Asset Bubbles—Is It a 

Mad World?

Eric Juzenas

CFTC
[A]ll too often in economics . . . 

faced with competing theories seemingly account for the samwe have no way of conducting experiments that can distinguisthem.

--Marcus H. Miller, discussing ass
Commodity Bubb

•

There is a perception, held by man

in the midst of a commodity bubble

•

A general theory advanced as a ca

seems to be:

–

Commodities have become an asset c

investment.

–

An influx of investment into futures ma

increase the demand for futures contracommodities underlying them.

–

This creates upward pressure on price

by fundamental market conditions.
Asset Bubbles

•

Defining a bubble.

–

Price rises quickly and then fall precip

•

Only known after the fact (not very useful)

–

Price departs from fundamental value 

speculative component to prices).

• In theory could be higher (inflated) or lowe

•

Asset bubbles are thought to:

– Distort the price discovery function of –

Cause misallocation of resources

•

Asset bubbles and futures markets 

studied.
Asset Bubble Theo

•

Existence of an asset bubble implie

has gone wrong with price discoveraffected market.

•

There are various bubble models:

–

Greater Fool Theory (Can always sell 

else for more)

–

Herding (Investors buy or sell in direct

trend)

–

Liquidity (Too much money chasing to

•

Commodities as an Asset class

• C

r

e

dit

–

Some firmly believe that there are no 
What is a Regulator t

•

Most debate on bubble policy h

relation to the Fed and moneta

•

The theory is raising interest ra

contains liquidity and pops the bubble.

•

While there is a great deal writt

bubbles and monetary policy, ointerventions are not discussed 
Making the Cal

•

Decision Tree (based on framewor

Rudebusch, Fed Reserve Bank of N

–

Can policy makers identify a bubble?

–

Will fallout from a bubble be significan

rectify after the fact?

–

What tools can deflate the bubble (In t

is monetary policy the best tool to deflbubble)?

•

Sorting through these questions req

deal of knowledge about markets thmay not have.
Controversy with Bubble 

•

There is still a great deal of debate 

whether the Fed should pursue a pto manage bubbles or not.

•

Concerns that have been raised by 

as Federal Reserve Chairman Bern

–

Given there are no generally accepted 

determines when there is a bubble ancausing it?

–

Monetary policy is a very blunt tool tha

wide ranging collateral damage.
CFTC Bubble Opti

•

The CFTC faces different policy options th

Reserve.

•

Options suggested have been:

–

Raising margin requirements for speculators

–

Position Limits

–

Limiting market participation through defining a

practices

•

Questions associated with these options:

–

Can we accurately identify a commodity bubble

– Is there an objective way to determine the true 

commodity?

–

Will these policy options effectively address a p

component to commodity prices?

– Is there a potential for detrimental impacts to m–

Might some of these proposals actually lead to 

prevent them?
Questions for the A

•

Are members concerned that there 

commodity bubble?

•

What further research could the CF

identify or rule out a speculative coprices?

• Is there a role for the CFTC in iden

managing commodity bubbles and research could facilitate this?

•

What further research can help in u

the potential impacts of different clainvestors?