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Wednesday, June 29, 2011

Can Food Prices Be Stabilized?

Jeff Frankel argues that limiting speculators is not the best way to protect against volatility in food prices. I agree:

Can Food Prices Be Stabilized?, by Jeffrey Frankel, Commentary, Project Syndicate: Under French President Nicolas Sarkozy’s leadership, the G-20 has made addressing food-price volatility a top priority this year...
It is probably best to accept that commodity prices will be volatile, and to create ways to limit the adverse economic effects – for example, financial instruments that allow hedging of the terms of trade. ...
But the ... policy that Sarkozy evidently has in mind is to confront speculators, who are perceived as destabilizing agricultural commodity markets. ...
But speculation is not necessarily destabilizing. Sarkozy is right that leverage is not necessarily good just because the free market allows it, and that speculators occasionally act in a destabilizing way. But speculators more often act as detectors of changes in economic fundamentals, or provide the signals that smooth transitory fluctuations. In other words, they often are a stabilizing force.
The French have not yet been able to obtain agreement from the other G-20 members on measures aimed at regulating commodity speculators, such as limits on the size of their investment positions. I hope it stays that way. Shooting the messenger is no way to respond to the message.

    Posted by on Wednesday, June 29, 2011 at 12:42 AM in Economics, Financial System, Regulation | Permalink  Comments (30)

          


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