By GENE HOWINGTON
One of the common complaints about the Federal Reserve Bank is that it is a private institution with too much power and too little actual responsibility to the public because of that. The reason this causes a problem is that the Fed has demonstrated that they will ignore the systemic health of the economy in favor of the profits of financial institutions. They seem to be set to do so again. This time the issue is physical commodities trading. The winners will be the usual suspects: JPMorgan/Chase, Morgan Stanley and Goldman Sachs, et al. The losers will be the business community (including some very large businesses indeed) and you, the American public. But is it a foregone conclusion this time?
The situation: The Fed has endorsed the entry of big Wall Street financial services firms into trading of physical commodities like aluminum and natural gas – traditionally not the finance end of the economy but the very real end of the economy where supply meets demand. Through a variety of (mis-)regulation and legal opinions, the Fed has allowed these companies to transform from pure middlemen matching goods to buyers into commercial enterprises that refine, store, transport, and these physical commodities; no longer a financial services provider but actual processors and holders of the goods themselves. There are three basic ways a bank can become involved in such a commercial enterprise. 1) They can ask the Fed for permission, claiming that the business would be complementary to ordinary banking activities. 2) They could buy companies engaged in physical commodities activities under merchant banking provisions that allow banks to make such purchases solely for the purpose of turning a profit (within a decade or so). 3) Banks could claim exemption from rules normally banning certain physical commodities activities because they were in these businesses prior to passage of the Gramm-Leach-Bliley Act. If you aren’t familiar with the Gramm-Leach-Bliley Act, you should be. It was the bill that effectively neutered the restrictions placed on banking in the wake of the Great Depression by the Glass–Steagall Act, leading in no small part to the CDS scandal and the near economic ruin of today’s Great Recession. Although the “Big Three” domestic players in this game are JPMorgan/Chase, Morgan Stanley and Goldman Sachs, it’s a global game with other players such as Citigroup, Bank of America, Wells Fargo, UBS, Credit Suisse, Barclays, Royal Bank of Scotland, Societe Generale, BNP Paribas, Deutsche Bank and Bank of Nova Scotia.
The problem: By allowing the banks to become actively involved in the real economy to this degree, you are allowing them to manipulate markets to their benefit and to the detriment of others. The question becomes can regulators feasibly track conflicts of interest and/or market manipulation across the financial and industrial sectors and mitigate or eliminate the “significant macro-economic risk” from having banks heavily involved in non-financial sectors of the economy?
Many think the answer to that question, in no small part based on past failures of the Fed to address the “too big to fail” mythology, is a resounding “no”. Regulatory officials and financial experts outside the government said the outcry from companies like Boeing, Coca-Cola and MillerCoors about manipulation in the real economy and from lawmakers like Rep. Alan Grayson (D-Fla) and Sen. Sherrod Brown (D-Ohio) presented the Fed with an opportunity to take decisive regulatory action rather than allowing banks to continue these profitable yet risky activities under the rubric that such actions in physical commodities pose too great a risk to the general economy. In other words, the Fed could do what needs to be done under what is nominally one of its primary functions: helping maintain the macro-economy for the public good. But being a private quasi-governmental institution that is entirely too comfortable with the industry it is supposed to regulate, the Fed fails in this public duty. According to Saule Omarova, a law professor at the University of North Carolina at Chapel Hill who served as a special adviser for regulatory policy at the Treasury Department during the George W. Bush presidency, “The Fed has always looked at this from the perspective of, ‘Does it enhance the safety and soundness of an individual institution?’ But that inquiry by definition leaves aside systemic risk. There is something to be said about the cumulative effect of various activities that may not be particularly scary for individual institutions, but taken together across the system could be very worrisome.” The Fed is essentially gambling by ignoring the developing risks to the financial system posed by banks’ involvement in physical commodities and putting the profits of those banks above the interests of the rest of the business community and the interests of citizens in general.
So what is the Feds response to this criticism? Are they going to reign in the already manifestly out of control financial services sector? No. They are going to punt.
With a Senate Banking Committee hearing scheduled for Wednesday to allegedly address this problem, the Fed isn’t going to do anything . . . except “solicit public input”. Read: evade any call to curb banks’ risk-taking at the expense of everyone else. This non-action is despite years of internal warnings at the Fed that “Wall Street’s expansion into metals and energy puts the U.S. economy at risk in the form of higher prices due to alleged market manipulation and endangers the financial system because of the possibility that a catastrophic incident such as an oil spill would lead counterparties to flee the affected bank and put it at risk of failure.” To be clear, there is still a chance the Fed might do something to address this problem in a real and substantive manner. Then again, there is still a chance a satellite will fall from the sky to crush my car today. “Possible” and “probable” are not the same thing.
