to price of lumber into the toilet. These boys would soon get the message.

There now. Perfect examples of how futures trading would benifit the vast majority of us and the environment.

It’s not moot if it is illegal (Congress) but the government (Executive) is already doing so. My friend thinks the government is buying futures on the entire market to artificially keep the boom going.

Still hoping for an answer to the OP…

Ouch, quite right. I rather overlooked that. Well, in any case, I think I captured the basic concept more or less clearly.

Of course I revealed my dislike for speculation, but also I think hedges more clearly reveal the basic role of futures.

In re the legality question. I am hard pressed to think of a reason why futures would be illegal for government entities to trade. This might depend on the locality also (too often folks confuse a local or state law with federal and vice versa). I am sure if there is actual illegality involved this would not occur (but I’m not sure any entities do trade in futures) but I suppose there may be some grey areas.

Why the paranoia?

That’s my question. I would think it would be illegal for the government to manipulate the market, and that they don’t – but my friend has graphs which seem to show that some very very very rich entity is doing so.

He kind of thinks there is some plot to get Gore elected. I think he’s off base, I’m just not sure how far – perhaps his entire premise is flawed.

Does he also believe in Black Helicopters watching him? I mean really. Your last line captures the issues.

This first cropped up over here in the mid 1980’s. We had a case or two of quasi-Government playing the markets with taxpayers money in the mad days of the even madder Margaret Hilda Thatcher. After much Appealing to higher Courts the $1 billion loss was found to be the product of ultra vires transactions. Not a huge surprise. All I can add to the debate is the legal fact that Local Government may not gamble away the future of a Borough with taxpayers money - in the UK.

But we did’t know that until the Court settled it - therein may lie your answer

The case was:

Hazel v. Hammersmith and Fulham London Borough Council and others, 2 A.C.1 (House of Lords 1992)

Did I say “lie”, how inappropriate. I must have meant “lay”

The case to which London Calling is referring is a good example of what I mentioned above - that you can get yourself into serious trouble very quickly in these markets because your losses are not limited by the amount of your initial investment. The dangers of people with no experience in securities markets and poor accountability investing in these areas is one reason you wouldn’t want the government in these markets too much.

The other reason can be seen by turning galen’s argument on its head. galen presents a couple of examples where a government’s intervention or threatened intervention could solve serious problems. However given that the government is not always perfectly informed and in tune with the public interest, there is a danger that they will often use these sorts of transactions for less pure reasons. If that’s the case then even if some interventions are desireable a rule prohibiting any interventions may be the best we can do.

The key point here is to imagine the effect on the markets of the constant shadow of this kind of intervention. As has been stated, a major function of these markets is the exchange of risk. The government controls some outcomes by the use of policy (sovereign risk). If the government frequently intervened in futures markets, there would be a lot less activity in those markets since one of the players would be able to influence the outcome.

picmr

Like funding the buying of the Black Helicopters! :stuck_out_tongue:

OK, thanks for all the information everybody.