Ever since the 1980s when Britain's Margaret Thatcher
and US President Ronald Reagan spurred de-regulation of global finance
and privatization, market fundamentalism became the main game.
At last, the world is seeing the difference between money and real
wealth, between "demand" in markets and the real needs
of people without money. We cringe at the tragic pictures of poor
people eyeing abundant, tempting supplies of food in the local markets
around the world but who are forced to go away hungry or make their
children patties made of mud, spices and whatever scraps of vegetation
they can find.
The games of traders, speculators, hedge funds,
private equity and even pension funds and charitable foundation
and university portfolio managers, driving up prices of oil and
food, invoke increasing outrage and demands for reform. The recent
FAO Summit in Rome called for $10 billion more to pay these higher
food prices. Yet, without financial reforms, this money will fatten
players in the global casino.
The flaws of laissez-faire economics are again
evident in the latest set of financial debacles, with $100 billion
written down from faulty risk models and collapsed hedge funds to
speculation in oil and commodities. Despite the efforts of socially-responsible
investors and asset managers to impose transparency, better corporate
governance and true-cost pricing, little progress has been made
to internalize social and environmental costs into risk-analyses,
company balance sheets and national GDP accounting. These huge,
mounting costs: from pollution to global climate change, ignored
for decades by financiers, accountants and most official statistics,
now feed the suspicions of millions that global finance is indeed
a casino with rules rigged by the insiders.
In the ceaseless, now computerized, trading between
all market players (recently measured in London's exchanges by the
elevated testosterone levels of the mostly-male traders), the games
of money, power and ego are changing again - for the worse.
- Market players unwilling to submit to
enhanced scrutiny of shareholders, analysts and the rigors of
public stock ownership retreat into private equity deals - buy
companies, saddle them with debt and often strip their assets
and re-sell them.
- Companies try to boost their stock prices
with share buy-backs - limiting the supply, e.g., oil companies
"banking" huge oil price increases rather than investing
in new supplies or facilities.
- Hedge funds (630 speculating in energy)
total $2.9 trillion with their top 10 managers earning $14 billion
in 2007. They still proliferate even after their many risk-analyses
failures, as greedier investors seek ever-higher returns. The
game, as with private equity, is also to buy companies with borrowed
money. Speculating in commodities ($8 trillion of futures contracts
in oil in 2007) drives up the prices of other necessities.
- The game of "enhancing shareholder
value" (versus other stakeholders' interests), played by
private equity and hedge fund players, has led many asset managers
of employee pension funds, foundations and university endowments
to join these new greed sweepstakes. Many employees are shocked
to find their pension fund managers investing their retirement
funds in all these efforts to try to beat each others' market
performance - contributing to the problems of plant closures,
rising gas and food prices and carbon emissions.
- The newest game is the rise of sovereign
wealth funds, swelled with oil revenues and trade surpluses. Norway
has the oldest and most responsibly managed of these funds. Others
are in Singapore, China, Kuwait and the United Arab Emirates.
Here the game is not just money but power and influence as well
as buying real assets instead of holding slumping US dollars.
The USA, the world's largest debtor, must court these funds, sending
Treasure Secretary Henry Paulson, hat in hand, while President
Bush pleads with Saudi Arabia's King Abdullah for more oil.
- Banks, hurt by reckless investments
in the alphabet soup of esoteric derivatives: CDOs, SIVs, CDSs
(at $62 trillion), also look to sovereign wealth funds to bail
them out, joining hedge funds and private equity supplicants.
Taxpayers baulk at the bail out of Wall Street investment bank
Bear Stearns, while central banks are exhausting their reserves,
tools and remedies. US Fed interest rate cuts have weakened the
dollar, feeding inflation and speculative bubbles in oil and commodities.
What are the likely outcomes of all these new
games in the global casino - still unregulated since the Asian meltdowns
of the late 1990s? Firstly, we are seeing the effects of the massive
credit creation by central banks which fed the dot.com bubble, the
housing bubble, the oil, food and commodities bubbles - a worldwide
expansion of fiat currencies. The globalization of unregulated financial
markets led to the rapid "contagion" - accelerated by
computerized and algorithm-based automated trading. The "rocket-scientist"
academic mathematicians, lured by the hedge funds, turned out faulty
models which failed to see risks from these new conditions and how
their own trading strategies were creating new systemic risks to
their own financial markets.
Financial sectors of the US, UK and other market
economies metastasized - just as they had done prior to the Wall
Street Crash of 1929. In Britain, finance represents 25% of GDP
and over 20% in the USA. Too many people are employed in trading,
borrowing and financial engineering - rather than in producing real
goods and services.
Money was an important invention in human societies,
but it only retains its value if it is a good tracking and scoring
system of the products and exchanges of the real economy. Pyramiding
of paper and now electronic "assets" inevitably leads
to write-downs, dislocating both the speculating players and the
rest of the economy. We see now how the changing theories of central
bankers distort real economies, from Alan Greenspan's belief that
the dot.coms had created a "New Economy" to his urging
US borrowers to try adjustable rate mortgages and hailing all the
new derivatives as "financial innovations" that spread
risk to those able to bear it.
