By Bart Chilton
I’m not so pleased to report that it has also been somewhat disappointing at times at  the work being done at Commodity Futures Trading Commission. None of that comes from the dedicated CFTC staff, but rather from our inability as a Commission, as leaders of the CFTC, to be more proactive and to look around the corner at potential problems—to be nimble and quick regulators. Although issues within the CFTC’s regulatory purview were not in the epicenter of the past year’s financial meltdown, we could have, and should have, done much better on some issues before and during this crisis.

That is certainly not to say that we didn’t do some very good work. We did. I am particularly impressed with our enforcement efforts and, as I’ll mention later on, our clearing staff capabilities. In fact, overall, the CFTC did a better job than most of the other financial service sector regulators, but everything is relative, and we also fell short many times. We could have done better.

We could have been aggressive advocates for closing dark energy markets—particularly after we witnessed how consumers were impacted by the activity in the natural gas markets in 2006. We could have given exchanges timely guidance on governance rules that we promised in the first quarter of this year. We could have been quicker to see the problems of look-alike contracts traded on domestic and foreign exchanges—the Enron and London Loopholes—if you will. We could have done more and reacted better in looking at silver and gold trading. We also could have done better by looking at the role of new speculators—particularly non-traditional, non-commercial long traders—in the commodity markets.

With gas prices over $4 a gallon this past summer, the CFTC’s position that the markets were operating appropriately strained credibility, at best. We could have dealt better in handling with the issue of market prices vis-à-vis swaps dealers. We could have conducted the interagency task force looking at oil trading in a different fashion—perhaps one that didn’t invite an Inspector General’s investigation. We regulate only a small fraction of the on-exchange risk management derivative markets (about $4 trillion), while the much larger market derivatives market is traded over-the-counter (OTC).

Yet there is still a reluctance on the part of the CFTC to even request legislative authority to get any information about OTC trading, let alone regulatory authority over these markets, in spite of the incontrovertible fact that the on- and off-exchange derivative markets are interdependent and frequently arbitrage and price off of each other. Even though the House of Representatives passed legislation in this regard with a wide bipartisan vote, the CFTC and the Bush Administration could not see fit to support the measure.

To be fair, as I said, we did some things right and the CFTC is just one of the many financial regulators in the U.S. and around the world that, looking back, may have done things differently. But let’s face it, there has been, in the U.S., a general attitude that the free market should rule for the past decade. The Free Marketeers view any government regulation or oversight as an impediment to the natural and free flow of market forces. That is what happened when banking laws were deregulated in 1999 and it is what happened when the Commodity Futures Modernization Act (CFMA) was enacted in 2000.

There were certainly good parts of CFMA, but the exempt commercial markets provision (ECM) and the swaps provision, in particular, certainly could have been drafted in a different manner that didn’t leave open the possibility for abuse. As laws and regulations became less strict, it seems that regulators were less interested in what was taking place. The problem is, free markets may work well on a pristine test track, but not so much on the real road where there are bumps potholes and varying conditions. In essence, we veered too far to the right toward deregulation, and we have all witnessed a pretty nasty crash. Now, with the meltdown, we know government went too far.

The result is a global economy in disarray. Nearly every day we learn of a new low in this or a new high in that. Records are breaking all the time. Just this week I learned about the Consumer Confidence Index, which is nearing an all-time low and consumer sentiment is lower than during the serious recessions in the 1970s and 1980s. Consumer retail sales have fallen dramatically for 5 straight months, highlighted by total U.S. auto sales reaching their lowest level since 1982.

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook