Consider the commodities markets, which sell rights to buy natural resources and industrial products such as oil, gas, sugar and wheat. These markets were established decades ago to solve what economic texts dubbed "the farm problem." In a nutshell, farmers had to spend money to produce agricultural products, such as corn and pork, long before they knew what price they could demand months or years later when these products were ripe (or plump) enough to sell.
The commodities markets gave farmers a place to sell rights to buy their wheat at a set price in the future and gave bakers, for example, a place where they could lock in a price for flour. Because few people can afford to buy a product months or years in advance, these markets also allow significant leverage, or borrowing, to buy. Typically you can put down just a small portion of the contract purchase price upfront -- often less than 5 percent. The remaining amount must be paid at delivery. You are essentially borrowing the rest.
Being able to borrow to buy a product that won't be delivered until some point in the future makes sense for traditional buyers such as airlines, which need oil, and manufacturers, which need other natural resources to produce their products. But it also allows hedge funds and other speculators to control roughly 20 times more of a commodity than they have cash to purchase.
In other words, $100 of oil can be controlled by a commodities purchaser with $5. If you have $100, you can control $2,000 worth. With $1.5 trillion in assets, that means hedge funds can control roughly $30 trillion in natural resources.
Siebert believes that soaring oil prices that sent the markets into a tailspin this year were the result of manipulation by speculators, who wanted to profit by artificially boosting demand. That, she said, should not be allowed, mainly because such speculation has a real effect on the companies that buy commodities to operate. It also hurts consumers, who pay more for goods and services when these markets are manipulated. And it spooks investors, who lose faith in the entire system when market prices become inexplicably volatile.
"To the extent that a hedge fund is playing with borrowed money, there should be some limits," she said.
Siebert would like to see a two-tier schedule in the commodities markets, where those who are using the commodities for production would be able to buy as they do now. But those who use the markets for speculation should be on a tighter leash, allowed to borrow only a fraction as much.
Investors also need to know what these companies are doing, she said. That could help average investors understand whether rising oil prices are a sign of runaway inflation or simply a temporary glitch caused by a momentary (and possibly manipulated) hike in demand.
That demands basic reporting -- registration of hedge funds, fund assets and the ability to audit to determine whether statements by the investment companies are true. That's something that's required of mutual funds and virtually any other type of investment firm that is entrusted with investor money, Siebert notes. It is, however, a change that would require an act of Congress to close loopholes in the nation's securities laws that exempt hedge funds from this type of disclosure. Whether these funds would require additional regulation remains to be seen, she said.
"We first have to know what we have," Siebert said. "Then we can say whether this product should be regulated and by whom."
Any significant regulatory changes should not be made in a vacuum, she added. In today's increasingly global environment, U.S. regulators should be working hand-in-hand with foreign regulators, she maintains.
"We don't live in our own little world anymore," Siebert said. "There is instant global communication now, and everything we do not only affects our economy, it affects economies all over the world.
"We need to keep credibility and transparency on a global basis," she said. "We should be talking to some of these countries to look ahead and envision what sort of rules we need to have stable financial markets over the long term. That's the only way we can keep investor trust, and without that trust, the entire market is at risk."