William K. Black: Regulations passed by CFTC gutted by industry pressure, but some progress given DC politics
Story Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. Iām Paul Jay in Washington. On October 18, the Commodity Futures Trading Commission voted three to two along party lines to limit the amount speculators can play or can speculate in the commodities exchanges. Now joining us to discuss the significance of this decision is Bill Black. Bell is an associate professor of economics and law at the University of Missouri-Kansas City. Heās a former financial regulator, and author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us again, Bill.
WILLIAM K. BLACK, ASSOCIATE PROFESSOR OF ECONOMICS, UMKC: Thank you.
JAY: So let me just say, if Iāsee if I understand this correctly. The old Rooseveltian regulations prohibited speculators from being involved in more than 30 percent of the commodities exchange, so that 70 percent of commoditiesā, you could say, investors were people that were actually going to use the stuff, whether weāre talking, you know, oil and gas or wheat or agricultural products. This regulation doesnāt go back to that. It limits how much any individual person or company can speculate. So do I have that right? And letās start with that.
BLACK: Yes, I mean, if you modify it slightly, by one-third of the volumes. But this rule, as you say, thatās just been adopted doesnāt limit overall volumes. It limits individual volumes of each trader.
JAY: Now, the people that were pushing for reform, they wanted overall volume controls, because just limiting individuals, you could still wind up with what some people say is as much as 60 or 70 percent of volume now is speculation, and that this wonāt limit that. Is that a legitimate critique?
BLACK: Without an overall volume limit, you canāt actually stop the excessive speculation. That doesnāt mean the rule will be completely useless. These limits on individuals might have the effect of significantly reducing the amount of speculation. But, you know, thatās a guesstimate, and weāre going to have to see what actually happens in the marketplace after they implement the rule.
JAY: So in spite of the fact that what was being opposed by the commission wasnāt the kind of regulation that many reformers wanted, it was still fought tooth-and-nail by the industry. So talk a bit about the political battle, ācause, you know, I think we talked a little bit ahead of time off camera, and you thought it was an achievement in this political environment even to get this much.
BLACK: Yeah, this is one of the most aggressive regulatory actions out of the Obama administration. And so thatās one way of telling the story. The other way of telling the story is also true, that it was nowhere near as aggressive as it probably needs to be to be effective in stopping the problem. But this is symptomatic of how much the world has changed. Even if you adopt a rule that doesnāt go more than halfway, itās not that the Republicans join you in a compromise; they attempt to prevent any reform of any [incompr.] And so both members of the CFTC voted against this who are Republican members, and the Republican representative in the House also indicated that he was a strong opponent of this action. And so you have to give some credit to the CFTC in being willing to go forward with the rule at all.
JAY: Now, just to remind everybody, or for people that havenāt followed the story, the context of this, just explain again why all of this matters so much to ordinary people. This isnāt just something that affects investors. This affects the price of food and basic cost of living.
BLACK: Indeed. Thatās exactly the point. This isnāt simply business as usual. When food price commodities in particular go up very substantially because of speculation and manipulation, people die, lots of people die, and others are malnourished. And weāre talking about hundreds of thousands of people potentially dying and millions of them being malnourished. So the problem for the folks who donāt want any regulation is that what weāre seeing in the marketplace is supposed to be impossible. [crosstalk] speculation, under their theories, is supposed to stabilize markets and make them more efficient. Instead what weāve observed increasingly over the last about eight years is rampant speculation that leads to enormous fluctuations in prices, typically but not always having them go up in ways that are grotesquely excessive prices, even though the underlying economic events suggest the prices should be going down.
JAY: Now, Michaelāhis name is Michael Dunn. Heās one of the Democrats on the commission. He voted for these limits. At the same time, heās quoted all over the press as saying heās not even really convinced theyāre necessary, that there still isnāt proof that this kind of speculation affects prices.
BLACK: I mean, you can never prove causation, in a technical sense. I mean, thatās what the scientific method says. We can only disprove things. But within the realm of the way we use causation in regular human speech, this is one of the most powerfully demonstrated links. It is precisely speculationāand everybody in the trade believes that itās speculation as well who isnāt filing a statement completely in their particular financial interest. In other words, if you talk to traders, just a regular trader in the pit, they agree and they agree full-heartedly.
