Scary rice and oil prices have sent politicians to their bag
of tricks. Not surprisingly, they have pulled out one that has been a staple
since the Middle Ages: blame the speculators and hoarders. But the politicos
should be pointing fingers at themselves. Governments around the world buy and
store commodities, especially rice and oil, with justifications stressing the
value of everything and the cost of nothing. A notable proponent of commodity
buffer stocks was John Maynard Keynes. As Keynes put it in 1942: "One of the
greatest evils in international trade before the war was the wide and rapid
fluctuations in the world prices of primary products." He recommended that
governments use buffer stocks to smooth out price fluctuations by purchasing
commodities when prices were thought to be low and selling them when prices were
thought to be high.
Not surprisingly, this buffer-stock variant of "Father knows
best" has not worked. For one thing, it assumes that government bureaucrats
possess the same knowledge of market fundamentals and face the same incentives
as well-financed, farsighted private traders. It also assumes that politics will
not raise its ugly head. Both of these heroic assumptions are not met in the
real world. Government buffer-stock schemes are rife with politics, and instead
of generating profits from buying low and selling high, they tend to generate
Incredibly, the great Keynes was unimpressed with central planners' lack of local knowledge, nor did he acknowledge the inevitability of policiticization. To this late date, many smart people still choose to overlook both of central planning Achilles' heels.
Hanke also suggests a market-based way to get rid of the stockpiles.
How would an oil (or rice) bank work? The government would
sell out-of-the-money call options on its stockpiles. It might, say, sell
December 2008 oil options with a strike price of $200 a barrel. If the price
surged above that level, the option buyer would exercise and take delivery of
crude oil from the government's stockpile. If the price never reached $200, the
option would expire worthless, and no crude oil would be released.
Both of the presidential candidates dabble in industrial policy. But with Obama it is the unabashed centerpiece.