STAFF NEWS & ANALYSIS
Showdown at the CFTC
By Staff News & Analysis - October 18, 2011

CFTC heads for showdown with industry … With the U.S. Commodity Futures Trading Commission (CFTC) set to vote on Tuesday on a final rule imposing position limits in commodity markets, the battle between the commission and its critics is set to move across Washington to the federal courthouse on Constitution Avenue. … The expected challenge to the CFTC will therefore set up a major clash between the Obama administration, regulators and the congressional Democratic Party on the one hand (all of who want to impose tougher restrictions on trading and banking in the wake of the crisis) and Wall Street and congressional Republicans (who oppose attempts to extend regulation as misguided and damaging). – Reuters

Dominant Social Theme: Those regulators are trying to subvert the free market again! We better fight back.

Free-Market Analysis: This is an interesting analysis from John Kemp of Reuters about an upcoming legal confrontation between free markets and regulation. He perceives it as a struggle between over-reaching regulation and market forces. The confrontation has been set up by the imposition of Dodd-Frank legislation passed in reaction to the crash of 2008.

As has been reported throughout the mainstream media, the CFTC and its supporters want to be able to micromanage commodities trading by setting limits on trading activity; many in the commodities industry do not want the CFTC to have these additional powers.

At least that's how the argument is being cast. But at a deeper level, we find a dominant social theme at work. The theme has to do with positioning the argument so that it makes the current state of affairs represent the free market. In fact, the current financial marketplace is nothing like a free market.

The current financial marketplace is the result of a century of central banking stimulation, which has entirely distorted the reason for markets and what they do. The overwhelming surges of money have overwhelmed the essentially transactional and intermediary functions of securities industries around the world. This leads to all sorts of distortions including ones in the fundamental narrative.

Here's a summary of the crux language of the enabling CFTC powers as amended by Dodd-Frank: "For the purpose of diminishing, eliminating or preventing [the burden on interstate commerce], the Commission shall, from time to time … proclaim and fix such limits on the amounts of trading which may be done or position may be held by any person … as the Commission finds are necessary to diminish, eliminate or prevent such burden."

In a sense, this is nothing but an invitation to outright market manipulation. Since bills are not passed without the blessings of industry's biggest players and the CFTC is notoriously influenced by the industry it purports to run, it is probably safe to say that at least some of Chicago-land's biggest interests are behind the increased powers.

Alternatively, the added powers represent an attack by the New York securities industry that resents the emergence of the Chicago boys as a power in the industry of securitization of anything with or without a pulse.

Finally, the vote has been cast as a necessary evil that will wring out the corruption and short-selling in the bullion market This is the position that many metals bulls are taking, and we have written about it previously. We agree (instinctively) that the corruption is such that position limits might help with the underlying power-elite manipulations of metals. Yet in another way the argument is a poisoned chalice, manipulating free market thinkers into supporting the CFTC and its regulators who are surely among the most questionable in the world.

The bottom line is always the same: Regulation is nothing but regulatory capture and always benefits SOME business interest – or suits the purposes of the most powerful among us. Here's some more from the article:

In court, the case will be cast in technical terms. Does the commission need to show excessive speculation has caused sudden or unreasonable fluctuations or unwarranted changes in commodity prices and position limits are the only means of "diminishing, eliminating or preventing" the burden on interstate commerce? Or has Congress given the commission an explicit instruction to impose them preemptively? (See Title 7 of the U.S. Code, Section 6(a)).

The underlying question is more emotional and ideological. Should the government be able to intervene in financial markets to limit the sort of positions participants enter into freely among one another? If so, under what circumstances? The dividing line between the two parties, and between industry and regulators, falls in the predictable place: pro-regulation Democrats and government agencies versus anti-regulation Republicans and the industry.

Position limits are shaping up to be an early test of post-crisis attitudes towards regulation. In the 1930s, in the aftermath of the last great crisis, the U.S. Supreme Court invalidated a string of New Deal regulations by 5-4 majorities until the notorious "switch in time that saved nine" by Justice Owen Roberts in 1937 ushered in an era of broader economic regulation. Political conservatives have long sought to reverse that shift and return to the pre-1937 era of small government and less economic regulation.

Kemp has done us a favor by presenting a clear perspective on some of the issues involved. However, the underlying issues remains intractable in the modern era. it is truly a terrible choice. Either one supports additional regulation which may squeeze some of the underlying manipulation or one acquiesces to the continued, bold manipulations.

Thus it is that many in the hard-money community face the faux choice of supporting MORE regulation or submitting to the status quo. Somehow, the CTFC now becomes the standard-bearer of the Invisible Hand! How ironic.

This is how we see it. The larger issues, unfortunately, will not be commented on for the most part within the context of this confrontation, not by free-market gold and silver bulls, not by those who oppose or support the rules for other reasons. And in the mainstream media, meretriciously, it will simply be cast as a battle between regulators and free-marketers.

In fact, this meme has been cleverly positioned to reinforce the status. Artificial monetary stimulation is very bad medicine and it has distorted not just the US economy but Western economies generally. The booms and busts of Western economies affect the world and have caused "capitalism" to come into disrepute. The solution to capitalist problems are said to be regulatory in nature.

The establishment of central banks, run by a small clique of one world elitists, is Machiavellian in its cleverness. It is monetary stimulation that gives rise to the manifold security abuses of today's money business. Everything from derivatives to the industry's "casino mentality" and its ongoing, incredible centralization can be laid at the doorstep of abusive monetary expansion.

Edited on date of publication.

After Thoughts

Look what free-market thinking has come to. One is compelled to support the CFTC's encroachments or, generally, fight the battle for "free markets" by endorsing more regulation. There is another way, however. If one wants to make a difference for oneself and one's children, promote the end of central banking and the de facto return of sound and honest money within a competitive free-banking environment. Money is not just the root of all evil; it is the solution, too.

Posted in STAFF NEWS & ANALYSIS
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