It takes a memory of long-ago days in the wheat market to recall the time when speculators were blamed for price weakness causing distress across the economy. Blaming speculators for price declines usually was accompanied by proposals for either legislation or regulation that would restrain, if not bar, participation in the market by anyone who was not commercially involved. As the result of those earlier episodes, the current blaming of speculators for just the opposite price moves, in the form of continuing advances and record highs, has a sense of déjà vu. Yet, the attacks in reaction to market moves this year, in wheat and corn and other grains, as well as in oil, metals and the entire commodities sector, cannot help but prompt a pause to see if this year’s criticism is different. It has to be asked whether 2011 price trends do justify governmental intrusions to put an end to what one memorable headline called “the global casino.”
Particularly helpful in examining this matter is realizing that practically all of the legislation enacted by Congress to regulate trading in futures markets was triggered by markets being on the decline. The original Grain Futures Act of 1922 came in the wake of the horrific collapse of wheat and other crop prices following the prosperity attributed briefly to World War I and its post-war demand to feed hungry Europeans. Similarly, the Commodity Exchange Act of 1936 was the work of the New Deal in seeking to shift responsibility for the Great Depression to anyone other than the government, since this broad economic downturn was accentuated by parallel weakness in grain prices. It was not until 1974 that the Commodity Futures Trading Act was passed in an effort to bolster regulatory authority with an expansion in trading, domestically and globally. The last change came with the Commodity Futures Modernization Act of 2000, marking the first effort to oversee trading in derivatives.
Drafters of these federal laws, and their accompanying regulations, had specific goals in mind. These centered on providing oversight of futures exchanges and traders in a manner that would bring about more transparency while preventing fraud. Another important target was formalizing steps to prevent manipulation by large traders. Stories, fictional and real, were frequently told of individuals making vast fortunes while destroying the livelihoods of grain farmers. Popular legend made market manipulators the targets of everyone from farmer spokespersons to members of Congress. No one in the course of debating earlier futures legislation even touched on the idea that unregulated trading could expand in volume to the point that it would not just drive prices but would threaten inflation.
In effect, the concerns that first arose about market behavior in 2008 and have intensified in the past year raise issues that were not previously touched upon and seem almost foreign to the rules and regulations. That is until the Dodd-Frank bill was enacted, providing for governance of financial markets. Suddenly, those charged with overlooking markets were given specific assignments meant to impose new controls on futures as well as derivatives. These new rules have been slow in coming largely because of their complexity and the demands placed on those made responsible for deciding. But to press for tighter regulations aimed at achieving one or another goal, like bringing inflationary pressures under control, seems not just beyond the authority of the current statutes as well as the abilities of governmental regulators.
Of overriding importance is understanding that trading by speculators, by index funds or by anyone contributing to the current huge volume represents dealings that may account as much for market weakness as for strength. Nothing is directionally one-sided. The complexity of global markets is so great that making price and value sense requires futures markets in which dealings are as open and as broad and as unrestrained as possible. It’s only in that way that manipulation may be avoided.