THE COVETED SCAPEGOAT
before the American Enterprise Institute,
Washington, D.C., October 31, 1985.
Published in the Futures Industry Association Newsletter,
ultimate bane of futures markets is their arcane existence.
It is the source of a multitude of pejorative beliefs about
our marketplace that have plagued us since time immemorial.
It has made our markets the ideal scapegoat.
is not to say that our markets are without fault—utopia has
not yet arrived on the floors of futures markets. Rule violations,
greed, and avarice are ubiquitous human characteristics and
occur in every endeavor. Futures markets are no exception.
However, futures markets and their traders are often the brunt
of grossly unfair prejudices and accusations that simply have
no basis in fact.
process of repudiating the unwarranted and repugnant slander
directed at futures markets throughout history is, to say the
least, difficult. One must begin by openly calling attention
to the demagoguery and debunking false beliefs.
ludicrous to think that foreign exchange can be entrusted to
a bunch of pork belly crapshooters," proclaimed a prominent
New York banker back in 1972 on the eve of the Merc's launch
of the International Monetary Market.
New Currency Market: Strictly for Crapshooters," echoed Business
Week and wrote that "if you fancy yourself an international
money speculator but lack the resources. . .your day has come!"
comments, defamatory innuendos, inflammatory jokes, false accusations,
misleading opinions, half-truths, out-and-out lies, that is the
fate and burden of futures markets. Thus it has been throughout
time, thus it will no doubt continue. And why not? From time
immemorial, predicting the future has been a hazardous occupation.
Good news was universally welcome, but its failure to materialize—or
its counterpart—was shabbily treated. "Behead the messenger
of bad tidings" was not an uncommon reward.
and options markets—that little understood corner of business
activity, that complex arena of esoteric economics, that noisy
place shrouded in mystery, that distant cousin of the financial
world—have served as an ideal scapegoat since time immemorial.
And why not? Visit the tumultuous, colorful, rowdy trading floor.
Observe the rough, boisterous, undignified members and brokers.
Clearly, there is something sinister going on there! Clearly,
no legitimate business is being conducted! And, even worse, there
is speculation going on there. Clearly, dens of speculation cannot
be a place for serious investment! Read the headlines—their members
are always out to make a killing. Those markets have nothing
to do with capital formation. Those markets create volatility.
Futures markets, the ideal scapegoat.
anything changed? In 1973, a group of Chicago housewives marched
on the Chicago Mercantile Exchange to protest high food
prices. A few years later, during the 1977-78 farm crisis, U.S. farmers
drove their tractors to the Chicago Board of Trade on LaSalle
Street to protest low prices on their agricultural products.
anything changed? After the War of 1812 played havoc with the
U.S. farm economy, anti-speculative sentiment was rampant. Buying
forward was acceptable, but any market that also allowed the
opposite—forward sales—was unacceptable. The New York legislature,
applying its ultimate wisdom, enacted legislation banning all
anything changed? In January 1985, 70 years later, leaders of
the American Agriculture Movement demanded that short sales in
futures be banned because "selling depresses prices." Later in
the year, mounting frustrations over the nation's failed agriculture
policy, its low farm prices, its record crop surpluses and sagging
land values inspired farm spokesmen—in search of a scapegoat—to
denounce the Chicago exchanges as the Bermuda Triangle of
Agriculture. A U.S. Senator piously agreed, pointed his
finger in our direction and proclaimed that "never have so few
done so little to make so much from so many."
anything changed? In 1976 when the U.S. Treasury bill and Treasury
bond futures markets were introduced, countless articles were
published that warned of the negative impacts of these new inventions,
of their unfavorable effect on the underlying cash markets by
causing price distortions, of their disruptive market influences
because of fraudulent acts by traders, and of their adverse consequences
to the U.S. Treasury's debt management activities. If it were
known then of our eventual 200 billion plus dollar deficit, these
futures markets surely would have been an excellent candidate
for its probable cause.
respected Economist, in its January 17, 1976 issue,
in reporting on the new interest rate markets wrote, "Like Linda
Lovelace, the girl with the deep throat, the International Monetary
Market (IMM) of the Chicago Mercantile Exchange tries to make
money by being more outrageous than its rivals. Now that its
currency futures market is well established—it was opened in
1972 by women in fancy dress—the IMM has this month opened a
trading pit in United States treasury bill futures. Bidding
for the government paper takes place on the same floor as for
pork bellies, live cattle and three month eggs."
futures and options markets are not immune from criticism. Surely,
they are not utopian—what enterprise is? Surely, there are rule
violators, there is greed and avarice. Surely, they are not without
sin. We agree. But neither are they the work of the devil! And
as an industry—they are a great deal better than most.
