A lack of ethics

David Kocieniewski of the New York Times is guilty of some outrageously bad journalism in the form of a groundless ad hominem attack on the reputation of two professors for the sole purpose of reinforcing the prejudices of his misinformed readers.

Kocieniewski’s article is titled “Academics Who Defend Wall St. Reap Reward”, and insinuates that academic research produced by University of Houston Professor Craig Pirrong and University of Illinois Professor Scott Irwin was bought and paid for by financial speculators as “one part of Wall Street’s efforts to fend off regulation.”

The question of substance for which Kocieniewski insinuates that Pirrong and Irwin were bribed to produce the wrong answer is whether “financial speculators and commodity index funds drive up prices of oil and other essentials.” Let me pose the question a little more precisely for anyone who actually wants to investigate this issue. Do financial speculators drive the price of oil to a value at which the quantity physically produced exceeds the quantity physically consumed? Because if the answer to that question is no, then it is fundamentals of supply and demand, not financial speculators, that are all you would need to know to calculate what the price of oil will be. Paul Krugman explained quite clearly why that is the crux of the question, and Knittel and Pindyck (2013) carefully go through the math of why it’s so hard to answer in the affirmative.

But in fact Kocieniewski’s hit piece deals not at all with this or any substantive issues associated with the topic. Instead his contribution for the New York Times is purely an ad hominem attack on two of the professors who have written on this question. Scott Irwin’s crime is explained as follows:

The business school at the University of Illinois has received more than a million dollars in donations from the Chicago Mercantile Exchange and several major commodities traders, to pay for scholarships and classes and to build a laboratory that resembles a trading floor at the commodities market.

Well, guess what? Scott doesn’t work for the business school at the University of Illinois. He is in the School of Agriculture and Consumer Economics. Not the same thing. But apparently everybody on the entire U. of Illinois campus has been tainted by money contributed to the business school, a picture of whose nice facilities leads off Kocieniewski’s hit piece.

And what did Craig Pirrong do wrong?

Mr. Pirrong has been compensated in the last several years by the Chicago Mercantile Exchange, the commodities trading house Trafigura, the Royal Bank of Scotland, and a handful of companies that speculate in energy.

I’ll give Craig the microphone for his own defense:

completely contrary to the impression in the NYT piece, the vast bulk of my consulting and testifying work has been adverse to Wall Street and commodity trading firms. Virtually none of this work relates to the alleged subject of the NYT story: the impact of speculation on commodity prices. In fact, much of this work relates to market manipulation (which is distinct from speculation) by commodity traders. I have been, and continue to be, on the side of plaintiffs in attempting to hold traders who abuse markets accountable for their conduct.

The failure of David Kocieniewski to point out this salient fact alone betrays his utter unprofessionalism and bias, and is particularly emblematic of the shockingly shoddy excuse for journalism that his piece represents.

Moreover, none of the research or writing I have done on the speculation issue received financial support from any firm or entity with even a remote stake in this issue.

And while I’m passing the microphone, let me also outsource to Felix Salmon:

Kocieniewski has missed the mark. Neither Pirrong or Irwin is mendacious or venal, and indeed it’s the NYT which seems to be stretching the facts well past their natural breaking point….

Once you realize how much of an axe Kocieniewski is grinding, then the rest of his article rapidly starts to crumble.

And from Peter Klein:

The result is a preposterous article riddled with “jaw-on-the-floor” errors, mendaciously edited so the unfounded accusations come first, and the self-contradictions revealed only at the end of the piece.

Clearly Kocieniewski needs some help in launching his ill-prepared attack on the Wall-Street/academic cabal. So let me provide him with a target-rich environment by quoting from my paper with University of Chicago Professor Cynthia Wu that we’ll be presenting at the Allied Social Science Association meeting this weekend:

One common strategy is to interpret a simultaneous unanticipated rise in prices and commodity inventories as reflecting speculative demand pressure. Kilian and Murphy (2013) and
Kilian and Lee (2013) concluded that such a model rules out speculative trading as a possible cause of the 2003-2008 surge in oil prices. In related work, Lombardi and van Robays (2011) and Juvenal and Petrella (2011) found only a small role for speculation using alternative specifications….

Brunetti, Buyuksahin, and Harris (2011) used proprietary
CFTC data over 2005-2009 on daily positions of traders disaggregated into merchants,
manufacturers, floor brokers, swap dealers, and hedge funds. They found that changes in net
positions of any of the groups could not help to predict changes in the prices of futures contracts
for the three commodities they studied (crude oil, natural gas, and corn)…. Stoll and Whaley (2010) used the public SCOT for 12 agricultural commodities over 2006-2009 and
found that changes in the long positions of commodity index traders predicted weekly returns
for cotton contracts but none of the other 11 commodities. Alquist and Gervais (2011) used
the public CFTC Commitment of Traders Report to measure net positions of commercial and
non-commercial traders, and found that changes in either category could not predict monthly
changes in oil prices or the futures-spot spread over 2003-2010, though there was statistically
significant predictability when the sample was extended back to 1993.

By the way, nobody paid me to write these words. And anyone who suggests otherwise is a liar or a fool.

