Bloomberg is reporting Lieberman May Seek to Ban Big Commodities Investors.

Senator Joseph Lieberman, a Connecticut independent, issued a proposal that could ban institutional investors with more than $500 million in assets from buying commodities.

A second proposal would limit the share of commodities held by investors across all exchanges and a third would impose position limits on financial investors not engaged in “bona fide” commodity investing. Lieberman didn’t guarantee that any one proposal would be in final legislation.

“There is a key distinction between speculation and excessive speculation, and we are going to try to define that,” said Lieberman, who will draft final legislation with Maine Republican Senator Susan Collins.

There is no possible way this can work, at least in the long run. Besides, there is no conceivable way anyone can possibly draw a line between speculation and excessive speculation, and have that line make any sense. It is possible that such legislation may appear to work for a short period of time, however, the likelihood of unforeseen consequences down the road is huge.

The big problem with such legislation is it does not address the real problem. The real problem is the Fed is encouraging speculation and fractional reserve lending allows it. Furthermore, the Fed is doing everything it can to keep the bubble expanding. Sadly, no one bothers to ask why speculation is high.

The Fed purposely punished savers in the wake of the dotcom crash, and the result is not pretty: Mammoth speculation in housing created an enormous global property bubble that has now blown up, and more recently mammoth speculation in commodities.

Everyone was OK when home prices went up, but now everyone is upset about commodity prices. Ironically, housing speculation caused a far bigger problem than rising commodity speculation ever will.

Rules Of The Game

  • The Fed can attempt to increase liquidity.
  • The Fed cannot dictate where that liquidity goes, if indeed it goes anywhere at all.

Those are the rules.

If Lieberman manages to get this bill passed, it will blow up in his face sometime down the road. More tinkering with our already not-so-free markets is the last thing we need.

Note: I am aware of the issue with Firedox 3. We believe there is a bug in the release. In the meantime, firefox 2 and IE7 seem to work fine.

Mike “Mish” Shedlock
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