The time has come for governments to consider intervening in the oil futures markets to reduce the effect of speculative demand, which may be exacerbating the rise in oil and other commodity prices.
Whether we like it or not, from time to time governments are forced to intervene in markets first and answer questions later. The U.S. government has intervened in the capital markets over the last 12 months by allowing non-bank financial intermediaries access to the Fed discount window; by backing unwanted paper in the Bear Stearns Cos. portfolio to facilitate its purchase by JPMorgan Chase & Co.; and, more recently, the U.S. Treasury and Federal Reserve have announced plans to increase the Treasury line of credit for Freddie Mac and Fannie Mae and, if necessary, even buy their equities. These interventions have been predicated on the need to prevent a financial crisis that would have instantly destroyed carefully woven and well-developed financial networks along with the global trust in the U.S. and other financial systems.
All interventions come at a price. The least visible and most lasting impact of interventions is “moral hazard,” the term used to describe excessive risk taking on the part of economic actors with the expectation that the government will bail them out if things go wrong. That is why many economists and cautious investors dislike market interventions of any kind.