# When has government intervention harmed a service or economic sector? **URL:** \ **Category:** Great Debates\ **Created:** [September 4, 2009, 10:53am UTC](https://boards.straightdope.com/t/when-has-government-intervention-harmed-a-service-or-economic-sector/508844 "2009-09-04T10:53:18Z")\ **Posts on this page:** 2\ **Page:** 3
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [September 9, 2009, 3:40pm UTC](https://boards.straightdope.com/t/when-has-government-intervention-harmed-a-service-or-economic-sector/508844/41 "2009-09-09T15:40:18Z")
> [@Digital\_Stimulus](#): > > It’s nice that you can cite a paper that supports your point. From the (very) little I’ve looked at it, in general, I find that futures markets are well-founded, make sense, and do reduce volatility (when applied to _commercial_ traders, or _hedgers_; not so much for _noncommercial_ traders, or _speculators_). So there’s that. > > But it would be even nicer if you responded with a cite that addresses _my_ point. Preferably something that covers the summer 2008 explosion (heh) in gasoline prices…which, again AIUI, was directly attributable to the oil futures market. Y’know…perhaps, like [this paper](http://www.bakerinstitute.org/publications/EF-pub-MedlockJaffeOilFuturesMarket-082609.pdf) (link to pdf). > > I don’t have time right now to read it thoroughly (and I doubt that I’ll be able to summon the desire), but I did just glance over it. If I understood it properly, they were saying that the correlations between volatility and percentage of the market share of non-commercial traders was striking (their word), to the point of having to willfully ignore the evidence. However, they also note two things: 1) correlation is not causation, and 2) the CFTC found no evidence of a problem – although the authors believe that the CFTC is not asking the right questions. > > If I’ve misread the report, I’d appreciate a correction. The Baker Institute paper isn’t a rigorous economic or statistical paper, to put it lightly. Their conclusions appear to be drawn by simply eyeballing charts and making observations. They don’t provide statistical analysis or reasoning for their conclusions. They don’t address the issues arising in regards to OTC trading and NYMEX traded contracts. They mention that the Commodity Futures Modernization Act made it easier for non-commercial entities to trade various types of swaps in the OTC markets, but then instead focus on only reported NYMEX data. One of the biggest problems, in my eyes, is the fact that they acknowledge that much of the increase in open interest/positions came in the form of spread trading. By definition, a spread trade is a market neutral position - for every dollar purchased, a dollar is sold short. The mechanism by which an increase in spreading could result in an upward spike in prices isn’t even hinted at by the authors. Overall, the paper seems to cherry pick data and draw conclusions without really providing much to back up their assertions. I suggest [this page](http://seekingalpha.com/article/159016-heard-the-one-about-the-baker-institute-and-oil-speculators) for a critical review of the Baker Institute paper. ---
**Author:** ![Digital\_Stimulus](https://avatars.discourse-cdn.com/v4/letter/d/aeb1de/32.png) [@Digital\_Stimulus](https://boards.straightdope.com/u/Digital_Stimulus)\ **Post date:** [September 9, 2009, 10:51pm UTC](https://boards.straightdope.com/t/when-has-government-intervention-harmed-a-service-or-economic-sector/508844/42 "2009-09-09T22:51:40Z")
So I didn’t misread it? That’s good to know, at any rate. I’ll admit (again) that this is not my field, so anything that I do get right is good. And thank you for addressing my actual point. > [@Trom](#): > > The Baker Institute paper isn’t a rigorous economic or statistical paper, to put it lightly. I would point out that the authors repeatedly represent the report as a “brief” showing correlations and trends, rather than a rigorous analysis. So, to use “lack of rigor” as a (_the_, actually) primary criticism is disingenuous, at best. And they do say that there is a more thorough report due out later this season – from what I can tell, it’s supposed to cover the same material, but with more rigor. We’ll see, I suppose… What I gathered from reading Dr. Pirrong’s critique (your link) is that he’s got an axe to grind…most likely, it seems, similar to a health insurance corporation trashing attempts at health reform. But that doesn’t mean the Baker analysis isn’t flawed – or even _fundamentally_ flawed. Looking for a bit more information, I prefer [this analysis](http://buytherumorsellthefact.com/2009/08/28/new-study-on-specs-sheds-little-light/) as being more fair (same conclusion concerning speculators). Quoting a bit from that entry: > [@](#): > > But despite the excesses of some headline writers, the Rice paper is preliminary and does not offer any real evidence that speculators caused the spike; it basically offers some correlation studies showing growth in long open interest coincided with increased prices as well as showing an increase in the overall size of speculators as a percentage of market participants. That sums it up pretty damn well. But you’ve mentioned two other things: (1) spreads and (2) NYMEX vs. OTC. About (1), Pirrong derides the Baker report: > [@](#): > > When they get to analyzing the effects of speculation on prices, the spreaders are out the window, and Medlock and Jaffee focus on net non-commercial positions. (This could be viewed as a tacit admission that there is no basis to believe that spreaders could have an effect on price levels.) It seems to me, possibly in my ignorance, that it’s _obvious_ (as you point out) that spreaders don’t exert a large effect on prices – _by definition_. So what? There’s no claim that I can see that spreaders affect price. So I’m not sure where he (or you) score a resounding argumentative win with that point, or whether it’s a red herring to begin with. As to (2), it seems eminently reasonable to assume that NYMEX trading exhibits similar characteristics to OTC trading; if speculation is a problem in NYMEX, it would also likely be a problem in OTC. The issue, AIUI, is that no data is available for OTC trading, making it utterly impossible to analyze it in the first place. Honestly, again, I don’t have the expertise to adequately judge this stuff (and picking up the required amount of expertise anytime soon isn’t likely). I hope this wasn’t too much of a thread hijack, and I can only hope I’ve done the topic some justice. [Previous page](https://boards.straightdope.com/t/when-has-government-intervention-harmed-a-service-or-economic-sector/508844.md?page=2)