By Curbing Excessive Speculation in the Commodity Markets
WASHINGTON – Homeland Security and Governmental Affairs Committee Chairman Joe Lieberman, ID-Conn., and Ranking Member Susan Collins, R-Me., Tuesday heard testimony from financial experts regarding three legislative discussion drafts the Senators have put forth to control excessive speculation in the commodity markets. They promised to introduce legislation after the July Fourth recess to bring relief to consumers weary of paying ever-escalating food and energy prices.
The testimony came at the Committee’s third hearing on the rising cost of food and energy and the second hearing focused specifically on the relationship between rising process and commodity markets speculation.
“Speculation is not illegal,” Lieberman said. “But that does not mean it isn’t hurtful… Motivated by the weakness of the dollar and rising demand for oil, speculators are moving enormous amounts of money into commodity markets for the obvious purpose of making more money. But in doing so they are artificially inflating the price of food and fuel futures and causing real financial suffering for millions of people and businesses…
“Speculation has passed the point where it provides stability to the commodity markets. It is now excessive and has consequences that are very, very harmful. And that’s why our government must step in as soon as possible to protect our consumers and our economy because against the forces of the speculative markets, the average person simply cannot protect himself or herself.”
Collins said, “High energy costs are having a devastating impact on our economy and our people, especially those in large, cold, rural states, like Maine. The increased cost of energy certainly reflects fundamentals, including increased demand from China and India, but institutional investors also appear to be driving up prices. Increased regulation and transparency in the futures markets is needed to guard against excessive speculation and price manipulation.”
Lieberman said testimony presented in previous hearings before the Committee had persuaded him that excessive speculation in the commodity markets substantially contributed to the rising prices in food and fuel. As a result, Lieberman and Collins asked their staff to develop three proposals to bring relief to weary consumers. The proposals, made public last week and available for review here range from moderate to aggressive. They would:
• Close the so-called swaps loophole and create a seamless system of speculative position limits that would apply to all commodity trading – on the exchanges, over-the-counter, and on foreign exchanges;
• Create aggregate speculative limits that restrict the overall share of commodity markets that may be held by financial speculators; and
• Restrict commodity investments by large institutional investors that invest through index funds.
Across the board, the witnesses endorsed the first proposal, although several voiced concerns regarding the other two proposals. The Senators said they planned to introduce comprehensive bipartisan legislation to address excessive speculation after the July Fourth recess. The legislation will be based on the proposals and the additional testimony received today.
Senator Collins, however, said that she has concerns with the provision that would prohibit institutional investors from investing in energy futures markets. “An outright ban would have unintended consequences for retirees relying on these pension funds,” said Collins. She said that she does believe that reforms are needed, including providing more resources for the Commodities Futures Trading Commission. The trading volume of commodity futures contracts and options has soared from 37 million contracts in 1976, to more than 3 billion contracts last year. Yet, there are fewer employees at the CFTC today than in 1976, leaving much more work for fewer staff.
Testifying before the Committee today were: Walter Lukken, Acting Chairman of the Commodities Futures Trading Commission; Dr. James Newsome, President and Chief Executive Officer, NYMEX Holdings, Inc.; Michael W. Masters, Managing Member and Portfolio Manager, Masters Capital Management, LLC; William F. Quinn, Chairman, Committee on Investment of Employee Benefit Assets; James J. Angel, Ph.D., Professor, McDonough School of Business, Georgetown University; and Michael Greenberger, Professor, School of Law, University of Maryland.