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Bob Pollin: New regulations very weak, needs a major public push

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. On October 18, the Commodity Futures Trading Commission announced its long-awaited new regulations, designed with the objective to control what they called excessive speculation. This was after a massive lobbying campaign by Wall Street and commodities traders and speculators. Bart Chilton, who’s a member of the commission, told me in an interview he was getting meetings 100 to 1 in favor of commodity traders and Wall Street versus people asking for reforms. They were deluged with a process to try to slow down the process and weaken it. But now they have announced their new regulations. So joining us to try to deconstruct all of this is Bob Pollin. Bob is the codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us, Bob.


JAY: So what do you think of what these new regulations are?

POLLIN: Well, I guess you could say it’s a step forward, in that, you know, before the 18th there hadn’t been any action taken whatsoever around a law that mandated that these position limits be set, and the law has been on the books for 15 months. So for 15 months there was no action.

JAY: This is Dodd-Frank, for people who aren’t following.

POLLIN: This is the Dodd-Frank regulatory reform law. And one of the important features of Dodd-Frank was to strengthen the regulations of the commodities futures market so that we wouldn’t have these massive spikes in oil prices and food prices. Nothing happened for more than a year. Okay. So now what has happened is that we have had a decision, a 3-to-2 vote, with the three Democrats on the commission, including Bart Chilton, voting in favor of the position limit law, the two Republicans voting against. The law is weak. If these laws were actually enforced as written, they actually could be pretty good. They do set real limits on the amount that any one trader can control the market–and that’s what we mean by a position limit. Position is just the number of contracts you own in the market. So it does set limits. The problems–there are a couple of problems. Number one, the limits are too high relative to the size of the market, so that somebody can dominate–even if the law were working perfectly, any one trader can own up to 25 percent of all the contracts. That’s too many. That gives you too much power. Number two, even that–those limits themselves are not going to be implemented in full, as the law was passed, for the next two years. And so a lot more lobbying is going to happen over the next two years, and that would weaken or could weaken the law. And number three, the law allows for quite substantial exemptions from the limits. And the exemptions, that is, that you don’t have to follow the limits, are based around the idea that a lot of the trading on the commodities market is, quote, legitimate hedging. And that’s true. That is, for example, if you take an airlines, airlines buys a lot of oil. They don’t want to have to worry about what the price of oil is going to be in 8 months, 12 months, 15 months, so they will lock in a price now. That’s a futures contract for oil, and that’s called a legitimate hedging action, and those kinds of legitimate hedging actions are exempt under this law. The problem is that it’s very, very difficult once you get into the nitty-gritty to separate out who’s doing legitimate hedging versus who is strictly speculating to drive up the price and get ahead of the market and make money by the price going up, or, for that matter, drive down the price and just be the first one ahead of the market, again, selling short and making money off of that.

JAY: My understanding is there’s also an argument being made by people who were doing this over-the-counter pure speculative business, where the banks are betting one way, and then they want to bet to hedge that bet, and they’re calling that a legitimate hedge. So they’re actually–all they’re really doing is hedging another speculative play. But how well are they actually defining what a, quote-unquote, legitimate hedge is?

POLLIN: There actually is no way to do this well. I mean, and this was–economists have written about this. Not me. William Silber of NYU’s a, you know, very well-recognized expert in this area, wrote a paper on this even before this latest. This paper’s, like, seven or eight years old. The point of the paper was, if you just study the balance sheets of people engaged in this market, their trading activity, their assets and liabilities, it’s almost impossible to really definitively tell who is a, quote, speculator versus who is a, quote, legitimate hedger. And, of course, if you’re a smart enough speculator, you will do all the things to make you look like a legitimate hedger. And on top of that, you’ll hire all the best lawyers to confirm the view that you’re a legitimate hedger, and poof, lo and behold, you are now exempt from the–meeting the position limits on these markets. So it was a terrible mistake to incorporate these exemptions into the law. So on balance it’s a very weak first step.

JAY: One of the other critiques I’ve heard is that it’s a good thing to limit the position any individual company or person could buy, but there needs to be an overall restriction on how much of the market is speculative and hedging and how much is for actual end users. And if I understand it correctly, under Rooseveltian law, no more than 30 percent could be considered speculative. But there doesn’t seem to be any limit on the overall role of speculation in the market.

POLLIN: Well, I mean, there is at least some evidence. I mean, I think–I’m just looking at an article here which says that according to–the standard is that nobody can have more than 25 percent of the deliverable supply of commodities. Now, if that is enforced–the 25 percent is too high, but we are talking about the physical commodity. So that is a positive feature of the rule, that they are basing the position limits on the actual physical amount of food or physical amount of oil that is getting produced and put onto the market, rather than measuring the position limit relative to the gigantic amount of speculation that might be going on on possibly a very small base of actual amount of food, oil, or natural gas, or metals that are being traded. So that part is there. It’s weakly there. What we do need is, obviously, to build on that quite dramatically.

JAY: Well, that would be my next question. There was a real movement, a reform movement to fight for better policy at the CFTC. So, you know, is to some extent this kind of watered-down version of the regulations meant to kind of prevent criticism rather than actually deal with the problem?

POLLIN: Well, you know, it’s hard for me to know. I think you should ask Bart Chilton, the commissioner, or maybe get Gary Gensler on, you know, the head of the CFTC. I think Gary Gensler and Bart Chilton have been, you know, sincerely fighting for some kind of decent set of rules based on the law. There is a law that says there has to be position limits, so there’s nothing really to debate about that until Congress repeals Dodd-Frank. So I think some of the commissioners do want to have serious position limits. As you said, they’re under enormous pressure from the other side, and that has forced this situation in which we have very weak position limits.

JAY: Let me ask you this, then, ’cause you’ve quoted the section of Dodd-Frank under which this regulations are supposed to be written, and I–you’ll have to remind me the exact language, but it’s to control excessive speculation, distortion of the economy. Do these regulations live up to the objectives of the law?

POLLIN: No. I mean, these–I mean, on–just on the issue of exemptions itself, their laws are too porous. You know, it is possible that over time what–if we have–as you said, we do–have had a reform movement around this, fighting for decent interpretation of Dodd-Frank. It’s been pretty good, I think, given that, yes, we’re up against massive odds on the other side from Wall Street. But if–for example, the Occupy Wall Street movement, if you’re interested in controlling excessive financial speculation, this is one specific area where you can really make a difference, where the debate is ongoing, where the issues have gotten very specific, and where the–you know, the impact is immediate. We’re talking about speculation and driving up food prices, which is causing malnutrition throughout the world. We’re talking about speculation driving up oil prices, which affects every single consumer in this country and every country throughout the world, including developing countries. When oil prices spiked, this was devastating for poor countries that import oil. It’s the most important commodity in their whole economy. So these are really important issues. And there has been some movement as a result of religious groups, you know, progressive groups focusing on this issue. And you at The Real News Network have been supportive of that, and we need to do more of it. So this, we have to consider it as just a first step.

JAY: Thanks for joining us, Bob.

POLLIN: Thank you for having me.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.