I’m sure I’ll catch some flak for criticizing deregulation, however, somethings just do better with regulation.
Banks are one. Bear Sterns proved that. Mortgage funds are another- Countrywide proved that. And, if you want to know why commodities trading needs regulation- well, Enron proved that.
I highly recommend either reading, or listening to this entire interview on American Public Radio’s Marketplace. Ryssdal is the host of the show, Greenberger is a former government regulator.
Marketplace: Deflating the oil bubble
Ryssdal: Why is it so hard to figure out what’s going on in commodities markets — oil specifically?
Greenberger: Well, the reason it’s hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market — that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation being passed, all energy futures traded in the United States or affecting the United States in a significant fashion were regulated by United States regulators under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.
Ryssdal: You’re not really telling me that seven years on, we’re still paying the price for Enron, are you?
Greenberger: Well, this has been called the “Enron Loophole” and there are many legislators working very hard to close that loophole. There is tremendous concern about this on Capitol Hill and on a bipartisan basis, people are drafting legislation to try and get a handle on this and not eliminate speculation, but bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law to escape traditional tested regulation on speculative activities.
George Soros, who is a master investor, thinks that the speculation bubble may pop, bringing yet another jolt to the economic system:
Marketplace: Did speculators fuel the oil run-up?
Over the weekend, George Soros gave an interview to the Daily Telegraph in which he described today’s oil prices as a bubble ready to pop. Most analysts pooh-pooh the role of speculation in today’s oil market, but some new evidence suggests that Soros may well be right.
My American Enterprise Institute colleague Desmond Lachman observes that institutional investors own and hold more than a quarter trillion dollars worth of oil today, up from virtually zero half a dozen years ago. If these positions were ever unwound they could exert an abrupt downward jolt to the price of oil.
The reality is, while many of us may feel like we’re working for gas money, at some point, America has to trade in its conspicuous consumption of oil and start making smart economic policy. Not just with encouraging things like public transit and high speed rail that decrease consumption, but in re-evaluate the “benefits” of living far from work.
As long as we’re dependent on oil (foreign or domestic) we’re going to be working for gas. Increasing domestic production wouldn’t make near as much difference as implementing incentives not to use so much gas- as my “Walk to work” tax credit idea would.
The Arabs are scratching their heads about this latest bump in prices- demand hasn’t grown, except amongst the speculators, and with a plunging dollar paying the oil producers less, we’re walking a fine line between staying a world economic power- and a third world nation when the rest of the world stops wanting anymore dollars.
Isn’t macro econ fun?
It’s time to take the casino out of Wall Street, before the games really cripple our country.