next time you hear a story, see a headline, hear a rumor maligning
futures and options, ask yourself the following questions: Would
the world's financial system have survived the economic stresses
and strains of the 1970s and early 1980s as well as it did without
these markets? Would the shrinking base of private sector capital
have been equal to the increased public sector demands without
throwing the free world into financial turmoil, were it not that
futures markets provided a new and more efficient means of capital
utilization? Would the speculative fevers unleashed by volatile
price movements due to unprecedented inflation and record interest
rates, followed by unprecedented disinflation and falling interest
rates, not have materially disrupted the world's financial fabric
were it not that futures and options acted as a buffer and a
pressure valve? Would our shrinking world—where a bank in South
East Asia is as near as your downtown counterpart, where an event
in Abu Dhabi is as close as your nearest telephone—not demand
a means, such as our markets provided, to instantly partake and
protect yourself from the financial effect of a significant world
there had not been futures and options markets, wouldn't they
have been invented by now? And if there were no economic justification
for financial futures, how could these markets have achieved
such phenomenal growth in a matter of just thirteen years. How
could they have attracted so many financial institutions, so
many banks, money managers, foreign exchange traders and pension
fund managers worldwide? How could exchange membership scrolls
have swelled so quickly with the names of so many of the world's
most prestigious institutions? How could the transaction volume
of these markets have experienced such unparalleled increases
unless there were a fundamental need for them as a modern tool
of business, finance, and risk management. How could these markets
be as evil as their detractors claim, and yet be as coveted and
copied as they are by every major world financial center.
how could these markets have completely fooled four U.S. federal
agencies of exemplary credentials and unquestionable qualifications—the
Federal Reserve Board (Fed), the Commodity Futures Trading Commission
(CFTC), the Securities and Exchange Commission (SEC), and the
U.S. Treasury—in their recent study to determine the effects
on the U.S. economy as a result of trading in futures and options?
This study—mandated by the U.S. Congress and conducted under
the helmsmanship of the Fed—was so all inclusive that it covered
virtually every issue ever raised about these markets. The resulting
document, together with the Fed's separate report on securities
and futures margin, represented the most comprehensive report
on the subject ever produced.
yourself how these reputedly wicked markets could be the recipient
of the following Federal Reserve Board findings: That financial
futures and options serve a useful economic purpose by providing
a more efficient way to manage risk; That the liquidity of related
cash markets such as those for U.S. Treasury securities and common
stocks have been improved by the presence of futures and options;
That the Fed's ability to conduct open market operations in an
orderly manner across a range of maturities in government securities
has been enhanced by futures and options contracts; That this
also means that the Treasury's ability to conduct debt management
operations is similarly enhanced; That the improved liquidity
in the Treasury securities market means interest rates paid by
the taxpayer on debt incurred by the Federal government is lower
than it would be without financial futures markets; That the
ability to hedge corporate bond underwritings results in a lower
all-in cost of funds for the private sector; and, That there
appear to be no significant regulatory problems concerning either
manipulation or customer protection.
you asked yourself these questions and reflected on the answers,
you would, in all candor, become skeptical about the derogatory
comments, defamatory innuendos, inflammatory jokes, false assertions,
misleading opinions, half-truths, and the out-and-out lies one
reads and hears about futures and options.
we therefore now expect things to change? Can we expect a fairer
review now that the mandate of Congress has been satisfied, now
that we have some credible answers to those age old concerns
that historically have plagued and inhibited these markets.
Can we now expect futures and options to become a universally
accepted and integral tool of risk management?
it. Listen to the cover story of Business Week, September
16, 1985, "Playing With Fire: As Speculation Replaces Investment
Our Economic Future Is At Stake:" "Ah, progress. Spurred by
deregulation, the financial inventors have been working overtime.
They've churned out a vast array of new instruments and created
whole new markets. It's now possible for even the average citizen
or company to take a financial position almost instantaneously
in just about anything, anywhere. What only 15 years ago was
an oppressively restrictive financial system has been recast
in a pluralistic, almost anything goes mold. . . .by stoking
a pervasive desire to beat the game, innovation and deregulation
have tilted the axis of the financial system away from investment
toward speculation. The U.S. has evolved into what Lord Keynes
might have called a `casino society'—a nation obsessively devoted
to high-stakes financial maneuvering as a shortcut to wealth."
that, Business Week paying homage to Lord Keynes. Will
wonders never cease!
listen to Barron's, "Pin-Striped Pork Bellies: Why
Stock Index Futures Are Red Hot:" "Like their lightening-paced
video game counterparts, stock index futures offer instant gratification
or instant annihilation depending on the accuracy of your impulses
and the quickness of your reflexes."
things never change. Thus, it is imperative that we inform and
instruct, divulge and debunk, proclaim and protest, again and
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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