Crony capitalism? Naked fascism? Raw stupidity? Business as usual?
What do you think?
Source: Huffington Post
Nicole Plyler Fisk
Gene Howington
FFS Guest Blogger
Joy of Fishes
Chuck Stanley
shortfinals
Terry Welshans
ann li-summers
wordcloud9
Flowers For Socrates 
“Crony capitalism? Naked fascism? Raw stupidity? Business as usual?”
All of the above.
I think …. the flip side of money in politics. One of the many reasons financial corporations in particular want to influence politics is precisely this, to avoid regulation and let them take unlimited risks with other people’s money, be they shareholders, clients, or the taxpayers.
This is just one of many reasons an industry worth hundreds of billions will spend tens of millions to corrupt politicians, so they can make tens of billions. Corruption is a very good investment. It is also why politicians are ever striving for new ways to make that corruption perfectly legal and concealed from the public.
Gramm-Leach-Bliley Act is a gift that just keeps on giving and perfect proof of Tony’s “flip side of money in politics” contention.
Companies like Boeing, Coca-Cola and MillerCoors should be worried … the failure of Dodd-Frank to fully address the moral hazard problem (interventions to address the prospect of a prolonged disruption in the credit delivery system and a consequent reduction in commercial activity thus expanding the banking safety net ) has almost guaranteed that the well proven greed of banksters will lead to further reduction of capital held against the riskier investments.
Latest Gallup poll on Congress Job Approval shows 13% of Americans approve of the job Congress is doing, essentially unchanged from December but above the all-time low of 9% from November. Congressional approval has rarely been 20% or higher in the last three years.
I only read and or follow polls that are on-going for the only real value of a poll for my purposes is whether or not there is movement indicating trends. The interesting thing about Gallup’s Congressional Job Approval poll is that it has been running since 1974. The historical average is 33% but Gallup has not measured a job approval rating above that mark since early in Barack Obama’s presidency. They attribute some of these low numbers to a divided party control of Congress, Rep controlling the House – Dem controlling the Senate and failing to agree on an approach to solving the many major problems … gridlock. But they also attribute the low numbers to neither registered Republicans or Democrats who are willing to embrace Congress as their own it thus making it a political orphan.
Blouise: I haven’t seen it discussed much, although I have brought this up a few times: I think the gridlock is an intentional collusion of corrupt Republicans and corrupt Democrats.
For both sides, they look stubborn and irrational to voters of the opposing party, but heroic and principled to voters of their own party. Why not gridlock? Their corporate masters don’t want them to pass anything anyway (and if they do, they can pass it without fanfare or debate, because all the media really pays any attention to is fights and insults).
I think it is a formula they have stumbled upon, gridlock also gives both sides endless opportunity to e-beg more money to “help” them do their damn job, which never seems to actually get done.
Tony C.,
That is a thought worth researching.
It is true that a declaration of gridlock has been known to be a very effective instrument but, what you are suggesting is outside the norms, historically, of a forced gridlock … a purposely constructed spillway of sorts, in plain view but well disguised … a channel for money.
Collusion suggests conspiracy and the key to unlocking that puzzle is to look for patterns … thus the research.
I think a preference for gridlock on the part of business was preferred until recently. The tea party with is desire to actually shut the legislative process down has probably changed this.
http://www.theatlantic.com/politics/archive/2014/01/the-iran-vote-this-really-matters-and-you-should-let-your-senators-know/283070/ This is a situation where republicans along with some AIPAC supporting democrats are getting together to stop the Iran deal.
Blouise: I point at the Public Option.
I think we know now that, even though Obama promised he wouldn’t pass Health Care without it (on camera, as a candidate), he threw it under the bus in closed door negotiations with the major insurers, in return for considerations. This was before the town hall debacles, and when the Public Option was polling over 70% positive. It was a dead deal before it happened. I think we also know now that Obama sent Rahm specifically to recruit Liebermann to be the ‘bad guy” on the Public Option, a role Liebermann adopted with relish, and this is part of the reason he wasn’t sanctioned in any way by the Reid and the Democrats.
And in the meantime, unbeknownst to us, how many hundreds of emails did we get begging us to contribute so we could save the Public Option? Are we to believe that “gridlock” over the Public Option was real? Obama did not just cave, he was actively opposed to it because he had already traded it for political considerations (including, I think, mandatory enrollment, private company controlled rates, and avoiding the simple solution of making Medicare open to all).
And in the meantime we are donating mightily to the campaigns of pols to ransom the life of a hostage that was shot in the head before we even knew there was a controversy.
