rofessor Cagan has prepared a very provocative paper, one containing many P assertions and judgments that in my opinion cry out for qualification if not objection. Rather than try to address every issue raised in the paper, however, I have decided to direct my remarks to what I perceive to be the paper's underlying theme and to comment on specific issues only where this appears relevant to my general focus.
As I interpret it, the main theme of Cagan's paper can be summarized by the following propositions: (a) markets for financial futures contracts will serve the needs of society best if they are left as unfettered as possible from government regulation, and (b) unfortunately, misguided, overzealous government bureaucrats fail to understand this point and at every opportunity seek ways to impose more and more unneeded regulation on these markets. Now this is a familiar theme. Most certainly it is one that Washington bureaucrats have become increasingly sensitive to in the past few months, and I am inclined to agree with Cagan that in the case of many agencies this recognition is long overdue. In my view, however, the Federal Reserve and the Treasury generally have had good records in recognizing the basic truth of proposition (a)
and have striven to avoid committing the errors of proposition (b). I certainly believe that on the whole they have so operated in the case of financial futures.
In rendering that assessment let me emphasize an important clause in proposition (a), namely, that markets are left as unfettered as possible. That requires stress because the Treasury and the Fed have indicated that they believe some government regulation and oversight of financial futures markets is needed. But this simply puts them in the same general camp with Professor Cagan. For he does not recommend repealing existing government regulations of financial futures; rather, somewhat ironically, he proposes imposing additional regulation in the form of position limits. Thus, the CFTC has found at least one supporter for its proposal, now out for comment, to impose position limits in all futures markets that do not currently have them.