speculation, banks, etc.

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

On Thu, 26 Nov 1998, Arvind Kumar wrote:

> If it is
> possible to provide an efficient system to those indulging in genuine
> trade while at the same time weeding out speculation, it would be the
> best system (Remember, even the New York Stock Exchange imposes limits
> on program trading in order to reduce the efficiency of speculation)

a) It is not possible to provide an efficient system for curbing what
you call speculation. You can only do so at the expense of curbing trade
and free flow of information; thus giving undue advantage to some who
possess inside information. 

b) There is no way to determine whether a particular investment/ trade
is speculative. Second, so-called 'speculation' is beneficial and not
harmful. I dealt with at length at some point in time. Else, simply
pick up a good book on international finance, corporate finance, and
find out full reasons. 

> laundering. The best solution is to allow convrtibility to companies who
> want to genuinely invest in india.

There is no known mechanism in the entire world to discern that. 
 
> As to your other question regarding Reserve Bank autonomy, implicit in
> such a demand is the assumption that the finance minister is
> incompetent. There is no other reason. Hoping for autonomy of Reserve
> Bank can only be a dream. 

False. The reason for Reserve bank autonomy is NOT the possible
incompetence of the finance minister. It has to do with the necessity
for monetary policy to be determined strictly and rigidly on sound
principles an not on short term political incentives. The fact is that
in New Zealand, Germany and USA, among many others, the central bank is
enormously autonomous. The chairmen of the central bank outlive their
political appointees and law prevents encroachment on central bank
policy by the executive.

Read a good book on banking, monetary policy, etc. Keep learning!!

It is VERY common for people to realize the enormous amount of fallacies
that they hold when they pick up books on how an economy functions. It
is amazing how our 'common sense' misguides us deeply. That is the key
problem we have to overcome.

Books consider all aspects of the argument, including the commonly held
views like what you have expressed here, and show what is the true logic
of the case. Books also show why there might not be consensus on
particular aspects of an issue. However, on both these issues, there is
massive consensus (speculation, autonomy of central banks).

SS


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