As reported by Zach Carter for Huffington Post

WASHINGTON — Two economists at the St. Louis Federal Reserve have published findings that indicate that Wall Street speculation is responsible for 15 percent of the increase in oil prices over the past decade, a finding with significant implications for the recent sharp rise in gas prices.

While politicians have little ability to alter the price swings of commodities like oil, regulators have both the authority and policy tools to do so. The Commodity Futures Trading Commission is responsible for overseeing the financial market for oil. The 2010 Wall Street reform bill gave the CFTC new power to limit excessive speculation, but the rule will not go into effect until later this year.

According to St. Louis Fed economists Luciana Juvenal and Ivan Petrella, speculation in oil markets was the second-biggest factor behind the past decade’s price run-up, behind increased global demand for oil, which accounted for 40 percent of the increase.

“Speculation was the second-largest contributor to oil prices and accounted for about 15 percent of the rise,” the economists wrote. “The effect that speculation had on oil prices over this period coincides closely with the dramatic rise in commodity index trading — resulting in concerns voiced by policymakers.”

Commodity indexes allow speculators to bet on the price of several commodities at once, and have become very popular investment tools for both Wall Street investment companies and pension funds. Between 2004 and 2008, the total volume of trading activity in commodity indexes jumped from $13 billion to about $260 billion, according to research by Michael Masters, founder of Masters Capital Markets and the financial reform nonprofit Better Markets.

Masters and others have noted that speculation can exaggerate price swings otherwise dictated by fundamental supply-and-demand dynamics, and can also force prices to move contrary to supply-and-demand predictions. During 2008, when oil prices soared to their highest level on record, they did so during a period in which global demand was low and global supply was high — what should have been a recipe for lower prices.

The most recent Fed study concludes that economic fundamentals are still the primary determinant, saying only that speculation can “exacerbate” price swings.

“Global demand remained the primary driver of oil prices from 2000 to 2009,” Juvenal and Petrella wrote. “That said, one cannot completely dismiss a role for speculation in the run-up of oil prices of the past decade. Speculative demand can and did exacerbate the boom-bust cycle in commodity prices. Ultimately, however, fundamentals continue to account for the long-run trend in oil prices.”

Fuel prices are currently at the highest level on record for the month of March, a phenomenon upon which presidential candidates are seizing to attack President Barack Obama on the issue at campaign stops. The financial reform bill Obama signed into law in 2010 allowed the CFTC to write its new rule, designed to curb price movements influenced by excessive speculation. The rule limits the size of the bets that individual traders can make on any given commodity.

by Jesse Eisinger ProPublica,  Nov. 30, 2011, 12:12 p.m.

Note: The Trade is not subject to our Creative Commons license.

Last week, I had a conversation with a man who runs his own trading firm. In the process of fuming about competition from Goldman Sachs, he said with resignation and exasperation: “The fact that they were bailed out and can borrow for free — It’s pretty sickening.”

Though the sentiment is commonplace these days, I later found myself thinking about his outrage. Here was someone who is in the thick of the business, trading every day, and he is being sickened by the inequities and corruption on Wall Street and utterly persuaded that nothing had changed in the years since the financial crisis of 2008.

Then I realized something odd: I have conversations like this as a matter of routine. I can’t go a week without speaking to a hedge fund manager or analyst or even a banker who registers somewhere on the Wall Street Derangement Scale.

That should be a great relief: Some of them are just like us! Just because you are deranged doesn’t mean you are irrational, after all. Wall Street is already occupied — from within.

The insiders have a critique similar to that of the outsiders. The financial industry has strayed far from being an intermediary between companies that want to raise capital so they can sell people things they want. Instead, it is a machine to enrich itself, fleecing customers and exacerbating inequality. When it goes off the rails, it impoverishes the rest of us. When the crises come, as they inevitably do, banks hold the economy hostage, warning that they will shoot us in the head if we don’t bail them out.

