A day after President Obama called for increased oversight of speculation in energy markets, House Republicans struck back, at least indirectly.
On Wednesday, the House Financial Services Committee voted on budget legislation that would, among other things, repeal the Resolution Authority granted the Federal Reserve in the Dodd-Frank legislation and subject the Consumer Financial Protection Bureau to the annual appropriations process. (Editor's note: The accompanying video was taped Wednesday ahead of the House committee vote, which approved the measure 31-26).
The developments speak to the starkly different philosophical approaches the two parties have regarding regulation of financial markets. They are related because the Commodity Futures Trading Commission (CFTC) was given authority in the Dodd-Frank Act to impose position caps on oil traders, beginning in January 2011. (See: Oil Speculators Must Be Stopped and the CFTC "Needs to Obey the Law": Sen. Bernie Sanders)
These limits have not yet been implemented because the CFTC's budget was slashed ahead of Dodd-Frank's passage, says Leo Hindery, founder of InterMedia Partners, a private equity firm, and a former economic adviser to President Obama.
"Dodd-Frank was a painful bill to get passed," Hindery recalls. "It didn't do everything a lot of us wanted but, that said, it was a pretty good piece of legislation despite untold opposition."
Unable to stop Dodd-Frank from becoming law, Hindery says its opponents, a.k.a. "Republicans", are now trying to "gut" the legislation. (To be sure, one man's "gutting" of legislation is another man's attempt to cut the budget and let free market capitalism work.)
Hindery is particularly outraged to the cuts made to the CFTC's budget, arguing high gasoline prices represent "the most insidious tax" on middle class Americans.
Hindery believes over 80% of oil trading is by speculators (vs. end-users) which adds as much as 40% to the price of crude, citing Congressional testimony by commodities specialist Michael W. Masters and former Exxon CEO Rex Tillerson. A recent report from the St. Louis Fed reached a similar conclusion.
"Because of Dodd-Frank at least we're starting to get real data," Hindery says. "We're not seeing real effective regulation yet because the CFTC hasn't been able to get its budget together."
While singing the praises of CFTC chairman Gary Gensler -- "an excellent steward of the public's interest" -- Hindery lauds proposed legislation such as the Anti-Excessive Speculation Act, co-sponsored by Reps. Rosa DeLauro (D-CT) and Peter Welch (D-ME), as well as Iowa Senator Tom Harkin's efforts to impose a financial transaction tax.
"The end user wouldn't notice, they're interested in physical delivery," Hindery says of the financial transaction tax. "But if you put just a little squeeze on the margin of the speculative trader, they disappear."
Whether speculators would really "disappear" and whether energy prices really would fall as a result is debatable. As discussed here Tuesday, there's a strong argument to be made for limiting position sizes or forcing traders to take physical delivery of commodities. But demonizing the speculators is bad economics and worse public policy.
- Leo Hindery
- President Obama