The thing about bubbles is that they alway burst. The 2008 oil price bubble burst, and oil prices dropped back to around $33/barrel. The housing bubble has certainly burst. Eventually you run out of people who are dumb enough to keep paying higher and higher prices.
Matt Taibbi likens a bubble to investing in a watermelon dropped off the roof of a skyscraper. The trick, he says, is to get your money out before the melon hits the pavement.
What you don't seem to run out of is people dumb enough to create another bubble (like the current oil bubble) or stop commodity bubbles from happening so often.
Congress could insist on going back to the former rules governing speculation, but that would involve doing something that would cost Wall St. lots of money. Even though it would save the American people a lot of money, somehow I think Wall St. will win.
Our political parties don't seem to be able to come to grips with the reality of speculation. Remember the 2008 presidential campaign?
The Republicans were convinced that the problem was the supply of oil. The mantra was, "drill, baby, drill!"
The Democrats were equally convinced that the problem was the demand side. Americans were simply using too much oil.
All the while, the supply was more than adequate and demand was actually decreasing.
According to Taibbi: "Asked why politicians continue to harp on things like drilling or hybrid cars, when supply and demand have nothing to do with the high prices, [former Congressman Bart] Stupak shakes his head. "I think they just don't understand the problem very well," he says. "You can't explain it in 30 seconds, so politicians ignore it."
Now, we've been using oil as an example, but the same thing has happened in virtually all the commodity markets. On Aug. 25, the McClatchy papers ran a story titled "Got 10 bucks for a cup of Joe? Speculators bid up coffee prices." Here's some of what they have to say:
1) "If you're angry that Wall Street speculators have been driving up the price you pay for gasoline, these same big financial investors now are pushing up the price of your cup of joe."
2) "The retail price of coffee in July was up 20.7 percent over the same month last year."
3) "Coffee-industry veterans blame financial speculators. They say they're taking advantage of global supply hiccups to drive up coffee prices by adding volatility to the trading of contracts for future delivery of coffee. It's not as debilitating to family income as high crude oil prices, but the phenomenon is the same."
4) "Howard Schultz, the CEO of Starbucks, complained in March that he had no trouble obtaining coffee beans — there's no supply shortage — and that speculators were to blame for soaring coffee bean prices on commodity exchanges."
5) "During the first week of August 1995, slightly more than 46,000 coffee futures contracts were traded. In 2001, the first year after investment rules were relaxed and Wall Street money poured into commodities markets, the number rose to almost 76,000 contracts a week. During the first week of August 2008, the month the U.S. financial system began a near-meltdown, 196,805 contracts were traded — actually down from a record 284,000 contracts traded in early March that year.
This all points to the entry of financial players who never intend to take delivery of coffee. Some are Wall Street banks and hedge funds; others are so-called "massive passives," big institutional investors such as pension funds that bet on rising prices."
And now, as the late Paul Harvey would say, you know "the rest of the story."
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