Double Standard Time

RECENTLY THE FINANCIAL TIMES PUBLISHED an article about Congress’ oversight when it comes to speculative trading in crude oil. Why would congress take an interest in speculating on crude oil but not when it comes to stocks, treasuries, or CDOs? Something doesn’t seem to match up here, so we’re going to have to take a look to see if this really makes sense.

The Financial Times article can be found here, U.S. Congress Takes Aim at ‘Speculative’ Crude Oil Trades . Lets play a little game and see if substituting “Google,” “Bear Stearns,” or “stock prices” for oil makes as much sense.

Here is a retake of the above article with some slight modifications:

“‘Right now, it is funds and speculators who invest in oilGoogle — and financial markets interfere with the oilstock market,’ [Secretary-general of OPEC Adbullah] al-Badri said in Vienna.

“The idea that speculators — often used as shorthand for hedge funds — may be trading in a way that results in unusual price movements has gained traction among some U.S. lawmakers…

“As chairman of the Senate Permanent Subcommittee on Investigations, [Sen. Carl] Levin produced a report this year on ‘excessive speculation” by collapsed Bear Stearns hedge funds Amaranth in natural gasCDO markets on the New York MercantileStock Exchange and the Intercontinental Exchange, an "over-the-counter" platform. Mr. Levin, energyconsumer groups, and some utilitiesbagholderssay this hit consumer priceswant their money back…

“Since the collapse of energy trader Enron, the Commodity Futures Trading Commission has charged 63 companies and individuals for violations in the sector, and obtained more than $300 million in civil settlements…

“In the U.S., lawmakersNew York Attorney General Andrew Cuomo, angered by the lack of a legal basis for the CFTC to fully oversee trading in OTC energy markets areto strike out at Washington Mutual directly, is pushing legislation to widen the agency’s powershis power to sue federal banks.

“Last week, Congressman Peter Welch of Vermont introduced a bill to require ‘government oversight of the trading of unregulated energy commoditiesGoogle stock trading to prevent price manipulation and excessive speculation.’”

Think about it. Why is it that speculation in Google, Treasuries, CDOs, asset-backed mortgages, etc., is all welcome, but speculative trading in oil is not?

The root of the problem is not speculation, nor is the problem the high price of oil. The root of the problem is economic conditions that foster, and even encourage, speculation in oil, commodities, gold and silver, currencies, and high beta stocks like Google, Apple, and Research In Motion.

Bernanke and the Fed purposely foster inflation. This drives down the value of the dollar and encourages speculation.

Ron Paul vs. Bernanke

Ron Paul blasted Bernanke in Congress last week as seen on this YouTube video . Following is a transcript:

“We [need to] get down to the bottom of this and define what inflation is, and not look at only prices. This was taught by the free market economists all through the 20th century. They said, ‘Beware, [the central banks] will increase money supply, but they will make you concentrate on prices. And they will give you CPIs and PPIs and fudge those figures.’

“We ignore the fundamental flaw, and that is not only have we had a subprime market in housing, the whole economic system is subprime in that we have artificially low interest rates. This has been going on for 10 years or longer, and now we are bearing the fruits of that policy.

“Instead of looking at consumer prices, which nobody in this country really believes, we need to talk about the distortion, the malinvestment, the misdirection, the bad information that is gotten from artificially low interest rates. In many ways, people refer to you as a price fixer. You fix interest rates. When the Fed fixes interest rates at 1%, that is price fixing.

“The real deception is when we distort the value of money, when we create money out of thin air.

“We have to get back to the very fundamentals of where this problem [bubbles] comes from. And the bubbles occur when we have mal-investment and the creation of new money.

“So my question boils down to this: How in the world can we expect to solve the problems of inflation — that is the increase in the supply of money — with more inflation?”

If Congress wants to reduce speculation in oil, houses, the stock market, and everything else, it should abolish the Fed and let the free market, as opposed to the price fixers, set interest rates. Instead, Congress is sponsoring more absurd regulation.

Government oversight of oil trading makes as much sense as government oversight of Google trading. None.


November 13, 2007

The Daily Reckoning