Federal government regulation of financial markets can work against innovation and economic prosperity by obstructing economic development in complex markets and creating additional risk and uncertainty.
This is one of the findings of a new Policy Brief from The Heartland Institute titled “Why Do Some Futures Contracts Succeed and Others Fail?” Finance expert Hilary Till explains how futures contracts produce impressive social benefits but sometimes are excessively regulated because elected officials and regulators fail to appreciate how they work.
Historically, price uncertainties caused by technological advances, wars, and government intervention have created financial risks for those who hold large inventories of durable goods. Businesses seek out financial instruments that enable them to hedge against those risks, producing economic benefits for producers as well as consumers.
Till illustrates the self-regulating nature of futures contracts by providing a brief history of why some futures contracts succeed and others fail. She writes,
[F]utures contracts and exchanges succeed only if they respond to genuine commercial hedging needs and if speculators are capable of managing the risks of taking on the hedgers’ positions. Unnecessary or inefficient futures contracts and exchanges don’t last long, the result of competition and continuous innovation by a sophisticated global futures industry.
It is incumbent on the finance industry, Till writes, to “educate the public and policymakers about the important role it plays in a global economy and the benefits it produces for the public, or else needless and counterproductive regulation will continue to be proposed and imposed.”