classical economics
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Congress Does Nothing
By Wayne Jett

    Hopes of airlines, truckers and Americans of all stripes for relief from manipulation of oil prices were trampled under feet of Wall Street lobbyists, who fashioned political strategy to prevent reform legislation from being voted out of either the House or the Senate. Speaker Nancy Pelosi prevented a vote in the House, vowing to continue doing the same, while Democratic Majority Leader Harry Reid stopped a vote in the Senate. Both houses of Congress adjourned until after Labor Day.
    The price of crude oil rose on news of Congress’ adjournment, as manipulators ended their repose that permitted lobbyists room to work their suasion on Congress with a hint that “markets” were already providing relief. Crude oil, gasoline, diesel and jet fuel prices rose to historic highs before prospects of legislative action improved with persuasive evidence of manipulation presented in hearings.    
    In addition, congressmen and senators were getting earfuls from Americans fed up with paying fuel prices that doubled during the past year. After Pelosi adjourned the House and turned out the lights, Republicans remained, calling for resumption of the session to deal with energy prices. Republican presidential candidate John McCain also called for immediate re-convening of the Senate to deal with the issue. As Democrats arrived home, news leaked that Speaker Pelosi was telling members of her caucus they are welcome to tell their constituents that she is to blame for the lack of energy legislation.
    Each legislator has an excuse and a story that they did the right thing to get the prices down. Republicans say they want more drilling for oil domestically, in ANWR and off-shore, but Democrats blocked it. Democrats say they want to stop manipulation of crude oil futures contracts, which set the price of crude, but Republicans blocked it. Wall Street achieved the deadlock it sought.
CFTC Finds a Speculator
And a Manipulator!
    After years of pretending to be alert while a “zzzzzzz” sound emanated from its chambers, the Commodities Futures Trading Commission awoke to the presence of a “speculator” in the market that previously had been classified as a commercial hedger. CFTC reclassified 327,000 long positions and 330,000 short positions to noncommercial speculation, but refused to say whether all positions were held by the same firm or to name the owner of the positions. However, only one unidentified trader was reclassified from commercial hedger to noncommercial speculator at the same time. This firm was said by observers to control as much as 460 million barrels of crude oil, approximately one-quarter of the entire market, and not much else.
    CFTC reticence in naming the giant speculator calls to mind its acting chairman’s refusal to answer questions posed by Congressman John Dingell during a hearing of the Energy and Commerce Committee on effects of “speculation.” Dingell repeatedly asked the names of parties who organized and owned Intercontinental Exchange (ICE), which operates the “dark” (unmonitored) trading markets in crude oil futures contracts. No answer was forthcoming, despite the facts that the moving roles of Goldman Sachs and Morgan Stanley in ICE were widely reported, and also noted in filings with the SEC in November, 2005, as ICE shares became publicly traded. When a federal regulator is so publicly reticent, don’t be surprised if the newly found giant in oil speculation, too, is such a Wall Street player with political influence.
    CFTC also publicly trumpeted its decision to prosecute a small firm based in The Netherlands for actions to manipulate the price of crude oil! Imagine – any suggestion that a party in the U. S. might manipulate the price of crude oil is considered beyond the pale, but a small firm in Holland is capable of it! The action was transparently intended to symbolize CFTC’s vigilance in protecting public interests in fair energy prices determined by honest market influences. The symbolism is false, of course, as the agency remains captured as ever by pecuniary interests that were intended to be regulated within bounds of fair and just conduct. Nonetheless, the greater public attention shedding light on regulatory failures and financial sector misconduct has already brought the crude oil price down to $118 per barrel from the high of $147. That is a start, and an important one, as it starts the rush to the door by all those who wish to be the first to short the highly manipulated oil price.
August Interlude
    The highly political crisis entails real pain for industry, business and ordinary Americans, coupled with great risk for ineffective politicians in the November elections. Wall Street players hoped the August break of Congress would enable business-as-usual to resume at the trading desks in New York and London. But the public exposure of the issue, coupled with education of key legislators in the ranks of Democrats and Republicans, made a dent in the Wall Street mantra (parroted by Treasury secretary Paulson) that oil prices were simply the free market results of supply and demand. With each passing day, the truth becomes more apparent that something more is afoot in the doubling of oil, gasoline and diesel fuel prices during the past year.
    Republicans are right to press for more oil production domestically, but wrong to block effective oversight and prevention of price manipulation. Democrats are late in acknowledging price manipulation and wrong in blocking domestic energy production of all types (oil, natural gas, coal, nuclear), but rank-and-file are right in apparent willingness to stop price manipulation.
    Legislators of both parties will come back in September with ears burned by constituents, rushing to do something about high fuel prices before votes are cast in early November. Wall Street hopes to regain fully the whip-hand; legislative days will be few, and their objective will be for this congressional session to end with nothing done to end the current trading practices in oil futures. This has nothing to do with laissez-faire regulatory policy. It is a ruthless contest to determine whether lawlessness will prevail in U. S. financial markets at the expense of workers and producers in America and globally.
SEC Asleep at Switch, Again
    The SEC awoke from a nightmare on July 15 and acted by emergency order to protect the shares of Fannie Mae and Freddie Mac from further counterfeiting by short sellers who neither borrow nor deliver shares sold. The same order extended protection to 17 other firms, most of which are foreign banks and/or notorious participants in naked short selling practices. Such emergency orders are limited to terms of no more than two weeks, so the first order expired on July 29, but was extended another two weeks to August 12.    The order of extension says:  “Following expiration of the Emergency Order, the Commission will proceed immediately to consideration of rulemaking, which would become effective after notice and comment.” If, indeed, that is the manner the SEC deals with this problem, then the 19 favored firms will be unprotected during the extended period for public commentary and formal adoption of any protective regulation. Presumably, such a regulation will provide equal protection to all securities in U. S. financial markets, as existing regulations were supposed to do before this regulatory agency’s failures of performance became so publicly apparent. ~