Wednesday, May 21, 2008
Senate Committee Looking At Commodities Investment Limits
Joseph Lieberman, chairman of the Senate Homeland Security and Government Affairs Committee, says he's considering legislation limiting large institutional investors in commodities markets. In his opening statement at a hearing convened to discuss the role of institutional investors and hedge funds in commodity markets and their affect on steadily rising food and oil prices, Sen Lieberman said that in only five years, from 2003 to 2008, investment in index funds tied to commodities has grown twenty-fold, from $13 billion to $260 billion. This unbridled growth raises justifiable concerns that speculative demand - divorced from market realities - is driving food and energy price inflation, and causing a lot of human suffering.
It fell upon CFTC Chief Economist Jeffrey Harris to defend the free markets against a dramtic Sen Claire McCaskill who raised visions of rampaging mobs across the heartland, pitchforks in hand, protesting food prices. You can listen to the full hearing here.
In this post last week, I said that eventually Congress would catch on, and start piling on speculative commodities investors, instead of blaming the much maligned oil producers. But I didn't expect them to convene a hearing so soon ... (Update May 24th 2008 - New York Times report says that Representative John B. Larson (D-CT) , plans to go even further, proposing legislation that would essentially ban over-the-counter trading of energy futures by traders who don’t plan to take physical delivery of the commodity. While Nymex trading would be largely unaffected, billions of other trades could potentially be brought to a halt.)
This is something which needs a widespread debate in the public marketplace. The difference between a free market and regulated prices is that a free market corrects itself. And if you're heading in the wrong direction in a regulated market, that's a recipe for disaster.
This same debate is going on in other countries too. Only difference is, the debate there, and the players, are much more informed than at Capitol Hill where people think the internet is a series of tubes. India's Finance Minister, P. Chidambaram, who by the way is the sort of financial whiz you want making such critical decisions, recently unleashed bans on futures trading on four agricultural commodities - refined soya oil, rubber, grams and potatoes. There's a big backlash going on against that decision now, with a committee set up to look into it, and op-eds dumping on the Finance Minister. If you read the linked article, you'll notice the author is a member of India's Parliament, and he knows more about futures markets, and their impact on the farm sector and commodity pricing than the entire U.S. Congress put together.
Point is, someone needs to inform Sen Lieberman and his committee that this is a one-way street. You can't turn around when you feel you've gone too far. People start getting used to stable prices, and since politicians need votes, no one will want to be the one who pulls the plug on the price controls. Something like what's happening with farm subsidies. Any President who suggests taking away the subsidies need not worry about getting reelected. So, unless Congress elects a couple of hard-nosed economists who know exactly what they're doing, and implement something which is capable of being tweaked back and forth, I wouldn't let them touch regulations for commodities investors with a 100 foot pole.
It fell upon CFTC Chief Economist Jeffrey Harris to defend the free markets against a dramtic Sen Claire McCaskill who raised visions of rampaging mobs across the heartland, pitchforks in hand, protesting food prices. You can listen to the full hearing here.
In this post last week, I said that eventually Congress would catch on, and start piling on speculative commodities investors, instead of blaming the much maligned oil producers. But I didn't expect them to convene a hearing so soon ... (Update May 24th 2008 - New York Times report says that Representative John B. Larson (D-CT) , plans to go even further, proposing legislation that would essentially ban over-the-counter trading of energy futures by traders who don’t plan to take physical delivery of the commodity. While Nymex trading would be largely unaffected, billions of other trades could potentially be brought to a halt.)
This is something which needs a widespread debate in the public marketplace. The difference between a free market and regulated prices is that a free market corrects itself. And if you're heading in the wrong direction in a regulated market, that's a recipe for disaster.
This same debate is going on in other countries too. Only difference is, the debate there, and the players, are much more informed than at Capitol Hill where people think the internet is a series of tubes. India's Finance Minister, P. Chidambaram, who by the way is the sort of financial whiz you want making such critical decisions, recently unleashed bans on futures trading on four agricultural commodities - refined soya oil, rubber, grams and potatoes. There's a big backlash going on against that decision now, with a committee set up to look into it, and op-eds dumping on the Finance Minister. If you read the linked article, you'll notice the author is a member of India's Parliament, and he knows more about futures markets, and their impact on the farm sector and commodity pricing than the entire U.S. Congress put together.
Point is, someone needs to inform Sen Lieberman and his committee that this is a one-way street. You can't turn around when you feel you've gone too far. People start getting used to stable prices, and since politicians need votes, no one will want to be the one who pulls the plug on the price controls. Something like what's happening with farm subsidies. Any President who suggests taking away the subsidies need not worry about getting reelected. So, unless Congress elects a couple of hard-nosed economists who know exactly what they're doing, and implement something which is capable of being tweaked back and forth, I wouldn't let them touch regulations for commodities investors with a 100 foot pole.
Subscribe to Posts [Atom]