47 thoughts on “A lack of ethics

  1. Jeffrey J. Brown

    Regarding the global oil market, I think that we are living in what one writer termed “The Age of Denial.”
    An excerpt from a previous post follows:
    It’s instructive to review what has happened, from 2002 to 2012 for key net export and consumption ratios, versus annual Brent crude oil prices, which rose at an average rate of 15%/year from 2002 to 2012 (with one year over year decline, in 2009).
    Normalized Liquids Consumption (2002 = 100%) for China, India, (2005) Top 33 Net Oil Exporters and the US, Vs. Annual Brent Crude Oil Prices:
    GNE/CNI Ratio* Vs. Annual Brent Crude Oil Prices:
    GNE/CNI Ratio* Vs. Total Global Public Debt:
    *GNE = Combined net oil exports from top 33 net oil exporters in 2005, EIA data, total petroleum liquids + other liquids
    CNI = Chindia’s net oil imports
    What I define as Available Net Exports (or ANE, i.e., GNE less CNI) fell from 41 mbpd (million barrels per day) in 2005 to 35 mbpd in 2012. While there has been a rebound in US consumption, there is some question about how accurately the EIA is accounting for product exports in the short term, but in any case I would argue that the dominant post-2005 pattern, at least through 2012, was that developed net oil importing countries like the US were gradually being forced out of the global market for exported oil, via price rationing.
    To the extent that we have seen a rebound in the US economy and in US oil consumption, it’s important to remember how many trillions of dollars in deficit spending we have seen in recent years (largely financed by the Fed).
    I think that the fundamental reality we are facing is that we are in the middle of a relentless transformation from an economy focused on “Wants,” to one focused on “Needs.” But governments in developed net oil importing countries refuse to acknowledge, or are incapable of acknowledging, this transformation, and they are desperately trying to keep their “Wants” based economies going via increased deficit spending, despite the post-2005 decline in the volume of Global Net Exports of oil available to importers other than China & India.

  2. Jeffrey J. Brown

    And I suppose that we should expect to see claims of market manipulation regarding natural gas prices in 2014. Incidentally, I always found it odd that the commodity traders “conspired” to drive oil prices up, but they “conspired” (until recently) to drive natural gas prices down, but I digress.
    The US natural gas market could be very interesting in 2014. I frequently quote a Citi Research report, from early 2013, that estimated that the US needs about 17 BCF/day of new production every year, just to maintain current production. Of course, this report (by the apparently rational wing of Citigroup) basically confirms what Berman & Huges, et al, have been talking about for some time.
    The Citi Research report implies that the US needs to put on line the productive equivalent of the peak production rate of 30 (Thirty) Barnett Shale Plays over the next 10 years, just to maintain current production for 10 years.
    And meanwhile, the reported (EIA) year over year decline in Texas + Louisiana’s (marketed) natural gas production is accelerating:
    January, 2012: 881 BCF (28.4 BCF/day)
    January, 2013: 850 BCF (27.4 BCF/day)
    Difference: -31 BCF (-1.0 BCF/day)
    September, 2012: 850 BCF (28.3 BCF/day)
    September, 2013: 792 BCF (26.4 BCF/day)
    Difference: -58 BCF (-1.9 BCF/day)
    Note that Texas hit 21.3 BCF/day in December, 2012, versus 20.4 BCF/day in September, 2013.
    LA Gas Production:

  3. Hans

    Excellent Professor Hamilton but would you have written this thread if the author had left out his attack on the two academicians?
    Once the greatest newspaper ever and now just a repository for social justice and progresso propaganda..
    “Reporting all the news fit to print” died a long time ago..

  4. W.C. Varones

    Reminds me of the NYT’s horribly incorrect feature story hit piece against Rep. Darrell Issa a few years ago. Or anything Krugman writes.
    It’s not a newspaper; it’s a party rag.

  5. c thomson

    Brilliant work by Prof. Hamilton. Congrats!
    The NYT is now mostly a slimy place for pushing the liberal agenda. A takeover by a Chinese billionaire would be a fitting end for it.
    Pity that Krugman blew his credibility by becoming just another hack writer for the NYT. Who cares what he says these days?

  6. BenK

    A million dollar gift to a business school is supposed to wield substantial influence? Maybe $35M. At least it should be enough to endow a professorship, not just some equipment.

  7. MKV

    Let’s not get swept away with hyperbole. They still publish C.J. Chivers on the front page above the fold.
    It will be interesting to see if the public editor addresses the issue–Prof. Hamilton may wish to contact her directly.

  8. Al

    NY Times has its ups and downs, but it’s rare to read such an explicitly ad hominem article. There should have been some editorial guidance: If you impugn the work of someone with easily accessible material, attack the material.

  9. anon2

    I remember an earlier article by JH defending R+R who were just wrong.
    I admire your loyalty to your buddies.

