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Tuesday, June 17, 2008

The "Enron Loophole"

From Marketplace:

Deflating the oil bubble, by Michael Greenberger: ...Host Kai Ryssdal talks with former commodity regulator Michael Greenberger about ways to keep tabs on speculation.

Kai Ryssdal: ...The [Commodity Futures Trading Commission is] in charge of regulating oil markets in this country and Congress has been after the agency to do something -- to do anything -- about oil and gas prices, what lawmakers perceive to be speculation, in particular.

Michael Greenberger used to run the ... [Division of Trading and Markets for the Commodities Futures Trading Commission. He now teaches law at the University of Maryland.]

Ryssdal: Why is it so hard to figure out what's going on in commodities markets -- oil specifically?

Greenberger: Well, the reason it's hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation..., all energy futures traded in the United States or affecting the United States in a significant fashion were regulated ... under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.

Ryssdal: You're not really telling me that seven years on, we're still paying the price for Enron, are you?

Greenberger: Well, this has been called the "Enron Loophole" and there are many legislators working very hard to close that loophole ...[and] bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law...

Ryssdal: So what's Congress going to do?...

Greenberger: Well, there are several proposals..., but the bottom line is the speculators will, in the end, be policed. We will know who they are, what they're doing, what their controls are, what effect they're having on the market. Maybe we'll find out that there's nothing there.

Ryssdal: So just to be clear, you do think that we're in a bubble, then?

Greenberger: I believe it and I'm certainly not alone in my belief. If you talk to anybody who trades in these markets on a regular basis, they will tell you that the markets are completely dysfunctional and out of control because of speculative activity.

Ryssdal: How long is it going to take then if we are, as you say, in a bubble, for it to work its way through and us to get back to something more realistic for the price of a barrel of oil, whether its 50 bucks or 80 bucks?

Greenberger: From my own experience as a commodity regulator, I believe that if the Bush Administration were serious about its regulation, we could begin seeing prices drop within a month. If we don't get the kind of regulation that has been done for decades and the market proceeds along the pace its proceeding, we will have to go through a very, very serious recession. The question is do you want to deflate the bubble by that kind of suffering or do you want to deflate the bubble by applying tight U.S. regulatory controls? ...

    Posted by on Tuesday, June 17, 2008 at 02:43 PM in Economics, Financial System, Oil, Regulation | Permalink  TrackBack (0)  Comments (34)

          

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