The Trojan Horse of cost benefit analysis
By John Kemp The writer is a Reuters market analyst. The views expressed are his own.
LONDON – Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?
It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.
On one side are business groups such as the U.S. Chamber of Commerce and the International Swaps and Derivatives Association (ISDA), backed by conservative lawyers such as Eugene Scalia (son of Supreme Court Justice Antonin Scalia) and a group of judges on the U.S. Court of Appeals for the District of Columbia Circuit who oversee most federal rule-writing.
On the other is the White House, the Treasury and a host of agencies stretching from the Securities and Exchange Commission (SEC) to the Commodity Futures Trading Commission (CFTC).
QUEST FOR QUANTIFICATION
What was once an esoteric legal dispute is turning fiercely political.
Speculators abandon oil for the moment
Bullishness about the short-term prospects for crude is evaporating among banks and hedge funds, as the market fails to sustain rallies above $80 and girds for widespread refinery shutdowns to work off bulging gasoline stocks.
The urge to buy on the dips, trade the range and hope for a breakout seems to be fading. Banks and other swap dealers boosted their net long position in WTI-linked futures and options by a meagre 7,000 contracts to just 22,000 in the week to Aug. 17, even as prices tumbled from over $80 to around $75.
The last time the market pulled back this far, swap dealers were carrying a net long position of 65-75,000 contracts, according to data published by the Commodity Futures Trading Commission (CFTC).
Money managers actually cut their net long position 16 percent from 151,000 contracts to just 127,000. While the position is still double the early July lows, it is less than half the 244,000 contracts reported at the start of April.
Significantly, hedge funds increased their short positions, even as prices fell, the first big increase in almost two months, indicating increased bearishness.
TABLE: http://graphics.thomsonreuters.com/ce/COT-TABLE.pdf CHART 1: http://graphics.thomsonreuters.com/ce/COTNET1.pdf CHART 2: http://graphics.thomsonreuters.com/ce/COTNET2.pdf CHART 3: http://graphics.thomsonreuters.com/ce/COTNET3.pdf
In a sign many market participants are now convinced range-trading will continue, with less likelihood of an upside breakout, and perhaps with a bearish bias, the total number of contracts remaining open fell 2.6 percent to 4.124 million, the lowest since July 20 and before that Feb. 23 (Chart 4).
Senate vote exposes Wall Street impotence
Wall Street’s diminished influence in Washington was made plain yesterday when the Senate voted to approve financial reform legislation by 59 votes to 39.
Industry lobbyists will point out the bill only just managed to scrape the required votes needed to end debate and forestall a filibuster. It fell far short of a lopsided bipartisan majority.
But the formal tally on HR 4173 (Wall Street Reform and Consumer Protection Act 2009) as amended by S 3217 (Restoring American Financial Stability Act 2010) conceals a much wider bigger majority of 63-37 for enacting far-reaching reforms.
In the final vote on passage, the bill was backed by 53 Democrats, 2 Independents and 4 Republicans (Maine’s Susan Collins and Olympia Snowe, Iowa’s Charles Grassley and Massachusetts’ Scott Brown).
It was opposed by 37 Republicans and 2 Democrats (Maria Cantwell of Washington and Russ Feingold of Wisconsin). Two senators were not present (Democrats Robert Byrd of West Virginia and Arlen Specter of Pennsylvania).
But the two Democrats who voted “No” did so because they thought it did not go far enough and were registering a protest in a bid to get it toughened further. The two absent members were Democrats who had voted in favor of the legislation before.
All four votes should really be added to the “Yes” column to give an effective underlying majority of 63. By any measure that is a very high tally or a major piece of legislation.
“adverse” struck me,too. populist = equalitarian, not stupid masses. so many terms get rendered toxic in the “spin,” what’s needed is a reassertion of the “all [persons] are created equal . . . endowed with . . . rights to life, liberty and the pursuit of happiness” understanding of what it means to be a citizen. it isn’t “adverse” to reduce the size and impact of an exploitive paracitic oligarcy, is it?
from Rolfe Winkler:
Go for it Gary
Gary Gensler -- regulator and, yes, Goldman alum -- has distinguished himself in Washington. As CFTC Chairman, he's fought to impose stricter rules on OTC derivatives and recently proposed rules that would cut the leverage currency traders are allowed to deploy from 100:1 to 10:1. Lest we all forget how dangerous leverage can be when traders misuse it, there's LTCM to serve as exhibit A. In a clear sign that Gensler is fighting the good fight, traders are screaming about the proposed rule. Fantastic.