  10. Nick G

    I think you’re right about the “age of denial”. On the other hand, I’d argue that this denial primarily takes the form of denying that there are cheaper and better alternatives to oil.
    We’re in the middle of an historic shift away from fossil fuels – the faster that transition happens, the better for everyone.
    It has some parallels to slavery in the US. If you’d asked the Southern Slavery Information Agency in 1858 about their future, they would have told you that slavery created their prosperity, and that slavery would exist for 100s of years. In fact, slavery held the South back economically, and it would be gone in 7 years…

  11. Bruce

    Let’s not be naive, shall we? Virtually every “market” that exists, including, and most especially, the oil market, has been completely and utterly financialized by the TBTE banks and the rentier speculators on Wall St., The City, Frankfurt, and Singapore/Hong Kong.
    We have futures, options on futures, ETFs of futures, options on ETFs, ETFs of ETFs of Uncle Seymours’ ETF’s ETF, volatility ETFs on oil and commodities futures, and options on those. What am I missing? Come on! Have mercy!
    How many times removed are these proxies from the actual business process of exploring, discovering, not discovering, reserving, hedging not reserving, investing, drilling, extracting, transporting, processing, storing, and otherwise? Good grief. If any of the players had to take delivery of any physicals for more than a few minutes or hours, the system would come cascading down like a Tejas oil gusher, y’all.
    Oil producers have been forced to become leveraged commodities futures speculators because of the aforementioned situation because there are SO MANY non-productive, hyper-financialized, rentier-speculator intermediaries (and disintermediaries) between the black gold, shale, methane flaring, and kerogen from the Earth’s crust and the final consumer.
    And how many academics are on the payrolls (or don’t even know they’re on the payrolls) of the big integrated oil and services firms, Wall St. petrobanksters, hedge funds, private equity, the commodities exchanges, offshore dark pools and their exchange-sponsored high-frequency trading and offshore proprietary trading shell companies and the like? Let’s get real, shall we? What’s real, you ask? Good question.
    Of course the academics are rewarded for carrying the water, or shall we say oil, for their benefactors who endow their university chairs, fund their research grants for grad students required to build academic empire, establish reciprocal relationships and associated funding for post-doc fellowships, and all of the rest of the circular/reciprocal flows that provide the incentives for the itchy backs and scratching fingers necessary for the crude sophistry to survive and thrive. (Sticky pun.)
    No, this is not cynicism, it’s the nature of the oily beast.
    Jeffrey’s argument is a principal foundation for the system. What the players are concerned about, no doubt, is that their lucrative scheme gets exposed and their zero-sum gains disappear, including the funding for academics to be paid to rationalize the system as it exists. Where would an imperial ministerial intellectual be without an empire of successive emperors requiring cover for their buck nekedness?
    We’re all adults. All of our axes are in need of occasional grinding to hone their edges with which to cut our share of the pie, so to speak. Show ‘dem shiny axeheads, boys! Let’s come clean and submit to the scrutiny of “the market” for allocation of pieces of the oil pie.
    Oh, yeah, right, a slippery subject that does not permit seeing the size of the pie before one gets a whack (crack?) at it.
    Come on down and wash your souls of their oily corruption. Come on down to the river and pray, and get aboard the little boat and paddle your way to intellectual freedom and enlightenment.
    The rest of us are on the river’s other side waitin’ patiently for y’all, for the blue bus (is callin’ y’all), and for Jesus to come on down to join us from Chicago (where he declined for some reason to bless the CBOT), bound for New Orleans to turn the frackin’ muddy water(s) behind the Sun into fine, fine wine. Have mercy.
    Go Stanford! 😀

  12. Tom

    Thanks for taking on a truly horrid piece of phony investigative journalism.
    Thanks also for identifying the most crucial question: Do financial speculators drive the price of oil to a value at which the quantity physically produced exceeds the quantity physically consumed?
    Another way of putting that, which might be easier to understand: Does speculation on commodity prices lead to sustained building of stockpiles?
    The crucial word is “sustained”. For speculation to be driving up the price, total stocks must be growing.
    Generally, speculative cornering leads to short-term stock-building which temporarily drives up the price, followed by a price-depressing effect when stocks are reduced.
    That all applies equally well to other commodities, and explains why speculative “cornering” tends to be particularly short-lived in commodities that are more expensive to store.

  13. Steven Kopits

    Bruce –
    When an oil company produces, or anticipates producing, oil, it must decide what pricing regime to accept. It can sell into the spot market as the oil is produced, or it can hedge its production against the futures curve. If the oil company wishes to lock in a future price or hedge its risk, it will sell a future.
    By definition, the counterparty to such a transaction must be a financial entity of some sort. There is no hedging and no futures curve without purely financial counterparties. Someone has to take the risk, and as a functional matter, it is the speculator who must do so.

  14. Tom

    I understand Bruce’s lack of comfort. When we’re confronted by new and complicated financial instruments, the people who assure, “don’t worry, these won’t cause any problems” aren’t always right.
    But that’s also no reason to fear everything that’s complicated, or to assign magical powers to things that can be understood but which one hasn’t taken the time to understand.
    The people pushing the story that the 2002-2008 run up in commodity prices was caused primarily by speculators are doing exactly that: assigning magical powers to things they haven’t taken the time to understand. I don’t care how financialized a commodity market is, prices are still set by real supply versus real demand. If you want to manipulate the supply upward, you must remove supply.

