Sunday, May 04, 2008

Clinton sets her sights on energy traders

Finally, a leading politician has acknowledge the open secret of why oil and gasoline prices are so high. It is the energy traders. An article in the Washington Post by  Dan Balz and Peter Slevin entitled "Democrats Step Up Debate on Gas Tax - Both Candidates Focusing on Economy" informs us that:

Going after the oil companies was only part of Clinton's energy message. She accused energy traders of manipulating oil prices and called for the Justice Department and the Federal Trade Commission to investigate. "It is a fact they are manipulating the oil and gas market," she said.

Whether anything will come of this remains to be seen, but at least there is some public and high-profile acknowledgement of the problem.

Technically, I am not so sure that it is market "manipulation" per se, but simply the fact that in-house proprietary trading desks at the major banks, financial institutions, and hedge funds are simply swamping the real market for energy commodities. There is simply way too much financial speculation in commodities in general and energy in particular. I do not know of any illegalities, per se, but the markets are out of control and harming average consumers. Sure, the commodities markets are functioning properly in a technical sense that orders are being processed, just as the markets for mortgage securities and auction-rate securities were working just fine, but there needs to some government hand on the throttle to recognize when consumers are being seriously harmed and that it is time to place limits on financial competition in commodities markets by non-producers and non-consumers. Futures markets were designed to smooth out market conditions for both producers and consumers of commodities with plenty of room for traders and speculators to help add some additional liquidity, but the amount of money being thrown into commodity markets is now interfering with the normal price discovery process.

Exactly what machinations would be discovered remains to be seen, but certainly investigations are clearly called for. In fact, somebody needs to investigate the extent to which changes in Federal Reserve banking regulations a few years ago may have enabled the participation of banks and financial institutions in speculation in commodities in ways that are not in alignment with running a bank.

Put simply, the major banks, financial institutions, and hedge funds are abusing the commodities markets and are clearly harming consumers.

-- Jack Krupansky


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