Moneybox: Moneyball Takes Manhattan

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Moneybox Not Worth the Gamble Why it should be illegal to speculate using financial derivatives. By Eric Posner Posted Wednesday, Apr 04, 2012, at 08:26 PM ET On Monday, the U.S. Commodity Futures Trading Commission issued an order prohibiting the marketing of a new set of derivatives that would have enabled traders to bet on the winners of national elections. While these "political events contracts"—the latest development in the world of prediction markets—have their partisans, the CFTC's order was based on fundamentally sound logic that should be applied more broadly. Financial instruments that serve primarily as a means of speculation rather than hedging should be banned, just as gambling is illegal in most contexts. A simple, common-sense principle guides this distinction. Imagine two different scenarios. In the first, an oil producer faces the risk that oil prices will fall while a consumer faces the risk that they will rise. The producer and the consumer might use a futures contract to hedge this risk by contracting to transact in the future at a price fixed today, thereby effectively purchasing insurance against the risks they both face. The consumer no longer worries that a price increase will interfere with his daily commute, while the producer no longer fears that a price decline will force him to lay off his workforce. This insurance reduces the unpredictability of the individuals' incomes, smoothing them out across different contingencies. Such transactions embody the valuable spreading of risk for which financial markets are justly praised. Now consider an alternative scenario. Suppose that two individuals, neither of whom uses or produces oil, harbor different opinions about the future price of oil ... To continue reading, click here. Join the Fray: our reader discussion forum What did you think of this article? POST A MESSAGE | READ MESSAGES Also In Slate Why Workers Should Have a Constitutional Right To Organize Is Science Really Moving Faster Than Ever? Maybe Not! The United States Should Follow Canada's Lead and Ditch the Penny	Advertisement
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