  15. Jeffrey J. Brown

    Of course, my central point was that the 2002 to 2012 average rate of increase in annual Brent crude oil prices of 15%/year makes complete sense when one looks at the net export data.
    Although what I define as Global Net Exports of oil (GNE*) and Available Net Exports of oil (ANE) rose from 2002 to 2005, and then showed a post-2005 decline, the Chindia region’s share of GNE has shown a steady increase after 2002, which I express as the declining GNE/CNI ratio, i.e., the ratio of Global Net Exports of oil to Chindia’s Net Imports of oil (CNI).
    But of course, almost no one is looking at the net export data, and even the small number of people who are aware of what I call “Net Export Math” tend to be oblivious to the scariest aspect of net export declines, which is that they tend to be “Front-end” loaded, with the bulk of post-peak Cumulative Net Exports (CNE) being shipped early in the decline phase.
    For example, six major net oil exporting countries hit or approached zero net oil exports from 1980 to 2010 (not counting China, which like the US became a net importer prior to a production peak, because of a rapid increase in consumption).
    In any case, combined production from the Six Countries** virtually stopped increasing in 1995. Seven years later, at the end of 2002, they had already shipped 84% of post-1995 CNE, while production had only dropped by 7%. In other words, a 1%/year production decline rate, combined with rising internal consumption, resulted in a seven year post-1995 CNE depletion rate of 26%/year (exponential decline rate).
    In other words, the cumulative remaining supply of oil that the six countries could net export after 1995 fell 26 times faster than the rate of decline in production.
    Note that the Six Country ECI ratio (ratio of production to consumption) fell by 17% from 1995 to 2002.
    The (2005) Top 33 net exporters’ ECI ratio fell by 13% from 2005 to 2012. Based on the Top 33 ECI Ratio decline, I estimate that the 2005 to 2012 post-2005 Global CNE depletion rate was about 3.4%/year.
    In other words, in round numbers I estimate that we have already burned through, in seven years, about one-fifth of the cumulative post-2005 supply of Global Net Exports of oil. Note that this methodology was too optimistic, regarding CNE depletion rates, for the Six Country Case History.
    *GNE = Combined net oil exports from top 33 net oil exporters in 2005, EIA data, total petroleum liquids + other liquids
    CNI = Chindia’s net oil imports
    ANE = GNE – CNI
    **Six major net oil exporting countries that, from 1980 to 2010, have hit or approached zero net oil exports, excluding China: Indonesia, UK, Egypt, Vietnam, Argentina, Malaysia

  16. Ricardo

    I do appreciate your post.
    But why should such a post even be necessary? Is this the first time the NY Times has demonstrated such blatant disregard for the truth?
    I can remember when the Times never misreported a story. Their method of supporting Progressive ideas was to only post stroties that supported Progressive causes while ignoring those articles that proved the viciousness of Progressivism.
    Today the NY Times has “jumped the shark.” More and more during the Obama administration the NY Times has actually manufactured lies or repeated them from others even when they knew they were lies.
    But what is even more amazing is that the Times seems totally oblivious to why they are losing readers and support in general. I am sure they have convinced themselves that is is all because of the internet and that the way to regain their hold on news is to become more Progressive.
    I imagine that the downfall of Progressive thought is going to be ignorance. Progressives refuse to engage in debate on issues because they are convinced that they are right and others are vile, evil, stupid people. That means that they isolate themselves from alternative arguments and are surprised when their arguments run into logical refutation.
    If nothing else Progressives have revived blind faith.

  17. JDH

    Ecomedian at January 2, 2014 05:21 AM: Such a development would raise the price of oil in the period when the product is taken off the market and reduce the price of oil when the product is put back on the market. The size of these effects can be quantified and measured directly. For example, the paper by Kilian and Lee (2013) that I cited above makes use of data compiled by Energy Intelligence Group that tries to estimate the volumes of oil involved in developments such as you describe.

  18. nony

    I hear all the back and forth about peak oil (kvetching that it was/was not a failed prediction). But what about peak gas!? That seems super dead in the water. And you can’t kvetch about liquids definitions. No?

