A couple of notes following up on previous posts.

I spent some bits criticizing Paul Krugman of the New York Times for his assertion that the futures market doesn’t influence the price of crude oil. In addition to the arguments that I set out, what I didn’t know was that many OPEC countries actually use the futures market prices as a benchmark to set the contract prices at which most oil is actually sold. Apparently this is done because the spot market is too thin, and therefore too easily manipulated. This excellent post, with supporting references, sets it out. The same kind of speculative money also appears to be driving up grain prices (Edit: although one imagines that burning food isn’t helping). I think that we can safely discount any notion that the futures market does not affect actual selling prices.

Edit: This is probably all Jim Rogers’ fault, by the way. While there have been commodity funds and commodity pools for a long time, I think Jim was the first to start a mutual fund whose asset value per unit tracked a commodity index. Jim developed his own index, more broadly based than others such as the GSCI, and then (circa 1998) started a fund, the Rogers Raw Materials Fund, whose return was based on the change in the index. There has since been an avalanche of new money chasing this idea. I’m not sure what the state of the fund is currently, I think it got caught up in the Refco bankruptcy for which the CEO just got sent to jail. If you want to see the effect of these index tracking funds, check out what happened when Goldman Sachs unexpectedly reduced the weighting of gasoline in the GSCI in August 2006, from 8.75 percent  to just 2.3 percent. This change caused indexers to unload gasoline futures in a hurry; wholesale gasoline fell 82 cents over four weeks, an unprecedented drop; and crude oil, which in July 2006 had traded over $79 -  a record -  fell to around $56 by January 2007.

The government action eliminating the tax on forgiven or cancelled debt resulting from a short sale or foreclosure seems to be accelerating the “walk-aways,” where borrowers simply decide that their house was a bad trade and cut their losses. Jim the Realtor posts a comment made on his blog which typifies the “just a business decision” attitude. Edit: In the Sac Bee,

Walking away is embarrassing, Fatius, a pipefitter and welder, admits. But staying is “stupid,” he says.

The lenders and the housing market are in deep, deep trouble.