Ever since passage of the Commodity Futures Modernization Act of 2000, speculators have been empowered to own the commodities markets through manipulation. It's an enormously complex and agonizingly obscure field of investment, fraught with anti-manipulation law and oversight dating back to regulations imposed during the Great Depression. The CFMA relieved much of the legal penalties of really clever and really big money cornering markets and extorting money out of an economy that's just trying to buy raw materials for its own consumption. Honest consumers, both businesses and individuals, it seems are perfect rubes to be ripped off by the unscrupulous members of Wall Street.
Wall Street seems to rely on some pretty flimsy arguments to justify a laissez-faire commodities market. The most egregious platitudes appear here, where Aaron Brown of Minyanville argues that commodities speculation is just like Las Vegas. It's a victimless crime he says, because commodity speculation is just like betting on a ball game. It can't affect the outcome of the game. Unfortunately for him, no amount or persiflage can make that analogy work.
The difference is that the outcome of the game is, in fact, affected by this particular kind of bet. Speculators buying futures drives up the cost of the futures on which consumers rely to make purchases for the next business cycle. People who will actually consume the product -- oil in the most topical instance -- will have to pay the price established by speculators for it. The speculators, meanwhile -- who have never intended to consume the oil -- just drive up the price and reap a profit from inflating the price themselves and then roll that profit over to further distort the next futures cycle. As speculator's money inflates the price of product, there are losers, and those losers are the people who will actually have to pay the futures contract price, take delivery of it and consume it: the public. As the law is now, it's legalized extortion by billionaires.
To a lesser extent, the same activity goes on in the stock market. A big player can create demand for a stock by running up the price himself and then selling to the rubes that want to buy a stock that is going up. There is no one as ruthless as the most ruthless of easy money speculators, and the more money you have the easier it all is. There's a lot of money in the hands of the 1 percent that is up to exactly this kind of mischief. It would probably do them and the public a great deal of good to surtax some of that back into the real economy. As it is, big money is just eating away at the economy on which big money depends to make money. It's manifestly stupid.
Having the commodities futures market open to non-consumers of the product does serve a purpose though. It helps prevent a big consumer of oil from dominating the market for its own benefit and grabbing up all the product with its purchasing power and re-selling it at an artificially high price that it created itself, exactly what outside speculators in oil are doing now. Again, the people who need the oil are just at the mercy of big money. This potential and actual behavior by markets is the poster child for government regulation of markets. Free markets really only work when everyone's resources and information are the same.
Obama aims to rein in speculation or at least make it a political knuckle ball for a Republican dominated congress to deal with. It's fair. The Republicans who de-regulated commodities trading should have to deal with the consequences of that deregulation rather the he.
Republicans aim to cash in politically on the very problems their ideology in policy caused for this nation. Obama is now in the process of making that obvious.
CFTC policing of U.S. oil futures will do exactly nothing to affect U.S. gas prices
(but will waste federal money).
Facts:
1. No matter how many "cops on the beat", U.S. CFTC can only regulate oil futures traded at Chicago Mercantile Exchange (read for example http://www.cmegroup.com/trading/energy/)
2. But no matter how well you regulate the U.S. oil futures, you cannot address the real world oil price manipulation that can only be done through London-based ICE Brent Crude Oil futures these days
3. Now, the reason Chicago oil futures cannot be used for oil-price manipulation is because of the oil glut in Cushing, Oklahoma due to Obama's decision to ban the Keystone XL pipeline from delivering cheap Canadian or Montana oil to Texas where it could be refined into cheaper U.S. gasoline.
4. You can google up "Cushing oil glut" to learn more about some real reasons for high U.S. gas price and Obama's involvement in it.
P.S. I worked at a stock-trading and option-trading firms before, so I have some idea of how people manipulate futures prices. Please ask me for more detail if you are curious.
The problem of course is many of the public sector pension funds would take the hit. And therefore the public.
So the best solution is a slow tightening of the noose around their necks.
Hardly. Commodity prices are driven by supply and demand. An investment in a futures contract is a sometimes educated guess as to where future supply and demand will set the price of the commodity. If you guess wrong, you lose money on the contract.
There is legitimate money to be made in trading futures. However when everyone is doing it, it becomes a bubble. Oil is right now in a speculative bubble.
Violations have not been found because the rules are now relaxed. Tightening them will preclude violations under tighter rules. That's why rules are made, not to cause more violations but to deter them. It is all political, but it's been a politics hidden from the public who are just left scratching their heads and blamming the flavor of the day. The best government is one that gets it done unnoticed, however that leads to complacency.
The general public has a hard time comprehending just how much money is available to manipulators. The gut feeling is that no single trader could have that much effect on a stock or a commodity. But that is simply not true. J.R. Simplot, a potato processor in Idaho, once ran the potato futures through the roof, then when the futures fell he refused to deliver at the lower price. He had made tens of millions buying and selling to rubes on the upswing and paid less than a million in fines for refusing to deliver, and bragged about it. That was in the old days under the "strict" rules.
I've read somewhere that 80% of stock at NASDAQ is owned by the 1%. Don't know if that is true. But it would be interesting to know just what percentage of stock and commodities are owned by just a small group of people. That statistic might help the public understand just how easy it is for that small group to manipulate the market.