As the global economy stalls, the media is working hard to identify those responsible for the economic chaos, but is there really a distinct group of people to blame? The issues and events driving the current economic slowdown are complex, and it is therefore impossible to identify a single cause – but oil speculators are currently taking much of the flack.
Certainly, oil companies and investors have reaped spectacular returns during the crisis, but can their influence really have global reach?
Speculators have become the bogeymen of the current crisis, but they are less monstrous than the media would have us believe. In essence, a speculator is just a short-term investor that takes a high-risk position against a fast moving stock in either direction – a speculator can make money by correctly predicting if a stock will increase or decrease in value. Like any other type of investor, they are simply taking a risk by speculating about the future of a stock.
Oil speculators have become high profile targets for two reasons. Firstly, the outstanding market performance of oil has attracted large numbers of speculators to the commodity, and secondly, the price of oil has famously only moved in one direction, making it an easy commodity to predict and keeping most speculative investors in the game. Certainly, their positions will have some market influence, but they cannot be held responsible for taking oil from $26 to $140 per barrel. After all, they are following market trends, not dictating them.
A Culture of Speculation
Speculators exist simply because our current economic system allows them to operate. It is not speculative investors themselves that are causing damage to the global economy but rather the whole concept of speculation, which has found a home in the free market.
Speculation has become more than an investment approach; it’s become a sensibility that runs deep into the roots of our financial and economic system and is particularly prevalent in the global banking system.
So, can we blame central bankers for the crisis? Certainly, they must share a proportion of blame because they knew what they were doing. Unless the global banking institutions were grossly negligent, they must have been fully aware of the extent of their subprime exposure and the associated risks.
However, hindsight has demonstrated that the imprudent risk management procedures in the global banking industry as a whole have been short-sighted. The financial services have worked to maximize profits during the boom years at the cost of massive losses in today’s downturn.
The irresponsibility of these institutions was highlighted in April when the Institute of International Finance (representing more than 375 of the world’s largest financial companies) accepted blame for the crisis, acknowledging “major points of weaknesses in business practices.”
In their book, The Gods That Failed, Larry Elliott and Dan Atkinson argue that our current financial and economic model is headed by a new “Olympian” class of politicians and central bankers. These elites have instilled greed, excess and speculation into the very heart of our current system to facilitate their own financial gain.
In their defense, global financial institutions remind their critics that they have delivered an unprecedented period of economic growth. “If you look back historically, this period of growth is not unprecedented,” explained Larry Elliott in an interview for the Guardian. “We’ve had longer periods of higher growth in previous decades when the spoils of that growth were spread far more evenly than they have been over the recent few years.
“And in fact, the cost of the growth we’ve seen has been building up in the background. Essentially, these economies have only been able to keep going through the creation of bubbles; when one bubble bursts, policy makers have engineered another. So I don’t think that the way in which the economy’s been run over the last 15 years has been sustainable.”
In our enthusiasm for prosperity, it seems that we have forgotten a basic law of economics: that bust will always follow boom. Certainly, there is little that politicians, central bankers or investors could have done to avert the business cycle altogether, but if the financial services were in better shape and more tightly regulated, then we could have experienced a softer landing.
Somewhere along the way we have lost contact with the realities of our global economy. A culture of speculation has opened a chasm between the financial markets and the underlying economy – and we are now witnessing the resulting fallout.
All that remains is lessons for the future.