Excessive Speculation and The Courts

For years, many thoughtful people -- progressive thinkers, anti-hunger advocates, and business executives at the mercy of energy and food prices -- have appealed for relief from rampant speculation that distorts the commodities markets. Such speculation makes traders rich, but burdens American households, hurts businesses, and leads to empty bellies in areas throughout the world that are dependent on food imports.

The Dodd-Frank financial reform law answered their plea. It directed the Commodity Futures Trading Commission to impose limits on the futures positions that could be held by speculative traders. The CFTC promulgated limits for energy and agricultural futures in October. The International Swaps and Derivatives Association (“ISDA”) and Securities Industry and Financial Markets Association (“SIFMA”), acting as always at the behest of the big banks, immediately filed a lawsuit challenging the rule.

On Friday, a Federal District judge in the District of Columbia decided that the rule should be remanded to the CFTC. The Court held that it was adopted incorrectly. This was discouraging to those who had worked to secure sensible limits on manic speculation. But it will be a tragedy for consumers when the next run-up in gasoline and food prices comes out of nowhere to disrupt family budgets; and a worse tragedy for impoverished populations denied food in countries struggling to keep their populations fed.

The banks were quite pleased with the outcome, however.

For those interested in good outcomes for the public, the judge’s decision reads like a detached exercise in sophistry. It hinges on word placement and the use of commas in the text, concluding that the CFTC was required to make a finding that the limits were necessary and appropriate to “diminish, eliminate or prevent” burdens on interstate commerce. In essence, this would require a determination that excessive speculation was affecting the prices of physical energy and agricultural commodities.

The CFTC did not make such a finding. In the preamble to the rule, the CFTC repeatedly asserted that Congress had directed that position limits be put in place and that no such finding was needed. In its view, the CFTC was obligated to adopt rules as a prophylactic against price distortion. Amicus curiae briefs filed by dozens of Members of Congress and Senators, many of whom served on the Dodd-Frank Conference Committee, pointed to legislative history that the CFTC interpretation was correct. The Court was unpersuaded.

Why didn’t the Commission make the finding anyway? It all came down to the vote of a single Democratic Commissioner. Commissioner Dunn, who has since left office and been replaced, insisted in open meetings that he had seen “no reliable economic analysis” to support the contention that excessive speculation is affecting prices. He said that he voted for the rule only because he believed the CFTC was required to act under the law. The rule passed by a 3-2 vote along party lines.

In fact, the CFTC had received a large number of analyses by economists and businesses on both sides of the issue. Commissioner Dunn was, for some reason, parroting the talking points of ISDA, SIFMA and the big futures exchanges (whose revenues are a function of trading volume) that employed the tried-and-true rhetorical tactic of demeaning inconvenient analysis as naïve and unreliable. One would think that the Commissioner might have recalled the years of battle between experts, many of whom were bought-and-paid-for by self-interested industry, in the wars over tobacco regulation. He never asked whether the studies supporting industry were purchased in any way.

The Court’s decision recites Dunn’s expressed views, along with the statements of the Republican Commissioners that unsurprisingly meshed nicely with the legal briefs filed by ISDA and SIFMA.

Conservative ideologues and the big banks must be giddy over this result and other recent rulings by the D.C. Circuit striking down SEC rules based on meaningless perceived shortcomings. Ironically, these rulings represent judicial activism of the most extreme type. It is one thing when courts act in areas devoid of legislative intent. It is quite another when Congress’s intent is obvious even to a casual observer.

The Federal Courts have decided to render regulators impotent to implement the law of the land based on gauze-thin logic. The D.C. Circuit is effectively packed with Republican judges, with three open positions out of eight remaining unfilled because a dysfunctional Congress can’t manage to approve Obama appointments. In that Court, such opinions are to be expected.

It is even more disheartening that the judge in the position limits case was an Obama appointee. There is no way to know whether he was fearful of being reversed by the packed D.C. Circuit on appeal.

But more fundamentally, regulators, lawmakers and judges need to recognize that many academic economists are not the independent experts that they appear to be. Banks are just as capable of writing checks as tobacco companies are. Congress has made it clear that the financial sector needs to be reformed to protect the public from crises and price distortion caused by unbridled speculation. It is far past the time for decisive action.