See Tim Harford writing in the FT on speculators. And, the Financial Times has a very interesting story by Javier Blas and Joanna Chung on the recent backlash against commodity futures trading. I found fascinating new facts within it which I had not previously known, about the history of the fears about derivatives on the part of politicians, including facts about the ban on onion futures in the US in 1959 and the ban on wheat futures in Berlin in 1897. Within the article is this priceless story:
In 2002, when the US Congress was debating whether to close the "Enron Loophole" that is, to require that over-the-counter energy markets be brought under the full oversight of the US futures regulator Republican Trent Lott rose to his feet in the Senate chamber.
Brandishing a dictionary, the senator looked up a definition of "a derivative", a term referring to the complex futures contracts used in the energy markets to hedge the risks associated with holding physical supplies of commodities such as oil and natural gas. The dictionary told him that it was "the limit of the ratio of the change in a function to the corresponding change in its independent variable as the latter change approaches zero".
Mr Lott turned to his colleagues with a warning: "We don't know what we are doing here. I have serious doubts how many senators really understand [this] and it sounds pretty complicated to me."
I think recent events underline the importance of the appointments process. Faced with the complexity of the modern economy and particularly modern financial markets, you need people like Paulson, Bernanke in key positions of influence. The staffing challenge is particularly acute in emerging markets where we get a vicious cycle: financial markets are repressed, which impedes knowledge and experience about finance, which impedes human capital development, owing to which people more like Mr. Lott often endup running the show.