  19. Bruce

    Steven and Tom, points taken, but the larger point I was attempting to make is the extent hyper-financialization of the US economy and its effects, i.e., in this case runaway leveraged futures speculation.
    Consider that US financial profits are nearly 50% of total profits and ~5% of GDP, which is 4-5 times the average before the mid- to late 1990s. This is a direct reflection of the unprecedented private debt to GDP and wages and by definition the extreme wealth and income concentration to the top 0.1-1% to 10%.
    Moreover, the MASSIVE debt to GDP and wages imposes a cumulative imputed compounding interest claim to GDP, wages, profits, and gov’t receipts today equivalent to 100% of private GDP to average term.
    Further, the cost of public and private “health care” ($9,200 per capita and $24,000 per household), debt service, and total gov’t receipts now exceeds public and private wage and salary disbursements.
    IOW, the rentier and gov’t claims in perpetuity on the private economy are so burdensome to the point that real final sales per capita cannot grow.
    In fact, the cumulative differential rate of growth of private debt to GDP and wages reached the critical order of exponential magnitude in 2008 from 1982, as in 1890, 1929, and Japan in 1996-97, the point at which private debt can no longer grow faster than GDP.
    Recently total local, state, and federal debt reached the similar differential order of exponential magnitude to GDP since 1950.
    So that’s it: no more net cumulative growth of public and private debt to GDP and wages hereafter in a debt-money-based economy means no acceleration of growth of real final sales per capita.
    In fact, trend nominal final sales per capita since 2007-08 is less than 2%, and below ~0% in real terms, whereas CPI has decelerated to 1.5% since 2011 and 1.7% since 2007 from 4% since the 1970s, 3% since the 1980s, and 2.2% since 2000. In addition to Peak Oil and Boomer demographic constraints, private debt service to GDP and wages adds a debilitating incremental drag on real final sales per capita.
    Note that the function of capitalist debt-deflationary depressions every 55-60 years historically (70+ years today because of increased lifespans), i.e., once in a lifetime, is to clear the decks of the excess debt burden to wages, production, profits, and gov’t receipts in order to restore the capacity of the private sector to again increase productive capital accumulation and for labor returns to increase to GDP and debt so as to sustain labor subsistence and reproduction. The Fed/TBTE banks, predictably, have resorted to unprecedented bank reserve printing to GDP, resulting in a record level of bank “assets” and financial profits to GDP, which, again, presents a disproportionate rentier claim on GDP and wages hereafter in perpetuity.
    Unprecedented leveraged rentier futures speculation and hyper-financialization of the commodities markets and economy are a consequence of the reflationary effects characteristic of the 32-year (to date) Long Wave Downwave’s secular decline in nominal interest rates, resulting in the accumulation of debt to GDP. Until the capitalist debt-deflationary regime of the Long Wave Trough is permitted to clear the decks of outsized debt to GDP and wages, the “secular stagnation” (what I call the “slow-motion depression”) will continue indefinitely, as has occurred in Japan since 1998. The MASSIVE leverage and associated rentier claims on the global financial system will remain a debilitating cost to growth hereafter.

  20. Bruce Hall

    One should not confuse politics with science and economics… even though the NYT attempts to do so regularly. It is needless agitation to get upset about anything the NYT publishes in opinion… or other… pages.

  21. Bruce

    “I think that the fundamental reality we are facing is that we are in the middle of a relentless transformation from an economy focused on “Wants,” to one focused on “Needs.
    . . . [I]n round numbers I estimate that we have already burned through, in seven years, about one-fifth of the cumulative post-2005 supply of Global Net Exports of oil.”
    Jeffrey, precisely.
    To the first point, given the US wealth and income concentration to the top 1-10%, the GDP is dependent upon the spending of the top 10%, which represents in round numbers over 40% of reported private GDP. Mass-media messaging, advertising, and mass-marketing memes are primarily focused on appealing to the lifestyles, tastes, preferences, status markers, envy, vanity, and boredom of the top 10%. But a disproportionately large share of the discretionary spending of the top 10% is on luxury imports, foreign travel, and low-multiplier high-end services.
    Moreover, the massive bubble in financial assets held primarily by the top 10% acts as a vacuum for savings and private investment at low or no velocity, starving the productive economy of the necessary investment to permit an acceleration of capital accumulation and labor returns to GDP.
    Also note the accelerating rate of US oil exports to reserves, consumption, and production since 2005-08, the definition of the Seneca effect/cliff. In effect, producers are burning through proven reserves as fast as is financially and technologically possible to extract and export at the current price, which, BTW, is a price that is too high for real final sales per capita to grow since 2007-08.

  22. JBH

    Like in “groundless ad hominem” attack on Romney in 2012? Where is the outrage about this? Like academic research isn’t bought and paid for by government grants? Even worst because these funds are legally expropriated from taxpayers by crooked politicians who are championed by the self-same liberal media including the NYT? Like there isn’t a huge revolving door between Wall Street, K Street, Congress, and the White House and administration officials that mainstream economics supports? (See Confessions of an Economic Hit Man by Perkins, along the very lines of, in this case the US government, doing a hit piece far more systemic and mendacious.) And while we are at it, like the lack on academia’s part in doing serious research on MF Global, Corzine, and the revolving door between White House friends, governorships, and the massive destruction of trust that MF Global wrought in commodity markets? Like Bruce says: “…funding for academics to be paid to rationalize the system as it exists. Where would an imperial ministerial intellectual be without an empire of successive emperors requiring cover for their buck nakedness?” Just where are the academic papers on the funding of those self-same academic papers? Just where is the academic research on how the BLS can get away with defining the health insurance premium and out of pocket expenses component of the CPI as having a weight of a mere 0.658 percent with year-over-year inflation of just 1.3 percent? At a time when a full one-sixth of the economy is coming under command control by the government? (Since 2003, premiums have increased 80 percent, nearly three times as fast as wages (31 percent) and inflation (27 percent) according to the Kaiser Foundation.))