Reforms of these excesses in the global financial
- taxing the 90% of speculation
in today's $2 trillion of daily currency trading;
- curbing the $260 billion in index funds
tied to oil and other commodities;
- reducing the 16 to 1 leverage allowed in oil
and commodity trading by raising margin requirements;
- repealing the "ENRON loophole" passed
in 2001 that de-regulated energy trading;
- repealing of US and EU subsidies and mandates
- greater transparency and oversight of
hedge funds, private equity and sovereign wealth funds.
Many more fundamental reforms are necessary: requiring
central banks to use their more targeted tools beyond manipulating
interest rates, e.g., increasing the capital reserves banks must
hold and raising margin requirements on stock purchases. Reforming
tax policies is urgent: taxing carbon emissions, pollution, waste,
planned obsolescence and resource-depletion while reducing income
and payroll taxes.
Shifting the still-massive subsidies showered
on the oil, coal, gas and nuclear industries to production tax credits
can accelerate the growth of renewable energy. Solar, wind, geothermal,
tidal, fuel cells, hydrogen, mass transit, smart DC electric grids
as well as capturing the 40% of energy currently wasted in the US
fossil fuel economy can shift human societies to the Solar Age.
And as we change the financial games and fix accounting
errors in the global casino, we can also change the obsolete scorecards.
There is widespread public recognition in global surveys of the
errors of money-measured GDP growth, and correcting its omissions
of social and environmental costs has begun (www.beyond-gdp.eu).
Including all these factors and indicators of health, education,
poverty gaps, environment and quality of life can help shrink the
global casino and restore finance to its proper function.
Debate is now raging in policy circles about the role of speculators
in sky high oil prices, now in the $140 per barrel range. Yes, supply
is tight and world demand is rising. In addition, 77% of the world's
proven oil reserves are now controlled by national governments.
Political risks abound in the Mid-East, Nigeria and elsewhere. Peak
oil is approaching and global warming is bringing a slow end to
the Fossil Fuel Age. We are entering the next industrial stage,
the Solar Age, based on renewable "green" technologies,
solar, wind, geothermal and ocean energy.
But the fights between the incumbent fossil fuel
and nuclear sectors and the rising solar and renewable resource
sectors are heating up, as I predicted in my The Politics of the
Solar Age (1981). The US Congress passed House Bill HR. 6377 in
June to limit speculators in oil. Expert witnesses to Congress claim
that enforcing higher margin payments on oil futures and other tighter
rules by the Commodity Futures Trading Commission (CFTC) could cut
oil prices in half in 30 days. Mainstream media are hesitant to
fully cover this, fearful of repercussions from this powerful industry
and big financial players. Meanwhile, the International Energy Agency
(IEA), a powerful voice for the fossil fuel industry, insists that
speculators are not a problem and that demand will be reduced by
the high prices.
The first thing we need to know is the difference
between speculators and hedgers. Hedging is buying future contracts
for oil to be delivered, hopefully at a lower price. Hedging is
a vital activity performed by participants in the commodity futures
trading markets such as Chicago's CME, New York's NYMEX and London-owned,
Atlanta-based ICE (Intercontinental Commodities Exchange). Hedging,
for example, by US-based Southwest Airlines still allows them to
continue operating for another year without facing bankruptcy now
plaguing other airlines. The key in hedging is that hedgers need
real oil to operate their businesses and plan to take delivery of
the oil when their futures contract comes due. Thus, these commodities
markets performed a vital function but were rarely overseen properly
in the past 7 years by the CFTC.
Speculating is buying futures oil contracts, purely
betting that oil will rise in price. Huge sums have poured into
this from pension funds, hedge funds, exchange traded funds (ETFs),
as well as university endowments and other large institutional investment
managers, all competing for "alpha," i.e. higher than
average returns. Such huge flows of money into commodities and their
futures markets have disrupted their normal functioning. They were
never intended for the purposes of such large investment pools just
buying futures contracts and then rolling them over when their delivery
dates come due. These speculators are buying paper or electronic
barrels of oil, while hedgers continue buying real barrels for their
legitimate business proposes
All this was revealed in the explosive hearings
of June 26th ,chaired by Congressman Bart Stupak, with experts in
financial markets including Michael Masters, CEO of Masters Capital
Management; Fadel Gheit, Oppenheimer & Company; Roger Diwan,
Partner, PFC Consultants; Edward Krapel and others. All urged immediate
enforcement by the CFTC of higher margins, up to 50%, full disclosure
of buying by large investment funds, limiting the size of such purchasers
and fuller disclosure. The Bill, HR 6377, which passed in late June,
called for these reforms and stated that speculation in oil futures
had risen from 37% of energy trading in April 2000 to 71% by April
2008. All witnesses agreed that this "bubble" in oil must
be popped as soon as possible because it was wrecking the price
discovery function and normal operations of vital futures markets.
