One of Masters' footnotes about the CFTC opening up the "swaps" loophole quotes minutes from a CFTC meeting:
"And that actually happened in 1991 with a particular swap dealer that was hedging an OTC transaction with a pension fund, and the swap dealer came to us, and we said, "yeah, that qualifies for a hedge exemption," so we granted a hedge exemption to the swap dealer. And in the years since then, we've done the same for other swap dealers, as well."
This is similar to the way the regulatory system broke down with the sub-prime crisis. One exception is made to the rule, and the next thing you know, everyone is lining up at the trough. It's a big Ponzi scheme, and whoever is holding these commodities when the bubble pops is going to be broke - while the ones who started it will be sitting pretty, quite a bit richer, and looking to their next criminal scam. This commodities bubble is going to hurt much more than the last couple of bubbles though, because the underlying physical commodities will prove to be much more sensitive to this wild speculation. I don't consume equities or bonds, or even the capital they represent, and can live just fine without them. Not so with commodities!
To add insult to injury, "We The People" will end up bailing them out, because Washington clearly isn't interesting in reforming the banking culture in this country. At the end of this week's Senate hearings, Lieberman agreed that speculators are having a disproportionate impact on commodity prices, and that he will convene another panel to close the "swaps loophole." It all sounded so hopeful until he referred to the Consumer First Energy Act of 2008 - which, on my initial reading, is aimed at punishing oil companies for their ridiculous profits and forcing them to pay for alternative energy research. These aren't bad ideas, but they don't address the root cause of rising oil prices, which is unlimited speculation in commodities futures by institutional investors. As a result, it will do as little to lower energy prices as the Farm Bill just signed into law will do to lower (working) Americans' grocery bills. Speculation will continue, because Washington can always roll out another tax rebate to placate us vulgar masses, right?
Until we do something to reform the banking community - specifically the investment banks - I believe we will continue to suffer through bubbles like this while investment bankers keep getting richer and fatter off the rest of the world's misery.
References:
Energy Information Administration
OPEC unhappy with oil price surge: El-Badri
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