Wednesday, May 07, 2008
The Fed should push prices at the pump down
The idea of the Federal Reserve intervening in commodities markets to push down the price oil and basic food stuffs seems a preposterous proposition to many. It is not mandated to deal with commodities and does not have the necessary tools to do so; it is in the business of printing money, overseeing banks and maintaining the smooth flow of the economy. But if we look at how money has morphed and been redefined in the last few decades and how the Fed has responded to these changes, it becomes evident that the Fed should be intervening. The Fed has ignored the rise in price of basic necessities such as gas and food because it cares little about average Americans.
What is Money?
Everyone knows what money is, or do they? Since the advent of the Floating Rate Exchange rate regime beginning in 1973 the setting of exchange rates has shifted from countries to the market. The Float ushered in the period of free markets and hyper-capitalism. With money no longer tethered to gold or tied to convertibility into dollars it was free to do as it would and it did. In the 1970’s money began to morph and redefine itself with an explosion of new personas—credit cards, CD’s, money market funds, derivatives etc…. By the 1980’s money was growing great guns and continued to evolve as financial markets around the world opened up to allow foreigners to buy their securities. The mutual fund business took off as did the derivatives markets, structured products, etc.
All through this evolution of money the Fed was recalibrating how it was conducting policy and the factors it looked at to set policy.
By the 1990’s the Fed’s priorities in this evolution of money became all too apparent. For the affluent having your own personal banker became the mainstay. A plethora of innovative investment products and vehicles such as speculative hedge funds and commodity pools that invested in commodities and other non-traditional investments developed for the rich. The poor saw banks depart inner cities as they became the un-banked; the Fed turned a blind eye to the exodus. Fringe banking developed to fill the void left by the banks. Financial hucksters developed a host of innovative financial products to exploit the un-banked; predatory loans, payday loans, auto title loans, cash checking outlets, rent to own stores refund anticipation loans, and the like. Ingenious ways were found to circumvent state usury laws. (To learn more about fringe banking click on: http://www.jubileeinitiative.org/RiggedDeregulation.htm .)
Today we have hundreds of billions of dollars parked in hedge funds, commodity pools and other speculative investment vehicles, that if leveraged can reach into the trillions of dollars. We also have a host of products and ways to invest in and trade in basic commodities such as oil and food--futures, structured derivatives, investment pools/funds focused on oil drilling and exploration, farmland, etc... In other words for the well to do there are securities and investment pools that allow someone to speculate in just about anything they want. While most of these products are not as liquid as cash they are like money, or a CD, or a host of other things that the Fed defines to be money.
While a fraction of these speculative funds may increase the production of oil and basic foodstuffs the bulk are targeted to exploit and de facto exacerbate the rise in oil and food prices. What do I mean? Historically, before the advent of the Float and free markets the PE Ratio (Price Earning Ratio) of the stock market had averaged 10 to 20 times earning; meaning that a stock would trade at roughly 10 to 20 times its yearly earnings per share. Since the Float began the PE of the stock market has hovered between 20 to 40 times earnings. In other words financial deregulation has jacked up the value of stocks 2 to 3 times historical averages going back over a hundred years. That same flow of money is currently driving up the price of oil and basic food stuffs 2 to 3 times more than the norm. The price leap is due to speculators trading in these essential commodities. (To see a historical chart of USA stock market back to 1871 click on: http://en.wikipedia.org/wiki/Image:IE_Real_SandP_Price-Earnings_Ratio%2C_Interest_1871-2006.png )
It is clear that the Float and its malevolent children, deregulation and financial innovation, have made the rich a lot richer. Will they be allowed to make the rich richer still on the backs of average Americans needing to eat, heat their home and drive their cars?
I ask you again, what is money?
Overstepping its bounds
Overstepping its bounds, pushing laws aside and doing what it wants is nothing new to the Fed, particularly under Greenspan. Before the Gramm Leach Bliley act of 1999 (GLB) was passed the Greenspan Fed was blessing the then un-lawful Travelers Citibank merger. The GLB overturned the Glass Steagall Act passed during the depression to prevent mergers of investment banks with commercial banks as in the Citibank Travelers merger.
On March 16th of this year the Fed again broke new ground when it bailed out Bear Stearns, an investment bank. Prior to this the Fed had never opened its borrowing window to securities underwriters. A few days later on March 20th Jeannine Aversa (Investment Firms Tap Fed for Billions) of the AP reported on the rush of investment banks to borrow billions from their new sugar daddy.
As Kevin Phillips recently noted (Plunge Protection Team, Washington Independent April 25, 2008, http://washingtonindependent.com/view/the-plunge ):
He mentions this in reference to a secretive, arguably clandestine, group titled the Plunge Protection Team that is widely rumored to have supported the stock and other financial markets. He details several of the many believed forays by the PPT into the highly volatile stock index futures markets.
