Meanwhile, the Homeland Security and Governmental Affairs Committee held Capitol Hill hearings on “Curbing Excessive Speculation in the Commodity Markets.”
The connection between the two events was little noticed but is direct: Something can be done about the higher prices of food and fuel — the source of the inflation that concerns the Federal Open Market Committee. Much as I hate to agree with any politician who blames the speculator whenever goods get too dear, which usually amounts to shooting the messenger, Homeland Security Committee Chair Joe Lieberman unfortunately had a point when he accused speculators of “artificially inflating the prices of food and fuel futures.”
The remedy for restoring stability, however, is far simpler than Senator Lieberman seems to realize. Instead of acting on his resolve to “introduce comprehensive bipartisan legislation to address excessive speculation,” his committee should simply demand that the Commodity Futures Trading Commission enforce rules that have been on the regulatory books since 1936.
The rules the CFTC should enforce are position limits that specify the maximum number of contracts in a given market that any single speculative entity can hold. These limits, which generally amount to about 2% of all contracts outstanding, are set for a good reason: The commodity markets are too small to absorb an excess of speculative dollars. Even at current inflated prices and a near-record level of trading interest, the total contract value on all domestic commodity exchanges comes to only $960 billion. By way of comparison, even at current depressed prices, the total market capitalization of all domestically traded stocks tops $13 trillion.
But as though commodity markets were as large as stock markets, a new breed of commodity index “investor” has taken speculative buying way beyond anything domestic commodity markets have ever seen. These commodity indexers ignore individual market fundamentals, instead flooding liquidity into markets based solely on the weightings dictated by one or another commodity index benchmark. The flood has become a torrent. For example, based on commodity trader Steve Briese’s calculations, “long” bets by the indexers in wheat account for nearly 60% of the 2007 domestic wheat crop.