The NYT told readers that: "Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all." The rest of the article explains how speculation stabilizes markets, reducing volatility, rather than increasing it. Actually, many people with years of knowledge about how commodity markets work do not believe that speculation is necessarily stabilizing. There is a substantial body of research around "noise trading," the notion that traders' views respond to prices in the market, rather than an independent assessment of fundamentals. In this scenario, speculation can often be destabilizing, since traders see higher prices in commodities like oil as evidence that the price should be higher. This can cause them to bid up the price further. While there is no easy way to identify noise traders, it is possible to tax them. A modest tax on financial transactions (e.g. 0.02 percent on the sale of a standard futures contract and 0.25 percent on the sale of share of stock) would substantially raise the cost of noise trading, while having very little impact on investors seeking to hedge or to engage in longterm investment. It could also raise more than $150 billion a year (1 percent of GDP). There is a long list of prominent economists who have advocated financial transactions taxes to reduce speculation, including Keynes, James Tobin, Joe Stiglitz, and Larry Summers. It would have been appropriate to mention both noise trader theory and financial transactions taxes in this article.
--Dean Baker