JAY: Now, the Dodd-Frank bill that was going to regulate casino capitalism and was going to bring the system back from the abyss and all the rhetoric we heard in ā08 whenābefore the banks were bailed out and there was still some fear in these peopleās hearts, this was supposed to be the thing to get limits on this kind of speculation. This was theāgoing to be the step to control things. Are you at all concerned that if this isnāt really effective, whatās been passed, that this is going to kind of let this regulatory commission and the law off the hook? Like, people will say, oh, they passed it, when in fact they didnāt pass something thatās going to be effective enough.
BLACK: Yeah. Well, we know that dynamic, right? Weāve just lived through, depending on how you count it, eight to 13 years of it. They passed something completely ineffective. Theyāre told that itās going to be ineffective in advance. And the idea is to be ineffective. Then itās put in place, it proves ineffective, and their conclusion is, see, see, regulation doesnāt work. Well, thatās just a self-fulfilling prophecy of failure. They designed it to fail. Again, this rule has a glaring weakness that you properly pointed out: the lack of overall volume. But it is possible that individual limits will result in damping down the amount of speculation. And that would be a good thing. But weāreāwe have to also look at that more fundamental point. Again, neoclassical economics says the speculator is the hero, the speculator is the person that notādoesnāt drive prices incorrectly, drives prices in the right direction, makes everything work better, so that they reflect real economic forces. Nobody seriously believes that anymore. That has been completely discredited. So if this effort fails and, letās say, the Republicans are put back in charge in the next election of all three branches of the government and they gut the rules, then thereās going to be such a disaster in the area of commodities that it might bite them really badly, because when these commodities go up in this manner, as I pointed out, a numberāvery large peopleānumber of people die and are malnourished. But thatās mostly in other countries. But if it simply produces a very substantial increase in food prices in the United States, then youāre going to really upset a very large number of households, and that could hurt them politically.
JAY: Now, just dig into the regulation they did pass a little bit. If I understand it correctly, the regulation essentially says that on the first 25,000 contracts that an individual company or person gets involved with, thereāll be a 10 percent limit, and then a 2.5 percent above that level. What does all that mean?
BLACK: That means a political compromise on the sides of the traders. I would urge your viewers not to get very much hung up into that and again to come to the eyes on the prize. The question is: is this going to reduce the overall speculative activity? Is that going to reduce, or even eliminate, in the best of all circumstances, these massive speculative rises and falls in commodity prices? And what else should we be thinking of? So one of the most effective things we could do is one of the central lessons of this entire crisis, and not just in the commodities sphere, and that is: excessive leverage is disastrously bad. And the right and the left in terms of economics tends to agree on this substantially. Well, commodities speculation is the zenith of grotesquely excessive leverage.
JAY: Explain that, excessive leverage, to someone who doesnāt understand that.
BLACK: Okay. Leverage is simply how much debt do you have to equity. And so a US bank coming into the crisis might have leverage of maybe even 20 to 1. The European banks, because they passed Baselāor adopted Basel II more quickly and without any safeguards, often had leverage more like 50 to 1. And that meant that when they suffered a loss, that leverage acts like a magnifying glass, and it greatly magnifiesāin the case of 50-to-1 leverage, it immensely magnifies your losses. So that was just in regular stuff, when they were doing all those mortgages and such. But in commodities, you have frequently been able to borrow far more with very little equity. And these things are done frequently off exchanges as well, which is again one of the potential loopholes to all of this. Thatās through financial derivatives, which is another topic, but itās a critical topic. If I can achieve the same purpose of speculating through a financial derivative that affects commodities but isnāt subject to the CFTC rule, well, you know, thatās even a bigger loophole. And so those are the things we need to concentrate on.
JAY: I mean, isnātāthat wasāpart of the argument, I think, of the industry is they were trying to claim that they are like end users, not really speculators, because theyāve speculated off market, and now theyāre hedging the speculation off market, and now they should be allowed to be considered not speculators, ācause theyāre just hedging something real, except whatās real is the casino bet over there. Am I understanding this correctly?
BLACK: No. This is a variant on the old joke, you know, what is the definition of chutzpah. And the definition of chutzpah is you kill both of your parents and demand mercy as an orphan.
JAY: Yeah. Thanks very much, Bill. Thanks for joining us.
BLACK: Thank you.
JAY: And thank you for joining us on The Real News Network.
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