Watchdogs need to walk the walk as well as talk the talk. That’s this watchdog’s message to the chief federal watchdog of energy markets, Gary Gensler, who made news today by repeating some earlier pledges to get speculative oil markets under control. He has to act soon. If oil prices can hit $70 a barrel in this economy, they’ll shoot back up to $140 a barrel, with $4-a-gallon gasoline, at the slightest encouragement.
Gensler, President Obama’s new head of the Commodity Futures Trading Commission (CFTC), issued a written statement today about some of his specific aims, intended to dampen speculation by traders who are just placing bets, not buying or selling oil.
From the NY Times:
Reacting to swings in oil prices in recent months, federal regulators announced on Tuesday that they were considering trading
restrictions on hedge funds and other “speculative” traders in markets for oil, natural gas and other energy products.In a big departure from the hands-off approach to market regulation of the last two decades, the chairman of the Commodity Futures Trading Commission, Gary Gensler, said his agency would consider new limits on the volume of energy futures contracts that purely financial investors would be allowed to hold.
The agency also announced that it would pull back part of the veil on the oil and gas markets, publishing more detailed information about the aggregate activity of hedge funds and traders who arbitrage between domestic and foreign energy prices.
The dull phrase “limits on futures contracts” will be sending the financial industry lobbyists to pound on Gensler’s door, issuing dire predictions that any restrictions on them, or even sunshine on their doings, will send the U.S. economy into a tailspin. Of course, these are the same hedge funds and banks that invented mortgage-backed securities, so they know all about tailspins.
Gensler says he’ll also be holding “a series of hearings” in the next two months on what happened to energy markets last year and the likely effect of limiting overall and individual company trading. It’s great to hear a regulator acknowledging the harm of speculation. It’s great that he’s putting out more information about the kinds of trading that goes on–though it doesn’t come near to telling the public what the biggest fund traders, like Goldman Sachs, are doing.
It’s also great to hold hearings–if, unlike in the last administration, they’re not dog shows dominated by banks and traders.
Gensler has a long way to go. Limiting how much a single fund can trade is important. But Gensler, in a letter to Sen. Bernie Sanders of Vermont before his confirmation, promised much more:
‘I
believe we must urgently move to enact a broad regulatory regime that
covers the entire over-the-counter-derivatives marketplace. As a key
component of this reform, we should subject all derivatives dealers to:
- conservative capital requirements;
- business conduct standards;
- record keeping requirements (including an audit trail);
- reporting requirements; and
- conservative margin requirements
‘I
believe that the CFTC should be provided with authority to set position
limits on all OTC derivatives to prevent manipulation and excessive
speculation. Such position limit authority should clearly empower the
CFTC to establish aggregate position limits.’
That list sounds like just a dull, sober checklist for conducting business responsibly. Here’s hoping that Gensler sticks to that concept, despite the predictions of locked-up markets, higher-than-ever prices and other forms of doom that his announcement is already producing among big traders. This time, however, traders have given up saying that markets simply react to supply and demand, and are telling us, “speculation is good.” Has a nice Gordon Gekko ring to it, eh?