Washington lawmakers, struggling with election-year nightmares such as soaring energy and food prices, are looking for a battle they can win. Perhaps that’s why in late June the House voted to invoke the emergency powers of the Commodities Futures Trading Commission, which could declare a moratorium on trading in various commodities futures. The catch? No one knows for sure what’s causing prices to rise. Legislators have focused on the unprecedented influx of new money from institutional investors, suggesting that a commodities price bubble has developed. “They are artificially inflating the price of fuel futures and causing real financial suffering for millions of people,” Senator Joe Lieberman told a June congressional hearing. But many economists argue that the price rise is due to the growth in demand for oil from China and the diversion of corn to ethanol. Lieberman has proposed limiting investments by institutional investors, but the International Swaps & Derivatives Association argues that new restrictions would force more of the market offshore. The CFTC will report to Congress in mid-September. Should institutional investors be worried? Not a lot. On average, they have about 1 percent of their assets in commodities. “It would affect high-frequency traders,” says Benn Steil, a director with the Council for Foreign Relations. “If they left the market, it could cause more volatility, which could make it less useful as a hedging instrument.” More volatility would not necessarily affect long-term investors. However, adds Steil, “it would also not make the prices go down.”