Phillips notes: “Some people foolishly think that Washington's recent high-profile effort to steer, subsidize and protect the American financial sector is the beginning of something new - a revolutionary development.” It is not.
If the Fed is intervening to support the stock market why doesn’t it intervene to influence the price of oil and basic foodstuffs? Especially since the price of oil and food is having debilitating consequences for the economy.
The Fed Is Limited
The argument against the Fed intervening in the markets for oil and foodstuffs is that it lacks the necessary tools to do so. But this did not stop them from buying stock index futures or other such vehicles. Would the clamor be louder if the Fed lost billions supporting the stock market and big corporations, or billions from trying to keep the price of necessities like food and gas from rising? I think that the answer is clear.
There are a host of other options beyond the futures markets available for the Fed to use for intervention. For example, the Fed has oversight over some of the pools driving oil and food markets. While the margin level (how much collateral must be put up to trade) is set by other organizations such as the CFTC (Commodities Futures Trading Commission), banks that report to the Fed are indirectly involved. Then there are other central banks and international organizations that should have a similar desire not to see oil and food prices rocket higher in price. Then there are….The fact is if there is a will, there is a way.
Lack of Will
If anything the Fed lacks the will to help keep oil and food prices from rising. It is a secretive organization that is independent of the checks and balances of American democracy—in other words it does what it wants. Its board members are some of the largest financial institutions in the world. Is it any wonder that they so readily bail out big banks and speculators?
The Fed also lacks the will because a lot of institutions (financial, pension, trusts, and endowments), corporations and individuals (aka the rich) are financially benefiting from the rise in oil and food prices.
The fact is as James Livingston points in Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913M, the Federal Reserve was established by a new ruling class of ‘corporate-industrial business elite’ to protect their interests;
Change is Needed
The morphing of money and new investment vehicles have redefined money and how it works. Consequently new institutions and methods need to be established to maintain order and protect the interests of ordinary Americans. Being able to feed yourself and heat your home is a basic human right and should not be contingent upon the whims of speculators.
The Federal Reserve is ill equipped and to beholding to the wealthy and business elite to equitably deal with the challenges America faces today. It also needs to be brought in line with the American system of checks and balances and should at a minimum have its oversight and policy making divisions separated.
In the meantime extreme pressure should be put on the Fed to creatively intervene in oil and foodstuff markets. Innovative ways to curtail speculation, price manipulation and price gouging need to be developed. Unless the Fed or some other organization moves quickly the American dream will sink ever deeper into the quagmire.
What is Money?
Everyone knows what money is, or do they? Since the advent of the Floating Rate Exchange rate regime beginning in 1973 the setting of exchange rates has shifted from countries to the market. The Float ushered in the period of free markets and hyper-capitalism. With money no longer tethered to gold or tied to convertibility into dollars it was free to do as it would and it did. In the 1970’s money began to morph and redefine itself with an explosion of new personas—credit cards, CD’s, money market funds, derivatives etc…. By the 1980’s money was growing great guns and continued to evolve as financial markets around the world opened up to allow foreigners to buy their securities. The mutual fund business took off as did the derivatives markets, structured products, etc.
All through this evolution of money the Fed was recalibrating how it was conducting policy and the factors it looked at to set policy.
By the 1990’s the Fed’s priorities in this evolution of money became all too apparent. For the affluent having your own personal banker became the mainstay. A plethora of innovative investment products and vehicles such as speculative hedge funds and commodity pools that invested in commodities and other non-traditional investments developed for the rich. The poor saw banks depart inner cities as they became the un-banked; the Fed turned a blind eye to the exodus. Fringe banking developed to fill the void left by the banks. Financial hucksters developed a host of innovative financial products to exploit the un-banked; predatory loans, payday loans, auto title loans, cash checking outlets, rent to own stores refund anticipation loans, and the like. Ingenious ways were found to circumvent state usury laws. (To learn more about fringe banking click on: http://www.jubileeinitiative.org/RiggedDeregulation.htm .)
Today we have hundreds of billions of dollars parked in hedge funds, commodity pools and other speculative investment vehicles, that if leveraged can reach into the trillions of dollars. We also have a host of products and ways to invest in and trade in basic commodities such as oil and food--futures, structured derivatives, investment pools/funds focused on oil drilling and exploration, farmland, etc... In other words for the well to do there are securities and investment pools that allow someone to speculate in just about anything they want. While most of these products are not as liquid as cash they are like money, or a CD, or a host of other things that the Fed defines to be money.
