A Free Economy…Maybe Not!

What does it take to have a free market? You need willing buyers and sellers, a supply of goods to be purchased with money or bartered for (I’ll give you six ears of corn and a measure of flour for twelve eggs—that sort of thing) and an environment—a market—in which this can happen. What you do not need is a lot of governmental interference in how that trade is conducted. I am not talking about common sense things like health and product safety regulations, or even rules on how and where certain items, firearms for example, may be bought and sold. I am also not talking about taxes. In each and every transaction, the taxman takes his portion one way or another.

What I am talking about is the current attempt by—you guessed it—Congress, to put limits on oil trading. Not buying into the idea that the market itself could actually be responsible for the rise in oil prices, that increased supply will lower prices, Congress has put the blame squarely on the heads of those foolish enough to speculate on oil market futures and they are determined to do something to put a stop to the speculators’ evil ways. Their plan? They are going to take control of (umm…regulate) the oil market.

The summary of Senate Bill 3268, sponsored by Sen. Harry Reid (D), of Nevada, promises that the bill:

• Prohibits the Commodity Futures Trading Commission (CFTC) from permitting a foreign board of trade to provide its members or other participants subject to CFTC jurisdiction direct access to its electronic trading and order matching system unless it meets specified requirements.
• Authorizes the CFTC to require recordkeeping by any person either located within the United States or entering trades directly into the trade matching system of a foreign board of trade from the United States.
• Subjects such persons to liability for violation of CFTC rules and regulations.
• Directs the CFTC to convene a working group of international regulators to develop uniform international reporting and regulatory standards to ensure protection of energy futures markets from nonlegitimate hedge trading, excessive speculation, manipulation, location shopping, and lowest common dominator regulation, each of which poses systemic risks to all energy futures markets, countries, and consumers.
• Defines "legitimate hedge trading" as transactions by commercial producers and purchasers of actual physical petroleum and energy commodities for future delivery and the direct counterparties to such trades.
• Directs the CFTC to review oversight actions regarding all energy futures market participants or market activity in order to ensure that: (1) legitimate hedge trading is protected and promoted; and (2) excessive speculation is eliminated.
• Requires the CFTC to set maximum speculative position limits on nonlegitimate hedge trading.
• Instructs the CFTC to convene an advisory group to recommend an appropriate level for position limits designed for traders or entities that are not legitimate hedge traders.
• Authorizes the CFTC to exercise oversight over any disturbance in a commodity market that disrupts its liquidity and price discovery function from accurately reflecting a commodity's supply and demand ("major market disturbance").
• Requires the CFTC to identify each large over-the-counter transaction or class of such transactions in order to detect and prevent potential price manipulation of, or excessive speculation in, any contract listed for trading on a registered entity.
• Instructs the CFTC to: (1) routinely require detailed reporting from index traders and swap dealers in markets under its jurisdiction; and (2) review the trading practices for index traders in markets under its jurisdiction to ensure that index trading is not adversely impacting the price discovery process.
• Requires the CFTC to disaggregate and make public monthly: (1) the number of positions and total value of index funds and other passive, long-only positions in energy markets; and (2) data on speculative positions relative to bona fide physical hedgers in energy markets.
• Directs the CFTC to appoint additional CFTC employees for enforcement purposes.
• Establishes a Working Group on Energy Markets to: (1) identify the factors that affect the pricing of crude oil and refined petroleum products, including market speculation; and (2) assess the roles, missions, and structures of relevant federal agencies, interagency coordination, and the gaps that need to be filled for federal oversight and regulation of markets critical to energy security.
• Amends the Department of Energy Organization Act to require each federal agency head to provide information to the Administrator of the Energy Information Administration for identification of each energy-producing company.
• Establishes within such Administration a Financial Market Analysis Office responsible for financial analysis of energy markets.
• Directs the Federal Energy Regulatory Commission to investigate and report to certain congressional committees on the role of financial institutions in natural gas markets.
• Directs the Comptroller General of the United States to study and report to certain congressional committees on: (1) the international regime for regulating the trading of energy commodity futures and derivatives; and (2) the effects of noncommercial speculators upon energy futures markets and energy prices.

The troubling thing here is that the bill tasks the CFTC to “exercise oversight over any disturbance in a commodity market that disrupts its liquidity and price discovery function from accurately reflecting a commodity's supply and demand.” In other words, the next time the market does something that we don’t like, a government agency will step in to make it all better. In still different words, this is an invitation for the U.S. Government to manipulate the market! Finally, it provides for a working group on energy markets that will, among other things, figure out what makes oil prices go up and down.

This kind of thinking may be old fashioned, but I always thought market manipulation was a bad thing that flew in the face of the free market capitalist society I thought we lived in. Also, wouldn’t you want to answer the question of why oil prices fluctuate before committing the Federal Government to this sort market regulation, especially if your argument for taking such control is that you already know the root cause of these problems, the evil of excessive speculation? What if this legislation goes through and in a year or so, the working group comes back and says the problem is supply and demand and not speculation? Do you think that Reid and Pelosi and company are going to have a forehead-slapping epiphany, admit the mistake and eliminate their regulations and market controls? I don’t see it happening. There would be too much power at stake, and that is the point.

We are in a crisis, and Congress is, with its typical grace and artistry, making a grab for power under the guise of helping people. Reid’s bill is just one of nine floating around Capital Hill. The pity of it is that we as a nation are so sick of high energy prices that it might just work, but then what? If the government can control one commodity—oil—this way, why not another? Steel, another commodity, has risen quite a bit as well. Maybe Congress needs to have a look at that, too. After all, it is one of the most important construction and manufacturing materials in the world and letting the free market run things is so dodgy, smart people in government should control it. If this kind of thinking persists, before long you will have a managed economy that is looking awfully socialist and business people will be looking around and wondering what happened to the free market. Don’t imagine that it cannot happen here. Socialized medicine, economic micromanagement, excessive government regulation and high taxes—all of them merely ways of redistributing wealth—could all be on the way as long as good people do nothing.

Of course, good people did do nothing and now we are in another energy crisis. We have to remember that it wasn’t OPEC that put us in this position, it wasn’t the Arabs and it wasn’t Hugo Chavez; it wasn’t Iran, Iraq, Nigeria or anyone else. It was Congress. It was the President. It was the radical environmentalists and dubious state and federal courts that allowed them to hold up the economy for the sake of this snail or that stretch of desolate sea floor. We can point our fingers at these institutions, but there is more blame to go around. You see, fault for this predicament can also be applied to us, all of us, who bought into the agenda and let our energy independence slide away as our government layered regulation upon regulation, tax upon tariff. America has a tradition of trusting its government. It is time that ended; at least until our government actually earns that trust back and that is something that no one in Washington seems interested in doing. If they were, they would admit—or the other side would be screaming from the rooftop—that it was short-sighted and excessive regulation on one of the pillars of our economy that got us into this mess, and that more regulation and additional controls over the economy will not get us out of it. If we as a people want to mitigate our own fault in this, then we have to try to fix it, and that starts by reminding our senators and representatives who they work for and whose benefit they should be voting.

Small business, the backbone of America’s economy and the heart of the nation’s communities, thrives in a free economy, not in a highly regulated command economy. When the market is free to work as it should, then real prosperity can exist, providing opportunities that cannot exist while the heavy hand of government is pressing down on free enterprise. We saw this truth played out in the failed socialism of Eastern Europe over the first four decades following the Second World War and now, under the guise of lowering gas prices, our own government is trying to embark down the same path.