Mark Sunshine

QEII failed to deliver either on unemployment or real estate, so why is Wall Street speculating on QEIII? The fact remains, the Fed holds the power to pop the commodities bubble-but why is it inflicting collective misery on the World by simply doing nothing? 

I don't know about you, but I'm fed up with being a victim of Wall Street speculators who are driving food and fuel prices up through the roof.  The recent plunge in commodities prices confirms what everyone knew all the time — inflation is being driven by commodities speculators who are profiting from everyone else's collective misery. 

Last week the margin requirements for silver — a relatively minor commodity — were changed and triggered a widespread sell off.  The evidence of a speculator driven bubble was unmistakable by the end of the week — crude oil was down almost 15%, corn down about 10% and wheat down almost 8%.

If margin rule changes for a minor commodity can trigger a general price run, imagine what would happen if a series of broad based rule changes were implemented.

Well I have a suggestion for our economic leadership in Washington — go crazy — change the rules for all commodities.  I guarantee that the commodities price bubble will instantly pop. The Fed has the regulatory authority to immediately implement this policy by ordering banks to stop funding, investing, clearing or facilitating derivatives commodity trading.

The problem that the Fed needs to fix is that the commodities markets have been "financialized" by Wall Street.  Prices that used to be determined by producers and users of commodities are now set by financial speculators making naked bets on how much price pain consumers can endure without breaking by buying and selling derivatives commodity contracts. 

These speculators don't own, or otherwise have a long term interest, in the commodities that they bet on, they are just in the market for the quick financial kill.

Over the past decade, commodities markets have become a large bookmaking operation where bets are placed on the amount of economic torture consumers can take before crying "uncle."  In the last 12 months when oil at $100 per barrel didn't destroy American families, speculators raised the stakes and tried $110.  When oil at $110 didn't break us, speculators were willing to go to $115.

Despite the rapidly rising prices, there was no shortage of crude oil to justify the run up of price in the commodities pits.  In fact, oil spot prices have consistently been far below reported "market" prices.

If you think the commodities markets seem like a Las Vegas casino operation that isn't a coincidence. 

Commodities speculation enjoys a special exemption from criminal gaming laws and only exists because Congress says that wagering on oil, corn and wheat isn't the same as gambling and that the people that run the markets aren't the same as gangsters.

If he wants to, Bernanke can fight back at commodities wagering by stopping banks from funding or supporting naked commodities bets.  That action won't hurt producers or users of commodities or the commodities trading markets that actually have something to do with the purchase and sale of the underlying goods.  Nevertheless, it will stop financial speculators from using liquidity that was actually intended as economic stimulus from being diverted into legalized commodities gambling.

Thirty years ago Paul Volcker attacked a similar liquidity fueled commodities bubble by declaring banks couldn't fund commodities speculation.  Prices plunged and the bubble was popped.  Bernanke can learn a thing or two from Volcker.

Put simply, the Fed has the regulatory authority to stop bank holding companies, and their subsidiaries, from being the "house" at the commodities casino.

Unfortunately, in recent years the Fed has been at best a reluctant regulator.  The Fed needs to ditch its policy of regulatory non-intervention, at least when its own monetary policy is creating unintended economic distortions.

Fed action doesn't have to be broad based to be effective — in fact, narrower is better.  Lending and capital rules only need to change for the financing and clearing of non-delivery derivative commodities contracts.  Fed policy shouldn't change for physical delivery contracts that are used by producers and users of commodities.

Bernanke needs to get some backbone and stand up to commodities speculators, and the sooner the better.  He should remember that there was a time when the Fed Chairman wasn't afraid of Wall Street and didn't hesitate to use all of the regulatory tools at his disposal.

Punishing everyone by raising interest rates, or waiting until inflation overtakes the economy, isn't a rational choice.  Bernanke has the power to pop the commodities bubble right now without hurting the rest of us.  Let's hope he uses it.