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  • “Stages of Truth”

    Remarks of Commissioner Bart Chilton before the Presidential Roundtable on Speculation in Commodity Markets, United Nations, New York, NY

    September 22, 2011

    Thank you and good morning. It is great to be here with my distinguished colleagues and friends on the panel. Thank you President Fernandez for your leadership on the issue of excessive speculation in commodity markets and the impact it may have on prices. Thank you, Senator Dorgan, for your leadership on this issue—and so many others—during your time in the United States Senate.

    The 19th century German philosopher, Arthur Schopenhauer said, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” I think that rings very true in the area of market speculation. Back in 2008, when food prices were relatively high and crude oil was at record highs, the idea that excessive speculation might have had something to do with it was ridiculed. Exchanges ridiculed the idea. The banks and other very large traders ridiculed it, and, I must say, even some people at my own agency ridiculed it. Still, we know that Massive Passive traders, those with very large and fairly price-insensitive strategies, the likes of hedge funds, mutual funds, index funds and others who had not been very active in commodity markets before were pouring money into them at a blistering pace. When I say a blistering pace, I’m talking about $200 billion over a few short years—a blistering and blazing pace, indeed.

    Then, fast forward to this year and we have seen even more speculation in markets than in 2008. Earlier this year, it became public that the number of speculative contracts grew by 64% in energy contracts and 20% in agriculture and metals when compared to 2008. The question is: does that affect the prices? Some researchers say no, not at all, nothing to see here. They contend price moves are a coincidence or based upon supply and demand. Other researchers quantify an absolute relationship between excessive speculation and prices. I’m talking well-respected researchers from Oxford, Princeton, Rice and many others.

    I kept seeing these studies from the latter group out there at the same time that I was hearing from people in the industry that no such studies even existed. So, I compiled about fifty studies, papers and quotations and put them on our website at CFTC.Gov.  I did so partly because it had seemed to me that the simple supply and demand rationale for higher energy and food prices this year and back in 2008 was very weak. There is no way anyone can explain oil prices going from $147.27 a barrel in June of 2008 to $30.28 in December of the same year based upon supply and demand. It simply can’t be done.

    Last year Congress passed a law that mandates position limits in commodity markets in the United States. We are in the process of writing a rule to do just that. Still, there are many who fall into the second stage of Schopenhauer’s definition of truth:  they violently oppose position limits, even still. They dance on the head of a legal pin trying to find a way around them or they threaten lawsuits if we impose them.

    From the beginning of all of this debate, I have accepted as self-evident the need for reasonable speculative position limits. We have actually had them in some agricultural markets for years. The world did not seem to end. Others have accepted as self-evident the likely impact of speculation on prices. President Fernandez has spoken out about it. I listened to President Sarkozy speak about it in Brussels a few months ago. President Obama has spoken about it repeatedly. We would not have the limits law without President Obama. The tremendous volatility we have seen in markets in recent months just can’t be justified purely as typical supply and demand fundamentals.

    So, we’re working our way through those three stages of truth. I know some of you are seeing that same phenomena in other parts of the world. Some will ridicule and some violently oppose. Ultimately, there will be a large majority who accept the truth.

    The next challenge is for nations to work cooperatively, as I know they already are, on financial regulatory reforms, including position limits. We need to ensure that to the extent that we can, respecting sovereignty of course, we do our best to harmonize rules and regulations. We need to learn from each other as we go through this process. Those nations that do so will reap a reward in my judgment in that they will make themselves more competitive, more efficient and effective. That will be good for markets, good for traders, but most importantly, good for consumers throughout the world.

    Thank you again, especially to President Fernandez, for the opportunity to be with you today.

    Last Updated: September 22, 2011



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