Japan in Their Own Words (JITOW)/日本からの意見

Draw a Sharp Line between Speculation and Investment
ONO Goro / Professor, Saitama University

November 7, 2007
Amid the current credit turbulence caused by subprime lending, Alan Greenspan, former Chairman of the Federal Reserve Board, argues against the regulation of hedge funds by saying that hedge funds correct the distortions in the financial market and that the regulation of hedge funds would make it impossible to meet the financial challenges of the 21st century.

Free competition is supposed to yield the best possible results in the market, but only on the assumption that the competition takes place in accordance with a fair set of rules. In other words, a sound market is by no means a "free-for-all", but entails a certain degree of regulation. To use a soccer metaphor, the goalie can use his hands, but is not allowed to punch the opponent's forward with his fist. Further, if the market rules were to be made through competition in the market, the winner of the time would always make such rules as would favour him, and fair competition would not be ensured.

John Maynard Keynes said in his General Theory of Employment, Interest and Money that the Americans are essentially speculators. If so, it is natural that Greenspan, being American, puts himself on the side of hedge funds, which are institutional speculators. Some may take issue with this and say, "In economics, it is understood that all economic actions involve speculation. It is impossible to draw a line between investment and speculation." In theory, the profit of a marginal enterprise operating in a risk-free market will have to come down to zero. It follows then that profit-seeking enterprises are aware that they face certain risks as they operate. However, this does not mean that they are gambling in a simple game of dice. No one in his sane mind would argue that just because there is a sequential continuum of gray zones from almost black to almost white, you cannot tell black from white.

We should draw a sharp line between normal acts of production and distribution that are designed to multiply the value added of actuals and earn profit, and acts of speculation that seek to earn profit through transactions not directly related to the multiplication of the value added. It is true that some speculation is necessary for the smooth functioning of the market. But it is nothing more than an auxiliary action to facilitate the primary function of multiplying the value added, like a lubricant to a gear. The lubricant must not be a greater presence than the gear. It is a striking anomaly that exchange rate transactions equivalent in value to a whole year's global merchandise trade transactions take place in barely a week!

Hedging is a way to free those engaged in transactions of actuals from price fluctuation and other risks and thus facilitate their smooth production and distribution. In practice, they buy or sell actuals and, at the same time, buy or sell in the futures market in opposite positions to offset the risks arising from future fluctuations. Thus, hedging is required only for flow transactions, not for stock accumulation. Speaking plainly, speculation may be justified for purposes of hedging, but there is little justification for speculation in equity investment. The reading of the future differs from individual to individual, and some do not see the need for hedging. This means that, if hedging transactions are limited to those who transact actuals, the amount bought will not match the amount sold. There will thus arise the need to invite, from outside, bids for counter buying or selling. To put it another way, the value of the buying and selling for such permissible speculation should not exceed the value of buying and selling for the original hedging purposes.

Speaking as an economist hailing from Japan, which has the history of the oldest futures market in the world (rice trading in Dojima), I feel that, for the sound operation of the world market, it is unavoidable to have some restraint on speculation, especially the regulation of hedge funds, which are institutional speculators. Given that the primary role a securities exchange is to bring together the multitude of investors looking for things to invest in and the entrepreneurs seeking capital, what is of the greatest importance is the market capitalization (stock), and not the turnover (flow). What is needed in terms of flow is the turnover sufficient to assure the investors that the securities can be realized into money, and not a turnover grossly inflated by speculation. However, with the restructuring of the stock exchanges into stock companies under way in recent years, there is a high risk that the stock exchanges give priority consideration to their own shareholders and become preoccupied with the turnovers.

It is hoped that the major industrialized countries move forward with drastic reforms of the money/financial market before
the hegemonic influence of the money game originating in the United States spreads untrammeled all over the world and disrupts the real economies of the newly emerging countries that are about to take off.

The writer is Professor of Saitama University.
The English-Speaking Union of Japan

小野五郎 / 埼玉大学教授

2007年 11月 7日








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English Speaking Union of Japan > Japan in Their Own Words (JITOW) > Draw a Sharp Line between Speculation and Investment