The speculative bets by the big new players with their "long
only" positions had helped push up prices beyond the true supply-demand
price of between $60 to $80 per barrel. Usually, where traders are
hedging for buyers of real oil, there are just as many "short"
positions to balance out the market. One witness said that the oil
"bubble" was fast becoming a "tumor," metastasizing
In my earlier editorial for InterPressService,
"Changing Games in the Global Casino," I called for similar
measures now in the House Bill HR 6377. The damage I cited to real
people and real companies is growing daily, as food prices lead
to hunger and oil prices lead to bankruptcies in trucking, fishing,
airlines and other industries. In the USA, the towns of Gary and
Terre Haute, both in Indiana, have lost all air service due to airlines
going bust. Mass transit is still crumbling and often non-existent
for people trying to find other means than driving to work. Infrastructure,
mass transit and energy conservation have been ignored for decades
in the USA in favor of continued subsidies of some $230 billion
per year to oil, gas and nuclear energy, all big political contributors
and sponsors of ad campaigns to deny the realities of global warming.
The key questions raised by those defending current
policies and speculation are :
· If the CFTC imposed these new rules to
curb speculators, would trading move from the NYMEX and ICE to other
new exchanges with less regulation (the usual threat whenever such
regulating of markets is proposed). The answer from the experts
is that this is an empty threat and that any such new, unregulated
markets would be little more than "casinos in the sky."
· If oil prices could be brought down by
50% in 30 days, how would this compare with more drilling for new
oil supplies in the USA off the coasts and in the Arctic Natural
Wildlife Refuge (ANWR)? The answer was no comparison! Exploring
and drilling would take many years, billions of new investment and
hardly affect the world price of oil.
The US Congress Committee on Natural Resources
reported in June 2008 that the USA cannot drill its way to cheaper
oil prices. The oil companies in the past 4 years have already stockpiled
another 10,000 permits to drill on public lands, on top of the 28,776
permits they have already, only 18,954 of which have been activated.
The US Department of the Interior reported in May 2008 that the
US public "had been deluded into believing that large tracts
of oil and gas are off-limits, whereas only 38% of oil and 16% of
gas areas are excluded from leasing."
What would be the risks to markets and economic
stability if these reforms were suddenly enacted? The answers the
witnesses gave were that these reforms would be bullish: for stocks,
bonds, the US dollar, all the companies now stressed and facing
bankruptcy, and all the consumers trying to afford higher food and
gasoline prices. The pension funds and other big speculators would
have to unwind their positions quickly, but they represent a small
percentage of most portfolios and their other assets would rise
Another bigger question is why anyone thinks that
oil companies would want to invest billions to find new oil supplies,
which would only decrease the price of their product? The business
decisions oil companies have been making are what Wall Street demands:
to deliver the most profits to their shareholders, not to reduce
the price of oil. Sitting on the leases they hold without exploring
or drilling them both keeps oil prices high and increases the value
of their leases as "proven reserves" to beef up their
balance sheets. And lobbying Congress for more leases would add
more "proven reserves" to their bottom lines. Thus we
see this market logic at work as oil companies continue to bank
their huge profits and use the cash to buy back their own stock.
The public interest, however, demands the passage
of HR 6377. If oil prices tumble as a result, the retail price of
gasoline should stay above $ 4 a gallon (closer to the real world
price of up to $9), even if additional taxes are imposed. Fifteen
percent of the speculation in oil is related to the US dollar's
decline. So the US needs to kick its addiction to oil - not by demanding
more at lower prices, but by shifting that $230 billion of subsidies
to fossil fuels and nukes to ramp up wind, solar, geothermal and
ocean sources. Cars will soon be run on electricity, as the CEO
of Nissan Motors, USA testified at another hearing chaired by Congressman
Edward Markey on Global Warming in June. Nissan will start delivering
all electric cars in 2010. Meanwhile high oil prices, even at their
real levels of $60-$80 per barrel are rapidly shifting societies
toward the Solar Age, where gasoline will not be needed in cars
or other transport. The world's remaining oil is too valuable to
continue burning in inefficient cars, but can be saved for chemicals,
plastics and other higher-value uses.
Meanwhile, the public interest also demands that
oil companies use their piles of cash to invest directly in the
most cost-effective new energy sources now growing at double digit
rates around the world. These include wind power, solar photovoltaics
sprouting on rooftops in many countries, solar thermal concentrator
power plants now dotting the desert Southwest in the USA, Spain
and other countries. Together with unexploited geothermal and ocean
energy, these Solar Age energy sources are already delivering electricity
to homes and businesses worldwide. And all those pension funds should
also be investing in all these new energy sources to assure the
future financial security of their beneficiaries, rather than playing
as short-term speculators. Socially concerned investors, employees
and citizens should hold the managers of their pension funds to
higher standards to foster the transition to the Solar Age.