From Carolyn Cui and Sarah Lynch at WSJ: Foes take on leverage curbs from CFTC
An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.
The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.
Under current rules, a customer putting up a security deposit of $1,000 in cash will be able to trade a notional amount of $100,000, a common contract size for currencies such as the dollar and the Japanese yen. The new rule would cap that amount at $10,000.
The rules also would require dealers to abide by new capital and disclosure requirements.
If the rules come into force, investors would be required to either put more capital in their accounts or pare their positions.
Unfortunately, what I'd like to start calling "the politics of easy credit" may get in the way of this sensible new rule:
"If our leverage rules are 10-to-1 and leverage rules elsewhere are 100-to-1, the business is going to move elsewhere," House Agriculture committee member Jim Marshall (D., Ga.) said.
Thanks Congressman Marshall, for protecting American entrants in the race to the bottom.
As I argued yesterday, on the one hand we want tougher financial reforms, but reforms are related in the sense that they're all designed to reduce the availability of credit. Call it what you want: leverage, credit, debt finance. Americans love the stuff because it magnifies rewards. The less you put down for an investment -- whether you're a bank, mortgagee or currency trader -- the more juice that comes back to you if a trade goes right.
from Commentaries:
CFTC prepares to recant speculators’ influence
-- John Kemp is a Reuters columnist. The views expressed are his own --
Like Archbishop Thomas Cranmer before he was burned at the stake for heresy, the U.S. Commodity Futures Trading Commission (CFTC) seems about to make a dramatic recantation.
Later today, the Commission will hold the first of three public hearings to discuss whether to impose tougher position limits in energy markets and restrict the availability of hedging exemptions. But it is already preparing to release a report that will accuse speculators of playing a significant role in last year's oil price spike, according to a report in the Wall Street Journal.
While it might seem a minor shift in emphasis, it is a radical reversal of the Commission's previously stated view that there was "no evidence" that investment flows had a material impact on prices. Commission staff have doggedly maintained that physical supply and demand factors could explain all the observed volatility in oil and other commodity prices over the past two years.
The position was stated most forcefully by CFTC Chief Economist Jeffrey Harris in testimony to the House of Representatives' Agriculture Committee in May 2008 (http://www.cftc.gov/stellent/groups/public/@newsroom/documents/speechandtestimony/harris-fenton051508.pdf).
It was repeated in September 2008 in the CFTC's "Staff Report on Swap Dealers and Index Traders" and again this year in a joint report with the United Kingdom's Financial Services Authority (FSA) on commodity regulation for the International Organisation of Securities Organisations (IOSCO).
The Commission's view has come under pressure from sceptical legislators as the scale of speculative positions in commodity markets and the number of exemptions the Commission and exchanges have granted have been revealed. Congressional anger threatened to derail Gensler's confirmation. The price of allowing him to take office seems to have been a promise to take a tougher approach.
Could you please post your article “Peak Oil is right answer to wrong question” on this blog so that I may pull it to pieces. However, I suggest that you have a look at the energy costs in extracting non-conventional oil or CTL. The production costs (mostly natural gas) are absolutely linked to the oil price, so as oil prices rise, so do production costs, which in turn cause the price to rise some more. A sustainable level of production in the Canadan Tar Sands, even if nuclear is used, would be no more than a paltry 5 million barrels a day (in 20 years) this is because of the water (& other environmental) constraints. The IEA predict peak beyond 2020, but this is only because of a growth in production in “Fields yet to find”. These fields are however unlikely to be developed as the bulk of them are in OPEC and OPEC won’t want to develop them even if they are found.
@Mott,
Correction: Third paragraph should have read “Only to such extent as unelected and unaccountable government bureaucrats unreasonably and without appropriate justification impose artificial and unnecessary “qualifications” on the accomplishment of projects or employment of people is there any connection between the adverse effect of ill-considered and arbitrary bureaucratic actions and inactions and the reciprocal and adverse effect on American’s “cost of living”.