And I won’t pretend this is a widespread view in finance — or even a large minority. You don’t hear this from the executives running the big Wall Street firms; you don’t hear it from the average trader or investment banker. From them, we get self-pity. For every one of the secret Occupy Wall Street sympathizers, there are probably 15 others like Kenneth G. Langone, who, like downtrodden people before him, is trying to reclaim and embrace a pejorative [1], “fat cat.”

The critics are more often found on the periphery, running hedge funds or working at independent research shops. They are retired, either voluntarily or not. They are low-level executives who haven’t made scrambling up the corporate hierarchy their sole ambition in life. Perhaps their independent status removes the intellectual handcuffs that come with ungodly bonuses. Or perhaps they are able to see Big Money’s flaws because they have to compete with the bigger banks for dollars.

Are these “Wall Streeters”? To civilians, they work on the Street. Bankers at the bulge-bracket firms wouldn’t think they are. But that doesn’t mean they don’t count. They know the financial business intimately.

Sadly, almost none of these closeted occupier-sympathizers go public. But Mike Mayo, a bank analyst with the brokerage firm CLSA, which is majority owned by the French bank Crédit Agricole, has done just that. In his book “Exile on Wall Street [2]” (Wiley), Mr. Mayo offers an unvarnished account of the punishments he experienced after denouncing bank excesses. Talking to him, it’s hard to tell you aren’t interviewing Michael Moore.

Mr. Mayo is particularly outraged over compensation for bank executives. Excessive compensation “sends a signal that you take what you get and take it however you can,” he told me. “That sends another signal to outsiders that the system is rigged. I truly wish the protestors didn’t have a leg to stand on, but the unfortunate truth is that they do.”

I asked Richard Kramer, who used to work as a technology analyst at Goldman Sachs until he got fed up with how it did business and now runs his own firm, Arete Research, what was going wrong. He sees it as part of the business model.

“There have been repeated fines and malfeasance at literally all the investment banks, but it doesn’t seem to affect their behavior much,” he said. “So I have to conclude it is part of strategy as simple cost/benefit analysis, that fines and legal costs are a small price to pay for the profits.”

Last week, in a Bloomberg Television event, both Laurence D. Fink, the chairman and chief executive of the mega-money management firm BlackRock, and Bill Gross, the legendary bond investor, evinced some sympathy for the Occupy Wall Street movement [3].

Over the last several decades, “money and finance have dominated at the expense of labor and Main Street, and so how can one not sympathize with their predicament?” Mr. Gross said, speaking of the 99 percent. “To not have sympathy with Main Street as opposed to Wall Street is to have blinders.”

It’s progress that these sentiments now come regularly from people who work in finance. This is an unheralded triumph of the Occupy Wall Street movement. It’s also an opportunity, to reach out to make common cause with native informants.

It’s also a failure. One notable absence in this crisis and its aftermath was a great statesman from the financial industry who would publicly embrace reform that mattered. Instead, mere months after the trillions had flowed from taxpayers and the Federal Reserve, they were back defending their prerogatives and fighting any regulations or changes to their business.

Perhaps a major reason why so few in this secret confederacy speak out is that they are as flummoxed about practical solutions as the rest of us. They don’t know where to begin.

Over the next year, maybe that will change. Things are going to be tough on Wall Street. Bonuses will be down. Layoffs are coming. Europe seems on the brink of another financial crisis. Maybe from that wreckage, a leader will emerge.

 As reported by Tom Raum in AP

WASHINGTON — The proposal to bail out U.S. financial markets to the tune of up to $700 billion creates a lot of potential short-term winners, as well as some losers.

Wall Street and the banking industry are perhaps the biggest winners. Scores of banks and other financial institutions faced with going under stand to gain a lifeline that should allow them to start making loans again.

Under the plan that congressional aide sought to put into final form Sunday, the Treasury Department can start buying up troubled mortgage-related securities now held by these institutions.

These securities are clogging balance sheets, leaving banks without the required capital to make new loans and putting the banks dangerously close to insolvency.

Banks not only have slowed lending to individuals and businesses, they have stopped making loans to each other. The rescue plan should help restore confidence to financial markets.

