First of all, let's look at what hedging really is. Take, for example, a farmer who grows corn. He knows that his cost for growing corn is, say, $3.00 per bushel. But he doesn't know what price the price of bushel of corn will be come harvest time. He looks at the September futures contract for corn and sees that the price is $3.30 per bushel.
To guarantee that he will get $3.30 at harvest time, he sells September corn contracts equal to his crop (each corn contract equals 5,000 bushels). When harvest time comes he delivers his corn to the appropriate delivery point designated by the Chicago Board of Trade exchange (CBOT) where the contracts are traded. It should be noted that if the price of the futures contract goes above $3.30 per bushel, the farmer may be called for margin money until he makes delivery, at which time his account is settled out.
The disadvantage of hedging is two fold. First, there may be margin calls. Second, the price of corn may be $4.00 per bushel at harvest time, in which case the farmer lost out on 70 cents per bushel.
Treasury Secretary Timothy Geithner wants to leave legitimate hedging in place. It is the speculators that he is going after. During the three months that futures contracts are in effect, speculators can buy or sell contracts and speculate on the price movements.
Now, I should point out that it was the wild speculation in financial derivatives that brought our financial house down. This is where the problem is. This is where Mr. Geithner must act boldly. Never mind kowtowing to the bankers, just do away with speculation in financial derivatives altogether. His duty is to prevent another financial collapse. His duty to the American people is to act now and act boldly, otherwise the people will never trust their financial institutions again, nor will the world. Our banking system must return to sound financial principles and speculation in derivatives must be eliminated.
Should Mr. Geithner eliminate speculation in financial derivatives to prevent another collapse and should any violators be prosecuted severely?
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Reader Comments (Page 1 of 1)
7-11-2009 @ 6:14PM
clikdawg said...
It is, perhaps, worth noting that on this date in 1804 Alexander Hamilton -- our first Secretary of the Treasury and founder of the very first National Debt and National Bank -- was shot and mortally wounded in a duel with Aaron Burr.
Can we dig him up and shoot him some more?
7-12-2009 @ 10:26AM
Mitch said...
Derivatives are a necessary financial tool. I don't mind the derivatives as long as the folks that sell 'em and the folks that buy 'em don't use my money the honor their contracts and margin calls. The Feds, however, need to stay out of the derivatives market as regualtors.
7-13-2009 @ 3:24PM
LARRY said...
I WOULD RATHER SEE GEITHNER ELEMINATED--SO FAR HE HAS DONE NOTHING EXCEPT CAUSE PROBLEMS-----------
7-13-2009 @ 9:26AM
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7-13-2009 @ 3:56PM
Iridium said...
How about, well I don't know, HAVE A FRICKIN SYSTEM WHERE THE DAMN FARMER WHO KNOWS HOW MUCH IT COSTS HIM TO GROW A DAMN BUSHEL OF CORN SETS HIS PRICE AND THE PEOPLE WHO BUY HIS DAMN CORN DECIDE WHETHER OR NOT TO PAY IT!!!!!!!!
INSTEAD WE HAVE A SYSTEM WHERE SOMEONE WHO PROBABLY HAS NEVER SEEN A BUSHEL OF CORN IN HIS LIFE SETS THE PRICE BASED ON A PERIOD OF TIME SET IN THE FUTURE WHERE HE DECIDES A FREAK RAINSTORM WILL CAUSE THE PRICE OF CORN TO BE $2 HIGHER THAN THE 100 YEAR AVERAGE.
Then the rainstorm never happens and the farmer who locked in a futures contract goes out of business becuase of the margin call on his corn.
Hedging should be outlawed. No good can come from bets placed on events that may or may not ever happen. The only thing that can come from hedging is corruption in the market.
7-14-2009 @ 3:56AM
Zebra365 said...
There can be no legitimate hedging without speculators. The true idea of hedging is to transfer risk (and with it some potential profit) to a speculator. Like saying, "Let's keep hammers but outlaw nails." The fact is that many failed or bailed out "hedge funds" were doing the opposite of hedging, instead of laying off risk they were concentrating it.
The better idea is that people who lose money gambling should not be bailed out. I don't see the bailout line in the departure area from Vegas.
Do you really think we would all be worse off if all of the parties and counter-parties in the derivatives markets were allowed to reap what they have sowed?