Sunday, June 22, 2008

It's sort of like looking for a lost penny in a silo full of pig shit

Picking up on the thread from previous posts (most recently here ), I’ve been grappling with some issues in the commodities markets lately. I am very happy to see that Obama has picked up on the problems with the Commodity Futures Trading Commission (CFTC). This comes on the heels of Senator Carl Levin (D-Michigan), who last week came out with some more information on his committee’s research (explicating the so-called “Enron” or “London” loophole). Briefly, the loophole exempts a small number of commodities from CFTC oversight if they are traded electronically on overseas exchanges. The most popular exchange is in London, as the U.K. has some of the world’s most lax regulation of commodities markets, and benefited the Enron corporation immensely (hence the double nickname).

Obama’s speech about the commodities market mostly centered on oil (you can read a full transcript here), since the loophole that was created in 2000 singled out oil and a few other “Excluded and Exempt Commodities”.

The legislation itself is virtually incomprehensible to the layperson. Let this be an indication of how unreadable the Act is in its natural state: I had to consult a peer-reviewed academic legal journal to understand what the fuck was going on. So, thanks to the Securities Regulations Law Journal, Vol 29, 2001 and author Dean Kloner, I think I have the general idea. This article obviates the fact that the regulatory exemptions for energy and metal were seemingly tacked on—this exemption language appears in a section marked “Additional provisions”. It is worth noting that the article was generally laudatory of the Act, though other legal scholars (including most recently the University of Maryland’s Michael Greenberger) regard it as flawed (even dangerous) legislation.

After Obama’s speech, the McCanaanites were quick to fire back that the Commodity Future Trading Act of 2000, from where the loophole hales, was signed by President Clinton. Well, yes, that is true. It is also true that Phil Gramm, John McCain’s economic advisor sponsored the bill and heard all of the testimony on the bill. Testimony that included a protest from from then-SEC Chairman Arthur Leavitt, stating that elements of the Act “potentially could result in fundamental and counterproductive deregulation of our securities markets. He also stated that “To me, the question posed by this bill is whether the benefits of the securities laws that investors have come to expect should continue to apply to these markets. Unequivocally, the Commission’s answer to that question is yes.”

Interesting to note that Wendy Gramm, one of the most bat shit Reagan deregulators (she served in the Office of Management and Budget in the 1980’s), was also the head of the CFTC from the late 80’s to 1992. She was instrumental in the energy derivatives deregulation, and then resigned from the CFTC and took a gig sitting on the board of Enron, which made a lot of money in energy derivatives in the 1990’s. After Phil left Congress, he sat on the board of UBS, the Swiss bank that owned the majority of Enron’s trading operations.

Jesus. There’s even more, but it’s not particularly interesting (reactionary Big Oil donors funding Wendy Gramm-led University research that is used to roll back EPA regulations, etc.), and it leaves one feeling, well, unclean. In any event, McCain’s econo-brain (Phil Gramm) has a lot more to do with the “Enron loophole” than Bill Clinton. The whole McCain-Gramm axis of poli-business incest smacks of being just the standard issue Washington-as-usual political story. Obama could score some big points here, though the story is so convoluted, it is hard to see how it could be used.

The thing I don’t understand is this: this kind of speculator-led price inflation seems as though the Fundamental Canon Law, the Unified Theory of Free Market Everything, the very Gospel According to Saint Reagan—the Law of Supply and Demand-- is being manipulated through the difference between physical demand and financial demand for any given commodity. Conservatives love the S&D law—so neat and tidy, black and white, amoral and just. Here, the law of supply and demand isn’t functioning properly, as the actual entities that consume the commodities at the large, wholesale level are competing against the financial demand.

Crazy idea of the week: I propose (somewhat facetiously, humor me) that we eliminate the financial demand by requiring that all futures contract holders take delivery on their commodities BEFORE they can resell their positions (come on, don’t you want to see ten thousand bushels of wheat delivered to a hedge fund manager’s Manhattan penthouse?). This would ensure that the market laws would function properly, as only the consumers of commodities would be involved in trading them. It would restore a lot of sanity to the commodities market. Granted, this will never happen—but I stick to my original argument that necessary commodities should not be subject to the kind of speculator-driven volatility we are seeing today. I am hoping Obama’s attention to these issues will spur Congress to action (and perhaps highlight the revolting insider bullshit in which the McCain campaign is inexorably mired).