Friday, August 28, 2009


OMGSH guys, remember that time I got into a huge 2 hour argument with that guy outside my office from the LaRouche organization or whatever it's called?

Check this out!

So the argument that I had with the guy outside my office was about oil prices and speculation. LaRouchies were stopping people on the street and telling them that speculators were the reason oil prices were so high. When they stopped to tell me this, I asked, "have you considered reverse causality?"

I argued that speculators were perhaps betting on higher oil prices BECAUSE oil prices were rising. Maybe it's not the speculators who are driving prices up. Rather, it is our increased demand for oil that is driving oil prices up...

And then, of course, we got into an argument about whether climate change is real. They don't believe in climate change.
They also hate Britain.
I don't really know why...Britain has good scones. Mmmm. Scones...

Anyway, Susan, Anli and I wrote this in response to an ECON 321 [Money & Banking] p-set question. We mentioned oil speculation...

Financial asset markets often fail to exhibit the "law of demand" we learn in ECON 101, in which price increases lead to decreasing demand and increasing substitution. In these financial asset markets, however, rising asset prices actually cause higher demand and falling asset prices are a signal to sell. This failure of the "law of demand" in financial asset markets means that asset price movements feed upon themselves. Once they're going up, they continue to do so. As the Economist writes, "asset prices pull themselves up by their own bootstraps." But once there is a downturn, prices drop very quickly.
In the case of Lehman's collapse, one can argue that the reluctance of other financial institutions - BofA and Barclays - to buy Lehman, even at bargain prices, served as an indication that the government and other banks were losing faith in the financial system. After the collapse of Lehman, the prices of such debt instruments as MBSs and CDSs fell in price, further contributing to higher debt to asset rations for surviving banks. This led to a freeze-up in credit as surviving institutions tried to liquidate their balance sheets.
The market for oil and oil speculation is another example of the failure of the "law of demand." During the summer of 2008 [when I got into that argument with the LaRouchie!], many domestic consumers of oil complained that high prices were being driven by speculation. However, the Economist argued that in reality, high prices may have been driving speculation.

[To which the LaRouchies would say, "but how can we trust The Economist? it's from Britain!"]


  1. Dude, you should comment on The Economist blog post and tell about your own experience with the LaRouchies.

  2. I ran into some LaRouchies at Foggy Bottom last morning...was thinking about that blog as well when I saw them. Anyways, Chavez post is finally up. Discuss!

  3. I'd also appreciate some info on the economics of nationalization of strategic industries, if you have any thoughts...

  4. ... why would you ever talk to the LaRouche people??

    Btw, I have to agree with the LaRouche people.

    What I think the LaRouche people are driving at is that speculators have taken a fundamental increase in oil prices and ran off with it to create an oil bubble and bust. Though I have no economic theory or data points to back me up, I have a gut feeling outrageously volatile price swings in a commodity as ubiquitous as oil (transportation, plastics, tar, etc) have an adverse effect on the economy.

    Anyways you and your friends (e.g. jenniferkwon) write such heavy stuff... I can just imagine what dinner conversations with you guys are like