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Lieberman seeks limits to reduce speculation

A ban on large institutional investors, including index funds, from the US' booming commodity markets is proposed by a prominent Washington lawmaker. Central to the argument is the view that commodity markets are artificially inflated by financial speculators.


June 12, 2008
By New York Times

June 12, 2008

A prominent Washington lawmaker said Wednesday that he
would propose next week to ban large institutional investors, including index
funds, from the nation’s booming commodity markets.

The idea is one of several outlined by Senator Joseph I. Lieberman,
independent of Connecticut, who is chairman of the Senate Homeland Security and
Governmental Affairs Committee. That committee will hold a hearing on June 24
to continue examining whether financial speculation is affecting the prices of
crops and fuel.

“There is excessive speculation in the commodity markets
that is driving up the cost of food and energy,” the senator said in an
interview. “The question is, do large institutional investors play a positive
role?” His concern, he said, is that they do not.

Over the last five years, hundreds of billions of dollars have
flowed into commodity futures markets, which play an important role in setting
world benchmark prices for a variety of materials, including corn and crude
oil.

One steady source of money has been the growing number of
new funds that mirror specific commodity indexes, like the Standard &
Poor’s Goldman Sachs
Commodity Index. More recently, exchange-traded funds — popular new investment
vehicles that trade on stock exchanges but track commodity prices — have
followed the index funds into the market.

Other Washington lawmakers also turned up the heat
this week on the investors they blame for sharp run-ups in food and energy
prices.

Two other Democratic senators, Jack Reed of Rhode Island and Carl Levin of Michigan, said
Wednesday that the White House had agreed to their request for a new federal
task force to investigate whether “manipulative or deceptive practices” are
adding to the run-up in energy prices.

The task force would include members from the Treasury
Department, the Securities and Exchange Commission, the Commodity
Futures Trading Commission
, the Federal Reserve and the departments of
energy and agriculture.

Central to both proposals is the view that both oil and food prices are
artificially inflated by financial speculators whose trades do not reflect
fundamental factors of supply and demand. But most lawmakers also agree that
increased food and fuel demand from
China and India, widespread weather problems that
have affected harvests, new mandates that have steered food crops into ethanol
production, and a weakening dollar have all influenced these key prices as
well.

Besides what he called the “aggressive” idea of banning
institutional investors from the commodity markets, Senator Lieberman said he
would also put forward other ideas for discussion at the hearing on June 24.

One less-sweeping proposal would be to strengthen existing
regulatory limits on the size of the stake that each speculative investor can
hold in a given market, called speculative position limits.

And he plans to propose barring investment banks from using
the regulated futures markets to hedge speculative bets their clients are
making in the vast unregulated global swaps market — what he called “the swaps
loophole.”

 


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