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“Those who call for stamping out speculation may be confused between speculation and market manipulation,” Stanford business Professor Darrell Duffie wrote in the Wall Street Journal. “Manipulation occurs when investors ‘attack’ a financial market in order to profit by changing the value of an investment. Profitable speculation occurs when investors accurately forecast an investment’s fundamental strength or weakness. … Speculation is not necessarily harmless. If a large speculator does not have enough capital to cover potential losses, he could destabilize financial markets if his position collapses. The Over-the-Counter Derivatives Markets Act, which could come up for a vote in the Senate soon, will hopefully reduce such risks. It would be better for our economy to enforce anti-manipulation laws, and require that speculators have enough capital to cover their risks, than to attempt to squash speculation.”

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Also on Stanford Knowledgebase:

  1. Q&A: Stanford financial economist Darrell Duffie discusses government takeover of Fannie Mae and Freddie Mac
  2. How Big Banks Fail and What to Do About It
  3. Achieving Financial Stability

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