Cantwell Goes to the Oldest of Wells
By Christopher Faille | May 9th, 2008Posted in Commodities, Hubris, Politics
Last week, Sen. Maria Cantwell became the latest in a long line of politicians (a line that probably dates back to Pericles and the marble-futures market) who blame price increases on speculators and market manipulation.
In a speech on the floor of the Senate, she made reference to the Amaranth matter — which involved natural gas, not crude oil or petroleum – and then demanded that the powers of federal regulators be expanded to crack down on the (hypothetical) Amaranths lurking there.
Sorry, Senator, but I’m calling you on your reality avoidance. You might benefit by reading a classic by Henry Hazlitt, “Economics in One Lesson.” To understand the function of speculators, and why they have the effect of reducing price volatility in the physical markets they directly affect, skip ahead to chapter 16, “‘Stabilizing’ Commodities.”
Hazlitt of course put scare quotes around the word ’stabilizing’ in the chapter title to convey that this is what politicians claim they’re going to do via a variety of schemes much like your own. They always destabilize in the name of stabilization. The scapegoated speculators, on the other hand, generally stabilize in no name more exalted than profit.
Congress illustrated Hazlitt’s point in 2005, when it passed the very law, the Energy Policy Act, that Ms Cantwell now wants to extend. Yes, it gave new regulatory powers to the Federal Energy Regulatory Commission. What happened then? Did the Amaranth blow-up come before or after that law was enacted? It came afterward of course, so the passage of the law obviously didn’t prevent it.
What it might have done is to create confusion in the ranks of the regulators and those they regulate about who (FERC? CFTC?) is supposed to do what. In December, the chief regulatory officer at NYMEX, Thomas F. LaSala, warned Congress that it had generated confusion by adding another cop to the same beat. Mr. LaSala was likely speaking to deaf ears. Congress will no doubt go on destabilizing through the creation of bills that profess to stabilize.
Even blatant manipulators are usually destined to quick failure and oblivion if not rescued, intentionally or otherwise, by government action. The ways in which they are rescued can be complicated and indirect. They can come as a complete surprise to the rescuers. But they are there, and anyone who has absorbed the lessons Mr. Hazlitt laid down for us back in 1946 can find them.
As to our Senators and Representatives — they might earn their own salaries best by thinking of the recent price increases not as a commodity problem at all but as a dollar problem.
Back up a bit, though. Do we really know that Amaranth’s activities had a negative impact on the ultimate consumers? As the Senator accurately observed, last year the permanent subcommittee on investigations issued a report making that claim, and Ms Cantwell simply relies upon it. But that report also seemed to some of us to represent a bit of a stretch, and it has left energy economists, like Michael Giberson of Potomac Economics Ltd., notably unimpressed.
That report said, amongst much else in hundreds of pages: “The trading records examined by the Subcommittee disclosed that from early 2006 until its September collapse, Amaranth dominated trading in the U.S. natural gas financial markets.”
Replied Mr. Giberson: “They dominated trading until they collapsed? I guess ‘domination’ isn’t all that it is cracked up to be.”
Hubris, though, is still what it was in Pericles’ day.
