The Futures

Emily Lambert’s The Futures: The Rise of the Speculator and the Origins of the World’s Biggest Markets should help convince you that financial innovation isn’t all useless. A producer of eggs, or oil, or wheat, or corn is, after all, sort of accidentally stuck in two different businesses. On the one hand, he’s running a wheat farm. On the other hand, he’s running a series of gambles on the future price of wheat. If a group of people emerge somewhere to become dedicated wheat speculators, then the wheat farmer can focus on the wheat farming and offload the speculation to the wheat speculators. The development of ideas about how to extend this idea to a larger and larger set of commodities had real benefits for people.

The book is more witty and entertaining than it is analytic, but the description of the Chicago futures markets and their development is admirably clear and informative. The story that emerges highlights the essential paradox of financial regulation. As long as the political authorities minding the store of the futures markets were skeptical, the markets worked well. They were organized as partnerships, the partners were small-c conservative about the franchise value of their ownership stake, the pace of innovation was measured and deliberate, and every new idea had to overcome resistance. But the longer the markets go on working fine the laxer the regulation becomes and the more participants are encourage to push the envelop. And we all know how that ended.

This book definitely made me think that the Dodd-Frank law’s moves to ramp up the requirement that derivatives be centrally cleared is underrated and should have gone further.