If the CFTC is not in the wrong, please tell us how.

The debate over the cause of record high commodity prices rages through Congress and the media, not to mention high-fuel-price demonstrations and food riots reported in dozens of countries. Unfortunately, this debate has generated more heat than light. Fundamental “supply imbalances,” “Chinese and Indian demand,” and “the plummeting dollar” are the rallying cries of the bulls. Those hurt by high prices point fingers at commodity speculators. Both cases have merit. Who is right? What, if anything, should Congress do?


There are definitive, obvious answers to both questions. First, the blame must be laid at the feet of speculators who have been allowed to run amuck by the Commodity Futures Trading Commission (CFTC), the very agency charged by Congress with preventing excess speculation. Why am I convinced that speculators are to blame? The answer will be obvious to fans of tv’s Dr. House. We can eliminate causes for which there is no ready cure; including supply shortages, Chinese and Indian demand, and the weak dollar. Ignoring the distraction of causes with no quick fix, we can focus on the one factor that has a prescription: excess speculation.


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Gene Epstein Economics Beat Column in Barron’s

Barron’s Online            
Monday, June 30, 2008

A Simple Old Reg That Needs Dusting Off
Fixing the inflation problem.

IN ITS STATEMENT ACCOMPANYING ITS DECISION last week to leave the short-term interest rate unchanged, the Federal Open Market Committee expressed concern about "the upside risks to inflation," specifically mentioning the "continued increases in the prices of energy and other commodities."

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."

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Saber Rattling at the CFTC

On June 26, 2008 the Commodity Futures Trading Commission posted an ominous "CFTC Emergency Authority Background" on its website. I have to tell you that if this is meant to "telegraph" their intentions, it would not likely be positive for commodity markets in general, and petroleum markets in particular. In my humble opinion, this action may be a prelude to invoking emergency powers to restrict commodity buying, and thus lower prices.

Of course, the laws of unintended consequences pertain. Some commodities have daily trading limits. If a bearish shock were to hit these markets, bulls have to potential to be locked in adverse positions as prices fall day after day without any significant trades taking place. I have been there. It ain’t fun.

If the CFTC simply wants to panic the market, this is a good start. Read the advisory at: http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/cftcemergencyauthoritybackgrou.pdf