Capital: New Futures Could Help Folks Insure Against Economic Risks
BEGINNING NEXT MONTH, speculators bored with trading mortgages, credit-card receivables and heating-oil futures will be able to bet directly on the number of Americans who have jobs.</br></br>At first, this sounds like a bad idea, one that strips away all subterfuge and truly turns Wall Street into a betting parlor. Imagine the bearish trader celebrating as wire services report that U.S. employers cut their payrolls in September. The more layoffs, the more he makes. He cheers. Cue the angry mobs.</br></br>Although individual investors won't be able to participate just yet, this may be a step toward something more socially useful: a way for ordinary Americans to insure against risks such as falling home prices, a sinking economy or a resurgence of inflation.</br></br>"The sharing of economic risk is one of society's deepest concerns, and rightly so," Yale University economist Robert Shiller says. "To the extent that inequality is created by pure luck, it's not only painful, but a shame." Sharing harm from bad luck is the reason for life insurance and government insurance against temporary unemployment. Global financial giants offer big companies ways to hedge the risks of unwelcome turns in interest rates, currencies and commodity prices. So why, Mr. Shiller asked in a 1993 book, doesn't our increasingly sophisticated market system allow more ordinary folks to share their largest economic risks?</br></br>The short answer: No one institution is wealthy enough to shoulder these risks, and most early attempts to develop markets to spread the risks have flopped. The Coffee, Sugar and Cocoa Exchange's attempt to establish a futures market in the consumer-price index, essentially insurance against inflation, died in the early 1980s as a result of lack of interest. The London Futures and Options Exchange's experiment with betting on real-estate prices collapsed in the early 1990s amid reports that false trades had inflated trading volume.