Macbeth and the Market

More significantly, there's been no new information that could justify the dramatic decline in their stock prices -- nothing, that is, other than a news leak that the Treasury was preparing some contingency plans in case things started to unwind. That's the kind of news that quickly becomes self-fulfilling in a volatile market. But contrary to what you've heard from gleeful critics, it hardly constitutes proof that Fan and Fred are insolvent or that the public-private model on which they are based is fatally flawed.

The lessons of bubbleology also suggest that speculation is a significant factor in the run-up in commodities prices. Yes, we should have expected to see commodities prices rise steadily over a several-year period until supplies could catch up with the increase in demand from emerging countries. But no changes in the fundamentals can possibly explain the sudden and dramatic price increases over the past year. It's also rather suspicious that these price spikes coincide with a big influx of money into commodities futures from pension, endowment and mutual funds.

This has all the markings of a self-reinforcing process in which higher prices beget higher prices, a.k.a. a bubble. Suppliers stop worrying about price declines and decide not to sell their commodities forward, while buyers of commodities feel even greater need to buy futures contracts to hedge against price increases. And the more futures prices rise, the more financial speculators pile in.

The good news is that Washington has finally acknowledged the serious damage to the real economy that can happen when markets turn irrational. Over the past two days, the mere threat that Congress may authorize regulators to raise margin requirements on futures contracts has triggered the biggest decline in oil prices in more than three years. And the emergency order by the Securities and Exchange Commission outlawing "naked" short-selling of key financial stocks sparked a huge rally in those stocks, as shorts scrambled to buy the shares they never owned but had promised to sell.

Don't get me wrong -- there's plenty of bad news ahead, as we learned yesterday from those bubble deniers at Merrill Lynch. But remember that, in economics as on the Shakespearean stage, the only thing more dangerous than assuming the best is for everyone to assume the worst.

Steven Pearlstein will host a Web discussion at 11 a.m. today at washingtonpost.com. He can be reached atpearlsteins@washpost.com.