While a fraction of these speculative funds may increase the production of oil and basic foodstuffs the bulk are targeted to exploit and de facto exacerbate the rise in oil and food prices. What do I mean? Historically, before the advent of the Float and free markets the PE Ratio (Price Earning Ratio) of the stock market had averaged 10 to 20 times earning; meaning that a stock would trade at roughly 10 to 20 times its yearly earnings per share. Since the Float began the PE of the stock market has hovered between 20 to 40 times earnings. In other words financial deregulation has jacked up the value of stocks 2 to 3 times historical averages going back over a hundred years. That same flow of money is currently driving up the price of oil and basic food stuffs 2 to 3 times more than the norm. The price leap is due to speculators trading in these essential commodities. (To see a historical chart of USA stock market back to 1871 click on: http://en.wikipedia.org/wiki/Image:IE_Real_SandP_Price-Earnings_Ratio%2C_Interest_1871-2006.png )
It is clear that the Float and its malevolent children, deregulation and financial innovation, have made the rich a lot richer. Will they be allowed to make the rich richer still on the backs of average Americans needing to eat, heat their home and drive their cars?
I ask you again, what is money?
Overstepping its bounds
Overstepping its bounds, pushing laws aside and doing what it wants is nothing new to the Fed, particularly under Greenspan. Before the Gramm Leach Bliley act of 1999 (GLB) was passed the Greenspan Fed was blessing the then un-lawful Travelers Citibank merger. The GLB overturned the Glass Steagall Act passed during the depression to prevent mergers of investment banks with commercial banks as in the Citibank Travelers merger.
On March 16th of this year the Fed again broke new ground when it bailed out Bear Stearns, an investment bank. Prior to this the Fed had never opened its borrowing window to securities underwriters. A few days later on March 20th Jeannine Aversa (Investment Firms Tap Fed for Billions) of the AP reported on the rush of investment banks to borrow billions from their new sugar daddy.
As Kevin Phillips recently noted (Plunge Protection Team, Washington Independent April 25, 2008, http://washingtonindependent.com/view/the-plunge ):
“Over the last decade or so, the Treasury Dept. and the Fed have both
developed something of a scofflaw attitude toward strict interpretation of federal statutes and regulations.”
He mentions this in reference to a secretive, arguably clandestine, group titled the Plunge Protection Team that is widely rumored to have supported the stock and other financial markets. He details several of the many believed forays by the PPT into the highly volatile stock index futures markets.
Phillips notes: “Some people foolishly think that Washington's recent high-profile effort to steer, subsidize and protect the American financial sector is the beginning of something new - a revolutionary development.” It is not.
If the Fed is intervening to support the stock market why doesn’t it intervene to influence the price of oil and basic foodstuffs? Especially since the price of oil and food is having debilitating consequences for the economy.
The Fed Is Limited
The argument against the Fed intervening in the markets for oil and foodstuffs is that it lacks the necessary tools to do so. But this did not stop them from buying stock index futures or other such vehicles. Would the clamor be louder if the Fed lost billions supporting the stock market and big corporations, or billions from trying to keep the price of necessities like food and gas from rising? I think that the answer is clear.
There are a host of other options beyond the futures markets available for the Fed to use for intervention. For example, the Fed has oversight over some of the pools driving oil and food markets. While the margin level (how much collateral must be put up to trade) is set by other organizations such as the CFTC (Commodities Futures Trading Commission), banks that report to the Fed are indirectly involved. Then there are other central banks and international organizations that should have a similar desire not to see oil and food prices rocket higher in price. Then there are….The fact is if there is a will, there is a way.
Lack of Will
If anything the Fed lacks the will to help keep oil and food prices from rising. It is a secretive organization that is independent of the checks and balances of American democracy—in other words it does what it wants. Its board members are some of the largest financial institutions in the world. Is it any wonder that they so readily bail out big banks and speculators?
The Fed also lacks the will because a lot of institutions (financial, pension, trusts, and endowments), corporations and individuals (aka the rich) are financially benefiting from the rise in oil and food prices.
The fact is as James Livingston points in Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, 1890-1913M, the Federal Reserve was established by a new ruling class of ‘corporate-industrial business elite’ to protect their interests;
"Upper Classes that seek to rule their part of the modern world must
therefore be able, above all, to specify the rules or methods that govern the designation of reality…the Federal Reserve System is an episode in, of evidence for, the emergence of a modern ruling class; neither historical event can be understood apart from the other."(page 232-233)
Change is Needed
The morphing of money and new investment vehicles have redefined money and how it works. Consequently new institutions and methods need to be established to maintain order and protect the interests of ordinary Americans. Being able to feed yourself and heat your home is a basic human right and should not be contingent upon the whims of speculators.
The Federal Reserve is ill equipped and to beholding to the wealthy and business elite to equitably deal with the challenges America faces today. It also needs to be brought in line with the American system of checks and balances and should at a minimum have its oversight and policy making divisions separated.
In the meantime extreme pressure should be put on the Fed to creatively intervene in oil and foodstuff markets. Innovative ways to curtail speculation, price manipulation and price gouging need to be developed. Unless the Fed or some other organization moves quickly the American dream will sink ever deeper into the quagmire.
