More on the Wheat/Crude Oil Connection

Apparently the Senate report of excessive speculation in the wheat market has moved (discussed in this post last week).   All 247 pages of it can now be found here.

Going through the report, one of the footnotes briefly references an op-ed of mine that appeared in the Boston Globe last August and can be found here.

It’s interesting to see the Senate report touch upon the crude oil/wheat connection — the authors are absolutely right to see linkage.  That connection is the fact that we are treating contract markets (whether exchange trades futures or OTC swaps) as if they were capital markets.  These markets were designed with different ends in mind (contract markets are designed for risk transference, while capital markets are designed for investment), and require different rules of governance.  

Whenever I write about the need for regulatory reform in these markets, I get some responses accusing me of everything from gross ignorance of the commodity markets to Marxism.  The need for reform is consistent with broad free-market beliefs, but recognizes that those markets need governance (not necessarily governmental) to protect their integrity.  In the capital markets, everyone accepts the need for prohibitions against front-running customer orders or trading on inside information.  Contract markets need rules, too, (e.g., speculative position limits) and while these rules differ from those that govern investment markets, we should accept that they are no less critical.

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