I would point at the repeal of Don’t Ask Don’t Tell. I don’t think the Military Industrial Profiteers really give a crap whether gays serve in the military or not; the sexual orientation of cannon fodder and bullet stoppers is immaterial to them. Soldiers are something they expend as a cost of doing business. Why drag it out? There are a dozen ways Obama could have sped it up, his excuse that we need to do it carefully because it is a law certainly doesn’t apply to anything else he wants done immediately. Laws don’t faze him.
But about 80% of us care, on one side or another, and Congress needs to drag that piece of legislation out to milk it for all the donations it is worth. They need grandstanding and TV time, and they need to turn that into campaign bucks. And even having done the right thing (because the rich don’t care and most people were in favor of the right thing), they can milk that:
Democrats as a badge of honor. Look what a great thing I did! Donate so I can do more great things! Because the opposition will undo it all!
Republicans as a dire warning. Look what a horrible thing they did! Donate so I can stop any more horrible things! We have to fight back and undo it all!
here is a list of top commodities traders in the world. How will the entrance into that market change what is already going on? You end up having more players, with the rise of global capitalism, there may well be a need for more traders to make sure commodities are delivered in a timely fashion.
http://www.telegraph.co.uk/finance/commodities/8451455/Top-ten-global-oil-and-commodities-traders.html
B,
Do you really think it’s a good idea to have the same people holding/processing the commodities as it is arranging/financing the very same trades? Doesn’t that set off your “free market alarm”? If it doesn’t, it damn well should. That’s a recipe for collusion and price fixing.
http://www.reuters.com/article/2014/01/14/us-banks-commodities-fed-idUSBREA0C1OG20140114 (Reuters) – The U.S. Federal Reserve on Tuesday took a first formal step toward restricting the role of Wall Street banks in trading physical commodities, citing fears that a multibillion-dollar disaster could bring down a bank and imperil the stability of the financial system.
The Fed board voted to publish its concerns and potential remedies following months of growing public and political pressure to check banks’ decade-long expansion into the commodities supply chain. The Fed also questioned the initial rationale for allowing them to trade and invest in risky raw materials and lease oil tanks or own power plants.
The Fed “expect(s) to engage in additional rulemaking in this area,” according to prepared remarks of Michael Gibson, the Fed’s director of bank supervision and regulation, to a U.S. Senate banking committee hearing on Wednesday.
The new rules could include a cap on total assets or revenues from such trading, increased capital or insurance, or prohibitions on holding certain types of commodities “that pose undue risk.”
Gene:
I dont know enough about it. Generally commodity traders help get corn from point A to point B in an efficient manner. Would the banks be any different?
It could be as you say which would be a bad thing.
Why do you think it will be bad? I guess I dont really understand exactly what the banks are going to be doing. Are they going to litteraly buy 10,000 tons of aluminum and then sell it to Boeing? How will the prices be set for Aluminum? The same way they are now or something different? If it is the same way they do now, the banks could be in a risky position if they buy Al at $10/ton and it drops to $5/ton.
If they can somehow manipulate the price of Al to $16/ton, then you are right. But the market is full of examples of failure, think the Hunt Bros and silver back in the 80’s.
B,
That’s precisely the danger except where the Hunt Bros. only tried to control the supply, the banks have control of the whole chain from mine to end industrial user. What if they decided they simply weren’t going to sell Boeing aluminum because they had a vested interest in Airbus? This kind of arrangement is nothing but trouble waiting to happen. Big trouble.
Tony C.,
There you go … the pattern emerges.
No comment, just for the grist mill & being hung back on a Cross of Gold.
http://www.zerohedge.com/news/2014-01-14/marc-faber-warns-bubble-could-burst-any-day-prefers-physical-gold-bitcoin
Correct thread… Economics… Somewhere, over the rainbow, why up high, probable out in Colorado maybe? 🙂
BTW:
There is another verse to “Somewhere Over the Rainbow” I’ve hear sung around here.
I don’t recall it all but it starts like this: Somewhere over by Tulsa, there’s cheap beer….
lol
Gnite
Gene:
you do have a point. I guess they could pool their money and buy a particular industry from top to bottom but wouldnt that cost a sh*t pot full of money? They would be stuck in one industry and they may not have enough cash to buy all of the mines and factories. Then what?
I think there is more risk for the banks to be involved than for the consumer.
here is an interesting article on aluminum and Goldman Sachs: http://www.forbes.com/sites/robertlenzner/2013/07/25/goldman-sachs-makes-255-million-storing-3-of-global-aluminum-production/
B,
You don’t have to buy an industry top to bottom (not to mention to a certain extent that is still disallowed) if you control one or more of the primary/necessary materials required for that business. That’s how leverage works. The risk to the banks should not be the primary concern here, but rather the risk to the larger economy putting that much leverage in one place creates.