  23. Bruce

    Ricardo, is there really much of a debate today?
    I ask in the context that rentier-financier capitalist “globalization” (the neo-imperial “trade” regime) has won; the system is without rival today or in history. The resulting wealth and income concentration to the top 0.01-0.1% to 1%, and secondarily to the next 9%, renders the “winners” beyond scrutiny and “untouchables”.
    Business, like war and reproductive competition, is amoral, i.e., “all is fair”, having as its imperatives the perpetual increase in profits, to overcome competitors, and to capture and monopolize markets, secure and defend resources, and co-opt and control domestic and foreign elites and gov’ts.
    Again, the “winners” have no one to whom they must answer (apart from their shareholder peers) nor justify their motives, actions, influence, and power.
    There is no debate. The “winners” have won because they can buy the results they desire, irrespective of the cost to everyone else. There exists no viable alternative system, political constituency, nor an emergent zeitgeist to challenge the global rentier militarist-imperialist corporate-state ideal type model of economic, social, and political organization.
    Notable so-called Progressives are direct or indirect beneficiaries of the success of the neo-imperial rentier corporate-state and its extreme wealth and income concentration.

  24. aaron

    The NYT should probably split into two different papers. Some sections are quite good, but a lot of it is like a bad tabloid, eg. the op/ed section, the Bengazi piece, the front page in general.

  25. Steven Kopits

    The amount of financialization in, say, oil markets is a) the volume to be hedged x b) the price per barrel of oil.
    If the price of oil has increased fivefold over the last decade, and the volumes to be hedged remain roughly stable, then the amount of financing required would have to be 5x that of 2003, say. The futures price of oil will adjust until it draws that volume of money into futures contracts.
    In this view, then, peak oil is driving financialization. The money is passive; the oil industry dynamics are active.

  26. Johannes

    Hi James, happy new year to you.
    Yes, a market can be cornered and Lord Beaverbrook (that’s the uncle of Jonathan Aitken the great) could tell you something about that.
    No, the oil business is the most attractive of all on this planet for cornering (could be that fracking will change the game) and Kopits shall explain to you why.
    Yes, I truly believe you that no one is willing to pay you for your blogpost words, not even a liar or a fool would give you a cent.
    Ecomedian at January 2, 2014 05:21 AM: you’re right, but believe me, the real deals are NOT reported in the papers, not even the tabloids.

  27. Johannes

    @aaron at January 2, 2014 10:08 AM : NYT sales are declining (hello, Huffington post) and the cure is some sort of sensationalism, at least thats what I heard via Mark Thompson.
    Bosom, blood and baby strategy ? Hopefully not, guess there will be some time left until naked women appear at the NYT front page.

  28. jonathan

    I assume you know one or both of these guys or you would have written a correction of the facts of the article rather than focus on the people discussed.
    As to content, I assume investigative pieces are flawed. A perfect example is the 60 Minutes Benghazi debacle: they put on a guy as their main witness without actually checking what he told the FBI. Politically motivated? Maybe, given Lara Logan’s prior comments on the subject, but maybe it was just a way to “sell papers” that was too good to pass up. As a non-political example, the Boston Herald ran an investigative piece the week before the 2008 Super Bowl alleging the Patriots had videotaped the Saints’ practice before that Super Bowl and that Matt Walsh, the video guy, had more tapes. Too good a story not to run … except it was completely wrong. Sometimes the desire to put out such a hot story overwhelms sense.
    As to the content of the NYT piece, it had two parts, the one about speculators – highly flawed to anyone who has read your blog – and the other about disclosure of financial ties. You attack with outrage the one but the damning parts are lines like Craig Pirrong saying he wouldn’t disclose payments by financial firms: “That’s between me and the I.R.S.” and the material about the lack of disclosure. I agree the writer took liberties with the U of I identification – which I’d bet was on purpose (though it has been corrected) – but it’s still the U of I in the public mind. If a right wing publication came up with something about funding research into gun violence or abortion rights by x professor, they would instantly draw a line from y group to that professor no matter the link. And they would pillory the lack of disclosure. (Heck, the commenters to this post who applaud it in other posts demonstrate highly imaginative ability to link x to y in the most improbable ways.) That is how public, political arguments work. If you expect otherwise, you are pretending to be naive.
    The article is heavy-handed and wrong in the underlying material but correct about disclosure. Craig Pirrong made a very poor choice in his response and that was, it seems, used to frame the argument. Think about the stupidity of that line: a huge news organization calls and says they’re doing a piece about the relationship between Wall Street money and academic work and your response is to tell this huge news organization to shove it. Note that in another quote, Pirrong refers to a person who questioned his objectivity as a “dipstick”. That was on his blog, but they put it in a context that makes him look really bad. In other words, he stupidly ticked off the NYT. Do that, you may pay the price. If you don’t get that, don’t work in public.
    I’d go so far as to say that Pirrong’s response shaped the piece – which is mostly about him – and that he drew in Scott Irwin. If the piece was just about Irwin, there wouldn’t be much of a story or much outrage, just questions about adequate disclosure. But Pirrong gave them a “story”, meaning something hot to sell, by giving the idea of disclosure the finger. As the GOP has pointed out, these academics are employed by government funded entities and they can be required to disclose. The U of Houston is a state school which receives about $130M in federal research funding. And you have an employee – as the GOP says, a “public employee” – telling the biggest paper in the country that he won’t disclose what he’s been paid.
    If I were Scott Irwin, I’d be pissed at Craig Pirrong.

  29. Bruce

    Steven, yes, and US peak oil production per capita in 1970-85 (down 50% since 1970) coincided with the US contracting “Dutch Disease” and the resulting deindustrialization and financialization having reached today’s extremes.
    Now Canada and Australia have “Dutch Disease” coinciding with global oil production per capita having declined in a similar manner as US oil production in the mid- to late 1970s with global real GDP per capita flattening out since 2007-08.
    The implication is that growth of “globalization” and “trade” (Anglo-American imperial global trade superstructure) has peaked (analogous to Britain in the 1880s-90s) with Peak Oil, which in turn suggests growth of China’s real GDP per capita will decelerate steadily hereafter, with the country having fallen into the “middle-income trap”, facing the risk of a debt-deflationary contraction of investment, production, and exports in the years ahead.
    Note that what it took the US to achieve over the course of two centuries (more than three centuries for Britain, Japan, Germany, the Netherlands, and Spain), it required China (after 1950 when Mao took over and with massive FDI from the US and Japan since the 1990s, far more than the US and Commonwealth countries received as a share of GDP from British banks, miners, shippers, insurers, etc., in the 1870s-1910s) just sixty years to increase real GDP per capita a similar amount. Granted, The result is the largest fixed investment and credit bubble as a share of GDP in world history, surpassing the most recent episodes in Japan and the US.
    But China is in the “middle-income trap” at $100-$110 oil, whereas the US and Japan reached similar levels of real GDP per capita in 1929-30 and the late 1960s respectively with the constant-dollar price of oil in the $20s-$30s.
    Thus, China, India, and Brazil are 40-80 years too late to the auto-, oil-, and debt-based economic model, whereas the ME oil emirates are building out an ultra-modern, high-tech, high-entropy, late-Oil Age economic, social, and political superstructure that is utterly unsustainable.

  30. ezra abrams

    To all
    I urge you to read thru the original NYT story
    imo, our host is not giving a balanced picture of the story.
    For instance, our host has a quote from teh 2nd page (of 4 online):
    “The business school at the University of Illinois has received more than a million dollars in donations from the Chicago Mercantile Exchange and several major commodities traders, to pay for scholarships and classes and to build a laboratory that resembles a trading floor at the commodities market. ”

    but our host doesn’t mention the following, found on the 4th page:

    While the C.M.E. has given more than $1.4 million to the University of Illinois since 2008, most has gone to the business school and none to the School of Agriculture and Consumer Economics, where Mr. Irwin teaches. And when Mr. Irwin asked the exchange’s foundation for $25,000 several years ago to sponsor a website he runs to inform farmers about agricultural conditions and regulations, his request was denied.

    on balance, imo, the article presents a lot of stuff that our host is not properly responding to, but, again, read it yourself and decide

  31. Nick G

    I’m not clear about this statement: “By definition, the counterparty to such a transaction must be a financial entity of some sort.”
    Why couldn’t a oil producer sell a futures contract to a consumer, such as a refinery?
    I always thought that was the original purpose of the futures market: allowing a seller to contract with a buyer to deliver a commodity in the future.

  32. Al

    Ezra, you may be naive with respect to rhetorical techniques, which is perhaps why you assume that people on this comment thread have not read the article. When you think that you have picked up on something that seems trivially obvious, yet everyone else seems to have missed it, your should check whether it is your insight that is trivial. In this case, you may have avoided puzzlement by asking why the author reported on the business school donation in a paragraph discussing Professor Irvin. As you perspicaciously noted, the business school has nothing to do with Irvin.

  33. Rick Stryker

    Excellent post JDH.
    I’d just add that besides smearing Pirrong and Irwin, the article also smears the regulatory community. There is a lot of insinuation and subtext in the article, some of which is directed at the regulators. I’m not sure that’s been much noticed.
    Apparently, according to the article, the regulators are not competent people who are capable of independently examining the arguments presented to them based on evidence and facts. No, the article implies, the regulators are simple folk who rely on expert authority to tell them what they should believe. Unfortunately, the regulators are also easily bamboozled by faux expert authorities who, unbeknownst to the regulators, are being paid to present false views. Not surprisingly, the article suggests, these false views are designed to benefit the very people that the regulators have been charged with supervising.
    How are the regulators supposed to know which authorities to believe? It’s all so confusing. Left on their own, these poor hapless regulators are so easily swindled by academic con men. What the regulators really need is a hard-hitting expose that rips the mask from the faux experts, revealing which of them to be just paid spokesman for the regulated. Once the regulators see the truth, they can disregard the views of the fake experts, because their views are, or course, necessarily false. What’s more, without being paid to do so, no other expert could possibly make the same false arguments as the phony experts. With the confusion and obfuscation lifted, the article insinuates, the business of regulation can resume.
    This is supposed to be a business article in a major newspaper? We are supposed to believe that this is the way the regulatory process actually works? I would think that the regulatory community ought to be pretty unhappy about being portrayed in such a negative light in this shockingly condescending article.

