Forwards and futures are kind of esoteric topic most people never deal in them. They're derivatives. They're so-called derivatives because they're buying or selling something on a forward or futures market is not as simple as buying on the spot market. So the spot market for any thing is that the market for immediate delivery. You pay the money, you get the item. Forward and futures reflect contracts involving future delivery. And it's more complicated. But I think that they're really important to economics because our markets have to reflect time as well as quality. And time is an essential feature of our lives. And so we have with forward and future's markets, we have not just one price but a different price for every different future delivery date. So instead of a single number for something, or a commodity say, it's a whole array of numbers reflecting the different delivery dates in the future. So as I said, most people don't seem to know much about them, don't really think about what they are. But I referred earlier to an essay that Charles Conant wrote in 1904 called Wall Street and the country, the function of stock and the produce exchanges. And he was lamenting that the public just doesn't get it. They think that these markets are places where rich people gamble, they speculate. But in fact, there is such, people do gamble on these markets but they do have a function,a real function. As he emphasized, they're tied to business, they're not games. Gambling is an entertainment industry. They conceive of games that will be fun to play but it's not particularly fun to trade in pork bellies. Why would you want to do that? It's not a game. So it reflect- reflects some underlying economic activity. But I actually documented in the paper I wrote 25 years ago with Maxine Boycko, how much people mistrust these markets. So we did a survey in 1990 in two cities, Moscow and New York, comparing attitudes to markets. And we asked about grain trading, we didn't mention forwards and futures because most people don't even have a clue that they exist but they know there has to be grain traders and of course grain traders trade typically, in futures or forward markets. So, the question was grain traders in capitalist countries sometimes hold grain without selling it putting it in temporary storage in anticipation of higher prices later. Do you think this speculation will cause more frequent shortages of flour, bread and other grain products? Or will it cause such shortages to become rarer? Well, the number one response was shortages are more more common. And in fact, the amazing thing is the Americans thought that. There even more than the Russians, we thought that communist ideology would encourage the Russians to think that speculation creates shortages. But in fact, it was less than half of them who picked the, take that. So why would you think about this? Does storing grain for shortages more common? I mean, I think just when you think about it in simple common sense, an oversimplified version of the world is that there's one harvest of grain every year. Okay? Does storing grain over the year make shortages less? How could that possibly be true? Storing grain is essential if you only harvest it once a year, somebody has got to store it. Unless you could eat it all on the day of the harvest, you can't do that. You've got to eat it over the year. So it's an essential business in every country storing grain. Okay? You understand that when you buy a sandwich or a have a breakfast bowl of cereal, you know that that cereal was in somebody's storage warehouse for, especially, think about your- right now is a good time. We're in February- we're in March. It's just before a harvest. We're coming out of the winter. And you better- everything you eat has been stored unless it comes from the south america or the southern hemisphere. But the public doesn't get that. What sort of products or assets have futures markets associated? Good question. The people at the futures exchanges would like to know the answer. There's an old story, futures market story that, you know how they figure out what markets will be a success? It's the same rule that chefs use as they call it the spaghetti rule. How do you know when the spaghetti is done? You take it out of the pot and you throw it against the wall and if it sticks, it's done. Okay? It's the same thing. You start a futures market, it sounds plausible and you try it and if it goes, it goes if it doesn't, you shut it down. So I've had experience with starting a futures market with my real estate- my colleague Karl Case and I worked with the Chicago Mercantile Exchange and created the home price futures market. It's now 10 years old. It's going but I have to say it wasn't as big a success as we'd like and we just don't have a clear answer. Real estate is a huge market that occupies a lot of attention. People worry about the values of their houses. They are looking for answers. So you'd think they would trade a lot in a futures market. I think that they may yet do that but as of this date, it hasn't been big. Now, one thing your question is a little bit like asking, how do you know when someone will have a nice party at his house where everybody comes? Well, when you throw a party, you never know that will be a nice party. And if everyone here says there's a great party at so and so's house, they all come. It's that sort of thing. It's a social phenomenon. Some efforts to start futures markets have attracted a huge attention and others haven't. It must have something to do with risk and the feeling that there's a lot of risk to be managed. And so, maybe the problem with single family home futures, is that the homeowners are not professional risk managers and they're there for a long time and they can forget about the risk of their home. Maybe that partially explains it. But I don't know that we have any really solid explanation for why some markets exist and why some don't.