Bron, Gene: I think the risk would still be as it was on mortgages: Arbitrage, options, splitting contracts and ownership rights (on mortages, rights to principle payments, rights to interest payments), Credit Default Swaps and other esoteric rights, bets, and contracts. The modern world isn’t like the Hunt brothers trying to corner the silver market, we are more sophisticated than that. Using modern financial instruments and contracts, a market can be effectively cornered without physically owning ALL of the commodity; but you have to be able to own some of it at some times, in transition.
Imagine you own a thousand tons of aluminum, and I pay you for a contract that you won’t sell it to anybody for three months. Or maybe anybody else for three months. Or maybe I can buy a percentage of profit on the sale. Or whatever, banks are more inventive than I am. If they are allowed to trade in commodities, be sure they will invent derivatives on top of derivatives and insurances and cross-insurances and crazy contracts nobody understands, that interact in weird and unanticipated ways, to create another worldwide bubble that makes them a trillion dollars before they have to get bailed out by us again.
As Mark Twain said, “History may not repeat itself. But it sure rhymes a lot.”
Tony,
That’s exactly where I was going with that: there is little difference between an actual monopoly and an effective monopoly.
Gene,
Are we talking Wall Street banks as Commodity Brokers? Perhaps I’m not fully understanding but I have a really good friend who made his living as a Commodity Broker … Chicago. At any rate there is a whole slew of things one has to go through including an FBI background check before getting a license.
I don’t think, and here I refer to SwM’s link yesterday at 7:01p, that the Fed is going to allow it.
Blouise,
It does indeed look like the Fed is going to balk, but given their already practically incestuous relationship with these Wall Street apex predators, I’m going to err on the side of discretion and say the proof will be in the eating of the pudding.
Gene,
Well if they don’t then we might as well kiss the economy goodbye because once those greedy fools fail to have adequate capital assets to back a swap, a trade or a particular soft commodity suffers a catatrophy and considering the size and diversity of commodity markets as they expanded internationally … those bozo bank boys could literally destroy the world’s economy overnight. No phuckin joke.
Blouise,
Yep. Allowing this practice to continue is probably one of the worst ideas in the history of bad ideas. If they allow Wall Street to get in that position and they do wreck the global economy? If all the rest of the world at that point decided to gang up and invade us (starting with NYC of course), they’d be perfectly justified in doing so.
Gene,
Yep … world wide wars have started over less
🙂
Krugman is a shill that’s very easy for me to not like his opinions, but unlike GWBush/Obama/Clinton, I could prolly stand to sit & drink a few beers with the loony.
http://www.maxkeiser.com/2014/01/overstock-com-ceo-attacks-krugman-hopefully-bitcoin-will-destroy-central-banking/
http://www.zerohedge.com/news/2014-01-15/tell-fed-how-you-really-feel-about-banks-trading-physical-commodities
Oky1:
from the 2nd post above, one of the comments:
So let me get this straight, the Banksters whom own the FED want to know how the debt slaves on the plantation “feel” about all the fucked up sh!t they do?”
Bryon,
That’s right, they want to know, but I don’t give a damn. They’ve already rigged every market for so long they’re upside down on their trades.
They are that proverbial coyote that has chewed off 3 legs, but is still caught in the trap.
Rome was once a great Empire right up until the day it wasn’t, so let the Fed Eat Cake if they haven’t the bread for the bill. LOL
Blouise, I think Janet Yellen will be far less partial to the investment bankers than Obama’s first choice, Larry Summers., would have been.
http://www.thenation.com/blog/176175/populist-rebellion-tripped-larry-summers#
SwM,
Both Brown and Warren support Yellen though Warren’s support is not as enthusiastic as Brown’s:
“WARREN: Well, let me put it this way. I asked about it, I asked about it in the hearing, I asked about the importance of enforcing and the importance of the regulatory role, and, you know, Yellen is making commitments in the direction of saying she understands the problem, she sees the problem, she knows what the tools are. I’m hopeful that means she’s going to act. … You know, you have to have some optimism around this. And I’ll tell you why, partly. Janet Yellen is data-driven. Look at the numbers. The big banks are getting bigger, and they’re taking on more and more risk. Our banking industry is becoming less and less diversified with every single day. We’re losing the smaller financial institutions. There’s pressure – the regionals are being lost. We’re ending up with these behemoths that absolutely radiate risk.” ( http://www.bloomberg.com/news/2014-01-10/warren-looks-to-yellen-for-tougher-fed-oversight-transcript-.html )
As for Summers … I can’t figure out why Obama can’t get past his emotional involvement with Summers and see the reality of that goofball’s abilities. Summers has failed over and over again and some of his failures have helped to lead this country into dire straights. Besides, the dude can’t stay awake in meetings.