Breaking news: Regulators are (re)discovering that maybe speculation CAN be excessive

The fact that this is the "emerging" orthodoxy does not make me impressed with our financial class. It's sort of like getting a hot news flash that the earth isn't flat, and the sun doesn't revolve around it.

"If regulators had forced mortgage originators to tighten up their standards or had forced the originators and securities issuers to keep “skin in the game”, I think the housing bubble might not have been so big."

Leaving out who could do this, I have argued that the housing bubble could have been stopped by the prudential policy of requiring a higher down payment as housing prices rose relative to other goods. However, this assumes that there is a relationship between prices and the ability of borrowers to pay off their loans. If people can afford the price, then prices can go higher. The main problem would seem to be the burden of debt.

How would this work with commodities? It seems that you're arguing that the price has become unnaturally high or there's too much volatility in the market because of speculators. In this case, how can you know the correct price a priori? While it's true that speculation might cause such an occurrence, it's also possible that it could make the market more efficient. By simply picking a number based on size, it's not clear that you're doing more harm than good generally. Instead, you're doing this to try and avoid bubbles. I just don't see how this precludes bubbles. Couldn't commodities rise and fall based on other factors?

I still agree with Friedman. If the price drops precipitously, won't the speculators lose money? It's hard for me to see them altering the market excessively without cornering it, or some such strategy which I take it is already illegal. This proposal has a moral feel to it, like not allowing CDSs separate from the actual product. In other words, to the extent that people make money doing this, they're not helping the economy. Hence, since they don't help the economy, and can be linked to some negative occurrences, we can ban or tax them.

I might be missing the point, but I'd like a more detailed account of how this speculation works to foul up the market.

Friedman was wrong.
One problem is that, in certain contexts, speculators do not mind losing money. Speculators are not individuals speculating with their own money. They are employees of organizations and they are speculating with someone else's money.
Their incentive structure is such as to encourage a short term outlook, herding, and a high risk, high return strategy.
To quote Raghuram Rajan (BSB, Chicago):

" Therefore, the incentive structure of investment managers today differs from the incentive structure of bank managers of the past in two important ways. First, the way compensation relates to returns implies there is typically less downside and more upside from generating investment returns. Managers, therefore, have greater incentive to take risk. Second, their performance relative to other peer managers matters, either because it is directly embedded in their compensation, or because investors exit or enter funds on that basis.
The knowledge that managers are being evaluated against others can induce superior performance, but also a variety of perverse behavior.
One is the incentive to take risk that is concealed from investors— since risk and return are related, the manager then looks as if he outperforms peers given the risk he takes. Typically, the kinds of risks that can be concealed most easily, given the requirement of periodic reporting, are risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks.
A second form of perverse behavior is the incentive to herd with other investment managers on investment choices because herding provides insurance the manager will not underperform his peers. Herd behavior can move asset prices away from fundamentals.
Both behaviors can reinforce each other during an asset price boom, when investment managers are willing to bear the low-probability tail risk that asset prices will revert to fundamentals abruptly, and the knowledge that many of their peers are herding on this risk gives them comfort that they will not underperform significantly if boom turns to bust. "

quoted from:
Has Financial Development Made the World Riskier?
by Raghuram G. Rajan
http://ideas.repec.org/p/ess/wpaper/id248.html

[...] Breaking News: Regulators Are (Re)Discovering that Maybe Speculation CAN Be Excessive — Justi... – Part of the continuing debate — which will only accelerate as the recession draws to a close — about how to deal with future asset bubbles. Fox is right: Something must be done; hopefully economists find the correct “something.” [...]

[...] Trading Commission that it may limit the size of trades by energy futures speculators: “This is a big deal.” For the past 40 years, financial regulators have increasingly gravitated toward the [...]

You link to Robin Hanson's commentary on speculative bubbles. Allow me to comment on that.

Robin Hanson shows an apalling lack of understanding of how markets work. He claims:

"It regulators think they know when commodity prices are too volatile, they should just buy low and sell high; if they are right they'll reduce volatility and make a profit in the process."

To my mind this suggests someone who takes the simplistic textbook models of efficient markets and all knowing rational agents with infinite horizons, as a literal description of reality.

Why this doesn't work has been known for generations now. One problem, as Keynes pointed out, is

"The markets can stay irrational longer than you can stay solvent"

For example during the 90's tech bubble George Soros correctly believed the there was a bubble, He correctly bet on the falling of the prices of overpriced tech stocks. However he still lost. Why? Because the bubble lasted even longer than he had anticipated.

Or take the case of LTCM. It basically bet that the prices of liquid US treasuries and certain other risky derivatives would converge. They were right. Unfortunately, before the prices converged, they diverged dramatically leading to mayhem and the collapse of LTCM.

Today most economists and practitioners are coming round to the view these simplistic models of efficient markets with rational agents are badly misleading. Our host, Justin Fox has even written a whole book on the matter, which has been very well received. Yet here we have a trained economist, Robin Hanson, putting forth policy recommendations based on the same discredited models, seemingly oblivious of the upheaval in the markets or of the vast and growing literature on bubbles and panics and market irrationalities.

[...] Regulators rediscovering regulation CNN [...]

[...] as volatility makes long-term investment unattractive). In a post on this subject, Justin Fox quotes Milton Friedman saying that the only stable exchange rate regimes are free floating and fixed. If [...]

Reading the highlighted Milton Friedman quote just sent shivers down my spine. I could just hear myself saying, "But what about Black Swans".

The poster's quote from Raghuram Rajan, definitely encapsulates the thought from another angle.

I think the consistent use of "in general", "on average" and "over time" are two of the biggest plagues in modern economics. While it's great to prove that some model "averages" out in your favor, it's hardly what "average" people want. People, and the populace in general largely favor consistency and moderate change over the wild, pointless swings contained in the term "on average".

So, kudos to regulators for thinking in the right direction (stability). But is there actually a fair way to regulate this type of complexity? Are trade limits really going to have the desired effect here?