And when it became clear that oil was being driven by a false sense that the US would fail, but China and Europe had decoupled “ from our problems” and tanked $30 and gas to $2.00 without an act of Congress, you might think that the debate about speculators would be over.
Then came Dodd-Frank — the committee to fix the markets and deflect any government responsibility for the crisis — and they tried to enact portion limits to try and stop speculators from doing something they were not doing in the first place. You can’t just say that speculators drive up oil prices without having any evidence to back it up. You can’t say that speculators were the cause because you "felt" that is the case. To say that speculators were the reason that oil prices went up to record highs is preposterous.
In fact it is clear that limits on speculation would have caused more panic and possible hoarding of supply as Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors would have enough cash to buy physical barrels if they had no way to offset historic risk to their existence. Banks failing, country’s failing. Do you really think position limits would have limited prices! Hoarding and fear would have created even higher prices and shortages of supply.
Yet perhaps cooler heads have prevailed. Reuters News reports that, “Federal limits on commodity market speculation, the prospect of which has haunted Wall Street's big banks, pension funds and energy merchants for five years, may have died in the District of Columbia courts on Friday. Just two weeks before the "position limits" rule was to take effect, U.S. District Judge Robert Wilkins rejected it and sent it back for an overhaul, a move that even some opponents said was surprisingly tough. Wilkins said the Commodity Futures Trading Commission (CFTC) had failed to prove that it was necessary to impose new caps on speculative bets in 28 U.S. markets, including copper, corn and crude oil, to reduce price spikes and volatility."
The Judge is right! In fact there is evidence to the contrary and based on what we know about this crisis and quantitative easing, it is more likely that position limits would have increased volatility without using the markets as an escape valve.
Reuters says that, “CFTC Chairman Gary Gensler has several options for reviving the measure — one of the agency's hallmark reforms — including an appeal, a fresh round of rule-writing, or even asking Congress to amend it. But each avenue is time-consuming and comes with potentially insurmountable obstacles. Some academics say the judge's ruling may have effectively killed the political will to pursue one of the most contentious pieces of the Dodd-Frank financial reforms. "Even if Democrats win the White House, the rulemaking process will take years to complete and, my guess, the Democrat commissioners at the CFTC will probably have lost their appetite for this battle," says Jerry W. Markham, a law professor at the Florida International University at Miami and former chief counsel for the CFTC's enforcement division."