by Edward Miller
from GlobalResearch Website
These limits are intended to prevent speculation
in (among other things) agricultural commodities, speculation which, many
critics argue, have driven up the price of food worldwide and plunged
millions into hunger.
While analysts initially framed the crisis in terms of market fundamentals (such as rising population, increased demand for resource-intensive food, declining stockpiles, biofuel and agricultural subsidies, and crop shortfalls from natural disasters), a growing number of experts have tied the massive spikes to financial intermediation.
As economist Jayati Ghosh explains:
Crucially for our narrative, this removed limits on the number of contracts that could be held at any one time (called position limits) from the equation.
...began developing index funds (collective investment schemes) based on these commodities, specializing in buying futures contracts in the belief that the future price will be higher than the present price.
Journalist Fred Kaufman eloquently stated this in his Harpers article ‘The Food Bubble’:
All manner of institutional investors began dumping capital into these funds, driving prices, and profits, through the roof:
Traditionally, futures contracts play an important role in price discovery, reducing the price risk of the commodity itself.
However without a limit to the number of commodity futures contracts that could be held, investors were able to withhold huge amounts of food from entering the market. When combined with the real supply and demand factors mentioned above, this spelt volatile price spikes; between 2005 and 2008 the price of maize nearly tripled, wheat prices increased by 127%, and rice by 170%.
Throughout the crisis, at least 40 million
people went driven into hunger, and the number of people driven into extreme
poverty rose from 130 to 150 million.
Today, over a billion people remain hungry,
while wealthy investors continue to reap huge profits by gambling on the
stomachs of the world’s most vulnerable.
The Dodd-Frank Act provided sweeping financial reforms to the US financial sector, including reforms to commodity futures regulation.
Section 737 (4) requires the CFTC to,
These limits should,
So far so good right, problem solved? Think again...
The legislation provided a 270-day window in which position limits were to be put in place, meaning that by the 17th of April this year, this problem should have been solved, or, at the very least, ameliorated. However that date came and went, and the CFTC failed to reach agreement. A new date was set for the 4th of October, however that date also came and went with no further advance.
CFTC Chairman Gary Gensler responded, saying,
The rules have now been delayed until October
Robert Pollin and James Heintz of the Political Economy Research Institute at the University of Massachusetts calculate that,
The price of oil seems to be the CFTC’s main focus regarding position limits.
And its something that is hotly contested, as
speculative investors recoil in horror at the idea of their profit blade
being diminished. Their effect is indeed being felt, as Reuters reported in
mid-September that internal strife at the CFTC had slowed the progress of
the position limits rule, and they were struggling to harmonize it with
other regulations required under Dodd-Frank.
Indeed these limits might even encourage speculation, while other proposed rules would allow companies to avoid aggregating positions in different trading accounts, provided accounts are independently controlled and firewalls are imposed between trading desks. This would be very difficult to regulate, and provides banks with a set of loopholes big enough to drive a Wall Street bailout or bonus through.
Traders who exceed futures limits would also be
able to use swaps (derivatives that allows parties to exchange benefits of
their respective financial instruments) to reduce their net position.
CFTC Chairman Gary Gensler himself spent 18 years at Goldman Sachs, had made partner by the time he was 30, and eventually became the company’s co-head of finance. He subsequently worked as the undersecretary for domestic finance at the Treasury Department during the Clinton era, during which time he advocated the passage of the CFMA mentioned above.
Commissioner Jill E Sommers also worked
closely with congressional staff on the drafting of the CFMA, while another
Comissioner, Scott D O’Malia, lobbied for the repeal of the Public
Utility Holding Company Act, legislation that was directed at curbing
speculation by energy and water utilities.
In light of this, it is little wonder that the proposed limits leaked from the CFTC do little to rein in excessive speculation. Added to this is the fact that the CFTC’s funding hangs in the balance.
While the Senate Appropriations Committee
recently approved a bill raising the CFTC budget (from $202 million to $240
million for 2012), it is unclear how this will be reconciled with a House
bill that cuts the CFTC’s funding to $171.9 million.
Democratic Senator Bill Nelson of Florida and
Representative Peter Welch introduced matching bills in late September 2011
to cap position limits at a level that reflects market fundamentals of
supply and demand.
...a drastic reduction on the amount of a commodity than can be gambled on than under either the present scenario or the leaked regulations from the CFTC.
While a number of Democrats support the
initiative, the massive support the Democratic Party has received from the
finance industry would likely mitigate its passage in the Senate, or in the
Republican-led House of Representatives for that matter. Indeed, it is would
be unlikely that Congress would bother intervening while the CFTC, a
supposedly expert, non-partisan body, is still busy delaying in this area.