There are other winners, too, if the bailout works as intended: anyone soon trying to borrow money _ for cars, student loans, even to open new credit card accounts.

Top executives at troubled financial institutions, on the other hand, are in the losing column because the proposal would limit their compensation and rules out “golden parachutes.”

Of course, these executives may take solace in knowing their jobs still exist.

Investors, including the millions of people who hold stock in their 401(k) and pension plans, should benefit. Failure to reach a deal over the weekend could have sent stock markets around the world tumbling on Monday.

Homeowners faced with foreclosure or those who have lost their homes get little help from the agreement. Nor will it help people whose houses are worth less than what they owe get refinancing or take out equity loans.

It would do little to halt the slide in home values that are one of the root causes of the current economic slowdown.

“It doesn’t deal with the fundamental problems that gave rise to the problem _ or alleviate the credit crisis,” said Peter Morici, an economist and business professor at the University of Maryland

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are potential winners.

In just a few months, they have remade Wall Street. If the plan helps to get the economy moving again, they may be remembered for having kept the financial crisis from spreading throughout the economy.

“When I see Hank Paulson and Ben Bernanke on TV, I see fear in their eyes. Like on a battlefield when people are shooting at you. I think they are afraid to say how serious the problem is for fear of making it worse,” said Bruce Bartlett, an economist who was a Treasury official under the first President Bush.

Bartlett said the plan is flawed, yet the alternative of doing nothing could be catastrophic.

After the heavy dose of new regulation in the agreement, New York will have a hard time claiming it is the center of the financial universe. That title may have shifted to Washington.

If the plan stays together, Congress _ with approval ratings even lower than those of President Bush _ may be seen as having acted decisively at a time of national emergency.

Congressional leaders added new protections to the administration’s original proposal. That was only three pages long and bestowed on the treasury secretary almost unfettered powers.

Instead, the agreement would divide the $700 billion up into as many as three installments, creates an oversight board to monitor the treasury secretary’s actions and set up several major protections for taxpayers, including a provision putting taxpayers first in line to recover assets if a participating company fails.

The president, on the other hand, probably would get little credit for the deal. He allowed Paulson and Bernanke to do the heavy lifting. The only time he called all the players to the White House _ late Thursday afternoon _ the wheels almost came off the process entirely.

It’s hard to tell which presidential candidate benefits the most from an agreement they tentatively endorsed Sunday, a little more than five weeks before the Nov. 4 election. Democrat Barack Obama and Republican John McCain each sought to claim some credit for the deal, even though they played active roles only over the past few days.

Hard economic times traditionally work against the party that holds the White House, and in recent polls Obama has inched ahead of McCain. Furthermore, there is widespread consumer resentment over being asked to bail out Wall Street and lawmakers have learned the proposal has not been popular with their constituents.

That may help Democrats in general. The strongest opposition to the original bailout plan came from House Republicans.

Lawmakers and presidential candidates alike are “trying to orchestrate everybody jumping off the cliff together,” said Robert Shapiro, a consultant who was an economic adviser to President Clinton. “I think we’d have a different plan if we weren’t five weeks out from the election.”

And ordinary taxpayers?

Nothing that potentially adds $700 billion to the national debt _ already surging toward the $10 trillion mark _ can be considered a winner for those who foot the bills.

But lawmakers did put in taxpayer protections, including one to require that taxpayers be repaid in full for loans that go bad.

The package could even end up making money for taxpayers, supporters claimed.

But only if the loans and interest on them are repaid in full. Few expect that provision to be a winning proposition, however.

Our Perspective:

We are facing one of the biggest financial challanges. Congress in the midst of approving a $700B financial recovery package and no one can gaurentee what the results will be.

All we can do is hope that the voices of reason will prevail and the necessary check valves will be put in place going forward so distress signals will be sent, stating that action needs to be taken immediately to correct a specific course. We can’t ignore these signals and wait until a collapse is imminent and then act.

Let us know your thoughts? Post a comment or send an email to george@hbsadvantage.com

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