  34. Steven Kopits

    Nick –
    An oil producer could sell a future to any financial counterparty, as you suggest. But that counterparty has to assume the price risk associated with the future–that’s the whole point of hedging. Thus, the flip side of hedging is speculation, by definition.
    The point I was making about financialization was that, if the price of a commodity has increased fivefold and volumes to be hedged are roughly constant, then the amount of money needed for futures transactions also increases fivefold.
    But where can such money come from? It could be a very broad range of sources, including individual investors, hedge funds and specialized trading outfits. It will create the impression of financialization, but that financialization is driven by prices and volumes, not by the nefarious intent to pump money into a given commodity, oil in this case.
    This is neither to paint traders as angels, nor to discount the possibility of manipulation or momentum trading (where the proposition becomes based on the greater fool theory). But as a general matter, if producers want to hedge their output, then prices will adjust until speculators (counterparties) are drawn into the trade.

  35. fladem

    Academics should disclose the sources of funding for their research.
    What this post is really about is a continuation of the inability of academics to apply the standards to themselves that other professions apply.
    A lawyer discloses his conflicts. A financial advisor should disclose theirs.
    But suggest that an academic do the same and it provokes outrage.

  36. anon3

    Anon2 — on R+R, JDH had to take a position on one group of academics versus another. Its not clear that particular groups are his “buddies.” An alternative hypothesis is that he calls it like he sees it.

  37. Hans

    Ditoes, JDH, a most brilliant post..
    “The people pushing the story that the 2002-2008 run up in commodity prices was caused primarily by speculators are doing exactly that: assigning magical powers to things they haven’t taken the time to understand. I don’t care how financialized a commodity market is, prices are still set by real supply versus real demand. If you want to manipulate the supply upward, you must remove supply.”
    Well stated, Tom..It should be required reading for all cabalist…
    Subjectivity has replaced objectivity and the truth in what used to be called a newspaper; I am afraid that the New York Slim is no longer serving the public interest but rather it’s own..
    It must and will die…

  38. Nick G

    I agree that if the price of oil goes up by 5x, it makes sense that the money flows in the oil futures markets will go up roughly proportionately. I also agree that the markets need “market makers”, who provide liquidity, and allow the markets to be used for more or less complex forms of hedging or speculation.
    But I’m puzzled by the idea that an oil consumer who chooses to buy oil in the futures market is a speculator who has taken on price risk. Let me make sure I’m not missing something: isn’t the whole point of buying a future contract that the buyer has price certainty at the time of delivery? Perhaps they simply want to reduce the risk of blowing next year’s budget: they can buy next year’s oil input at a known price, and sell next years fuel output at a known price, and lock in a profit.
    So, in the old-fashioned core business of actually, you know, selling stuff, the seller is a producer, and the buyer is a consumer who is not primarily a financial entity.

  39. Tom

    Just to be clear, I’m no way saying that speculation in futures don’t affect spot prices. Of course they do. When a producer sells a future, it’s selling future supply. When processors and/or speculators bid up the price of futures, they are bidding up the price of securing future supply today. Of course that affects the spot price. Speculators are of course very much involved in setting the spot price.
    However, speculators are not able to raise the price over demand for any considerable length of time. They can only elevate the price by continually adding to hoards, which must eventually be released, producing a price-depressing effect roughly equal to the earlier price-elevating effect of hoarding. Over time the average price will reflect the real supply versus real demand.
    Financialization can mean many things. I’m don’t see the selling of futures by commodity producers or the speculation on those futures’ prices as a dangerous kind of financialization. The inherently cyclical nature of credit will always be a recurring problem, but I think modern societies tends to exaggerate those problems with misguided policy. I see two main reasons for US financial sector growth relative to the economy: one good, doing well at globalization, and one bad, state support at the expense of other sectors.

  40. jonathan

    An example from today’s NYT, regarding a bill to ban GMO crops on the island of Hawaii. The person speaking is a County Council member:
    But Ms. Wille had largely dismissed the opinions of university researchers, citing Monsanto contributions to the university. In 2012, she noted, the company made a one-time donation of $600,000 for student scholarships at the College of Tropical Agriculture and Human Resources, an amount that the college said represented about 1 percent of its annual budget that year.
    “It is sad that our state has allowed our university departments of agriculture to become largely dependent upon funding grants from the multinational chemical corporations,” Ms. Wille told reporters, suggesting that the university’s professors were largely a “mouthpiece for the G.M.O. biotech industry.”
    And you’re outraged because the NYT got a reference to parts of the UofI? This kind of thing is used all the time by people on the right or left. I picked this example because it comes from the left.
    I suggest again you consider why you’re outraged.

  41. Steven Kopits

    Nick –
    Of course, you’re right. A futures contract could lock in both seller and buyer , if they are the initial producer and ultimate consumer of the oil. In such a case, price risk is eliminated for both parties.
    However, most of the oil used in the US is in transportation, the majority of which is not hedged, ie, you pay at the pump whatever the price is at the time. (I am personally flirted with the idea of a pre-paid card system for just such a purpose, but that’s another matter.)
    In any event, you are correct, although as a practical matter a futures contract will ordinarily require a party taking the role of speculator.

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