"His plan will make those contemplating push'n 'round our energy markets think again." This folksy show of support for Barack Obama's latest plan to tackle "manipulation" in oil markets comes from Bart Chilton, a commissioner at America's Commodity Futures Trading Commission (CFTC). For good measure, Mr Chilton also cites Wall Street lobbying against new restrictions as a "major problemo".
The Dodd-Frank Act of 2010 relies heavily on the CFTC to write reams of new rules to regulate derivatives markets, a task it struggling to complete in the face of industry opposition and political gridlock. The act also gives the agency oversight of the swaps market, which is eight times larger than the futures market it was created to oversee. At a recent Congressional hearing, CFTC chairman Gary Gensler noted that the agency's enforcement division, with 170 staff, is only marginally larger than it was ten years ago (154). Monitoring eight times as many football games with the same number of referees makes for a lax application of the rules, he said. "The CFTC needs more referees."
Mr Obama obliged, asking for a mid-year addition of $52m to the CFTC's $205m budget to put "more cops on the beat". This will fund a six-fold increase in surveillance and enforcement staff focused on oil futures, according to the White House. It is also more or less pure politics, with no hope of passing Congress.
The CFTC received around two-thirds of the budget requested by the president for the current fiscal year, versus an average appropriation of 97% of the president's request in the previous ten years (see chart). This reflects the increasingly bitter fiscal debate in Washington, as well as the Republicans' disdain for Dodd-Frank. In a dissent appended to the CFTC's latest budget request, Republican commissioner Scott O'Malia called the proposal "an unsubstantiated case for a massive expansion in staffing that is both unrealistic and unsustainable in this deficit environment". And that was before Mr Obama's oil-market appeal.
Despite its limited resources, the CFTC launched a record number of investigations and enforcement actions last year, many aimed at Ponzi schemes that blew up during the downturn. But the agency faces heavy criticism for the implosion of broker MF Global on its watch, leaving a shortfall of $1.6 billion in customer funds.
In this context, the charges filed by the CFTC against Royal Bank of Canada earlier this month, alleging that the group concealed a large-scale "wash sale" scheme on an exchange in Chicago, can be seen as the agency's robust rebuttal to its critics. (The bank "vigorously rejects" the allegations.) Fitch Ratings cites the action as a sign of "increased rigour and conservatism" by the CFTC. Picking a few noisy fights with prominent market players may deter others from testing the agency's stretched surveillance staff. Monitoring the high-frequency and algorithmic trading schemes that dominate derivatives markets is very resource- intensive, as are investigations into the alleged manipulation that is at the centre of Mr Obama's recent gambit. For this reason, oil futures traders would be wise to play it safe in the coming months. There may be a limited number of police patrolling their extensive beat, but to put it in words that Mr Chilton can appreciate, those caught pushin' should expect a mighty whuppin'.
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The reason you see so much more regulation in response to any crisis (the GFC, Enron, LTCM) is that additional regulation is cheap: enforcement of the law is expensive. Most of the time, the issue is at least as much one of inability to enforce due to lack of resources as it is to the inadequacy of the law.
This is a purely political move of Obama, nothing to do with reality.
The only oil futures CFTC can touch have nothing to do with U.S. gas prices after the southern piece of Keystone pipe was put on halt. CFTC can only touch oil futures traded on CME, which have oil delivered in Oklahoma, which has nothing to do with gas prices because there is no Keystone pipeline to pump that oil out.
The CFTC current has around 700 employees. Its budget is $205m. You do the math.
I think one might need a teensy bit more information to 'do the math'.
At any rate you would expect people working for the CFTC to be pretty highly paid, because I rather think that those with expert knowledge of derivatives trading could get a pretty good deal working for a bank or trading house!
Jimmy Carter began "deregulating" (ending price controls, though not really deregulating) because massive regulation had caused the economy to grind to a halt. Now we are scaling up to massive regulation again, repeating the mistakes of the 60's and 70's. Expect a repeat of the slow growth, high unemployment and high inflation of the 1970's as a result.
Deregulating telecommunications and transportation industries was smart. Deregulating finance ranks as one of the colossal - and bipartisan - blunders of the 20th century. Simple common sense suggests that those who handle immense sums of other peoples' money need to be restricted in what they can do, and watched like hawks. The idea of a free market in finance is lunacy.
There was no deregulation of telecomm, transportation or finance. The federal government quit setting prices. That's all. Telecomm, transportation and finance are much more heavily regulated today than under Carter.
In finance, Congress quit setting interest rates for banks and removed Glass-Steagall. That's all. In the meantime, they added Basel I and II and thousands of other regulations. Finance is only slightly behind transportation in terms of regulations.
The idea that any significant deregulation of the market since Carter has taken place is ludicrous to anyone who has taken an intro macro econ class.
Maybe there has been no "massive" deregulation of finance, but there was certainly selective deregulation that looked massive to anyone outside the industry, especially in light of their recent malfeasance and outright foolish hubris. Again, they failed simple intro to stochastics.
It would also help public opinion if those responsible started to either ease and undo some of the damage they wrought, or better yet be brought to justice for the incredible fraud several years ago. Since this has not happened, the public's rancorous outcry has not receded. People don't always understand every regulation or restriction on the financial sector, but most support it because of the thought that it will somehow "hurt them". I would be lying if I told you that I didn't feel the same, at least on an emotional, not intellectual, level.
The big problem to me seems to be that we don't like to enforce the rules that we already have. Anytime someone wants to, they get sacked, similar to what organized crime used to do with judges and cops that went after them in the 20's - 70's era. That's a very troubling comparison, no?
I'm not so sure deregulating air travel has been all that good for rank and file airline employees. Removing price floors has all but doomed legacy carriers to a cycle of pension-stripping bankruptcies due to competition from upstarts that have no such historical burdens.
But maybe this is more an argument in favor of defined contribution plans rather than one in favor of government price fixing. It would not become me to start lobbying for the fixing of any prices by any central authority--since I don't even believe in interest rate setting by a central bank...
But the point, after all, is not the good of the airline (or any other industrey) employees. It is the good of the consumers, and of the economy as a whole.
Right - consumers want the best product at the lowest cost. But the issue gets muddy when the consumer is also a wage earner whose job is to produce the item in question.
It gets still muddier when the same ruthless competition that drives down prices also makes critical infrastructure more fragile. Consumers dislike high electricity prices, but not quite as much as they dislike power outages resulting from cost-cutting on maintenance of the power grid. But so long as the lights are on they don't worry about the outage.
This is a flaw in our present cultural DNA--we've collectively become the pig who chooses the straw house.
I don't know of a reputable economist who blames a lack of regulation for the crisis. IMHO, the best explanation is the monetary theory of business cycles offered by the school of Austrian economists. The most common explanation offered by economists is !@#$ happens!
So if you want to punish someone, join Ron Paul and punish the Fed.
Derivatives are like firearms - hi-tech, supremely efficient devices which should be prohibited unless called for, and strongly regulated when called for.
Alas the Wild West spirit is alive and well in some well-known places.
The chairperson of the CFTC is a Goldman Muppetteer School alum. Really think these new regulations will be as effective as promised?
Obama's "more cops on the beat" is a deft turn of phrase. The same people who routinely object to any and all government regulation of business are, after all, routinely in favor of supporting the police (not to mention the regulation of individuals).
Bravo. The conservative hypocrisy regarding regulation of business behavior vs that of individuals cannot be highlighted too often.