357. SEN. LIEBERMAN: INDEX SPECULATORS IN THE CROSSHAIRS
In case you missed it, Sen. Joe Lieberman chaired a hearing last week looking into the role of passive, long-only index investors in pumping oil and other commodity prices. Details on the hearing are here: Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?
I watched the video and learned volumes. Highly recommended for those who want to know how index speculators are inflating commodity prices. If you want the short version with the cites, read Michael Masters' testimony here(pdf). No one disputed Masters' analysis, including the Chief Economist of the CFTC, and the Chairman of the Commodity Markets Council. Masters' authoritative testimony also sparked a broad response in the media and financial blogosphere, and this article is a good start if you want to follow the action.
Today the New York Times DealBook blog posted an update:
But the billions that institutional investors have poured into these index funds managed by Wall Street banks could disappear. Mr. Lieberman is in the “early early” stages of creating a bill that would bar institutional investors in investing in commodities, a person close to the senator told DealBook. The bill would seek to amend the ERISA Act, making investments by institutional investors in the commodities market taxable.It's very interesting how we've gone, in the space of a few short weeks, from "speculators have no effect" to "legislating against speculators is dangerous, it could crash the market". Commodity profiteer newsfeeds like Resource Investor are also getting very emotional about Lieberman's proposal -- a good sign that Joe is on the right track.
Pension funds like Calpers, the massive California public employees fund, have diverted increasingly more of their capital into the commodity space as other markets have done poorly amid the credit crunch. Calpers invested $450 million in commodities last year, its first foray into that space. In a board meeting in February, the pension fund agreed to invest .05 to 3 percent of its $240 billion fund in commodities by 2010.
If institutional investors, like Calpers, are forced to divest its commodity positions, the market could go into a tailspin, crushing the positions of many of the banks that hold long positions. One of the investment banks’ more profitable businesses these days could be turned on its head.
The bull run in commodities has been influenced by many factors, but Congress believes that Wall Street bears the blame for a large part of it. With gasoline prices on the rise and the election looming, they appear to have full power to not only close the oil casino, but burn it to the ground.
My view: Let's go full-steam-ahead with this legislation. Run the experiment, and see what happens. What's there to lose? The futures markets functioned fine for decades without index investors. Let's clear out the riff-raff, and return the futures markets to the people they were built to serve: bona-fide producers and commercial hedgers.