What do the Enron scandal, $4/gallon gas, and the current credit crisis have in common?
What do the Enron scandal, $4/gallon gas, and the current credit crisis have in common? A really bad piece of legislation called the Commodity Futures Modernization Act of 2000.
This bit of nastiness was slipped in to the omnibus spending bill in the waning days of 2000 by Republicans, particularly Senator Phil Gramm working with Enron lobbyists. People were distracted by the whole Gore vs. Bush election debacle and congress was anxious to get home for Christmas. The bill was passed without debate and signed by Clinton on Dec 21, 2000. The primary effect of this legislation was to deregulate several different kinds of transactions.
So the first catastrophe it allowed was the whole Enron mess. It deregulated energy futures trading, allowing "Enron On-line" to be born, an electricity exchange that was allowed to take place away from the prying eyes of those oh-so-evil regulators. Enron manipulated this to gain profit, got greedy in their pyramid scheme, wiped themselves out and cost electricity consumers in California huge sums of money and helped contribute to the energy shortages and rolling black-outs. Despite the obvious failure of this, Republicans continued to block closing of the "Enron loophole" until Democrats managed to attach a rider to the 2008 Farm Bill which was passed over President Bush's veto.
The next bit of nastiness that this allowed was for more off the books trading of commodities, away from the daylight of the proper commodities exchanges. It also allowed financial institutions like banks, which had been prohibited from playing in in the futures markets to begin playing in the market. In particular the oil companies began deregulated company to company swapping of futures, and allowed for more speculation on oil futures. So looking back to when oil was trading at well over $100/barrel, we can see retrospectively that there was no particular oil shortage in the works, that it was purely just speculation and market manipulation. If there truly had been a shortage the oil companies wouldn't have been raking in record profits as they wouldn't have had as much oil to sell at those artificially inflated prices. So when you were paying more than $4/gallon for gas, you have the deregulation of this act to thank for it.
The last bit... well, you've heard of derivatives trading, right? Credit default swaps, naked short selling, etc, etc... Derivatives had been around since before 2000, but they were in a bit of a regulatory gray area. They could have been regulated by the SEC as they were derived from the stocks that the SEC had regulatory power over, but the SEC had never acted to formally codify rules around derivatives. One of the key features of this act was to legislate that there would be no regulation of derivatives. We could obviously just let the free market regulate itself right? Government has no role in the free market other than to keep people from profiting, right? So thanks to this bit of legislation and an administration that strongly supported unregulated markets, more and more money was poured in to pursuing the "easy money" that was being manufactured in these derivative markets... and much of this was being built on top of the housing bubble, so when that bubble burst the whole house of cards comes tumbling down and here we sit in a huge economic slump. And this was again enabled by the Commodity Futures Modernization Act of 2000 (and the Gramm-Leach-Bliley Financial Services Modernization Act). The Obama administration is moving to fix this hole by amending the act and pushing derivatives trading in to a visible and regulated forum.
So, there you have it. One bit of legislation written by greedy lobbyists and then overseen by a pro-business/anti-regulation administration has done a whole world of hurt. So millions of lives affected, people have even lost their lives over these things... you take someone's wallet by threatening to hit them with a stick? Years in prison. Let your friends steal billions from the little guys? As of 2009, Gramm is employed by UBS AG as a Vice Chairman of the Investment Bank division whose job is to "support the business in their relationships with key clients." (Get the Senator a job as a high-paid professional schmoozer.)
This bit of nastiness was slipped in to the omnibus spending bill in the waning days of 2000 by Republicans, particularly Senator Phil Gramm working with Enron lobbyists. People were distracted by the whole Gore vs. Bush election debacle and congress was anxious to get home for Christmas. The bill was passed without debate and signed by Clinton on Dec 21, 2000. The primary effect of this legislation was to deregulate several different kinds of transactions.
So the first catastrophe it allowed was the whole Enron mess. It deregulated energy futures trading, allowing "Enron On-line" to be born, an electricity exchange that was allowed to take place away from the prying eyes of those oh-so-evil regulators. Enron manipulated this to gain profit, got greedy in their pyramid scheme, wiped themselves out and cost electricity consumers in California huge sums of money and helped contribute to the energy shortages and rolling black-outs. Despite the obvious failure of this, Republicans continued to block closing of the "Enron loophole" until Democrats managed to attach a rider to the 2008 Farm Bill which was passed over President Bush's veto.
The next bit of nastiness that this allowed was for more off the books trading of commodities, away from the daylight of the proper commodities exchanges. It also allowed financial institutions like banks, which had been prohibited from playing in in the futures markets to begin playing in the market. In particular the oil companies began deregulated company to company swapping of futures, and allowed for more speculation on oil futures. So looking back to when oil was trading at well over $100/barrel, we can see retrospectively that there was no particular oil shortage in the works, that it was purely just speculation and market manipulation. If there truly had been a shortage the oil companies wouldn't have been raking in record profits as they wouldn't have had as much oil to sell at those artificially inflated prices. So when you were paying more than $4/gallon for gas, you have the deregulation of this act to thank for it.
The last bit... well, you've heard of derivatives trading, right? Credit default swaps, naked short selling, etc, etc... Derivatives had been around since before 2000, but they were in a bit of a regulatory gray area. They could have been regulated by the SEC as they were derived from the stocks that the SEC had regulatory power over, but the SEC had never acted to formally codify rules around derivatives. One of the key features of this act was to legislate that there would be no regulation of derivatives. We could obviously just let the free market regulate itself right? Government has no role in the free market other than to keep people from profiting, right? So thanks to this bit of legislation and an administration that strongly supported unregulated markets, more and more money was poured in to pursuing the "easy money" that was being manufactured in these derivative markets... and much of this was being built on top of the housing bubble, so when that bubble burst the whole house of cards comes tumbling down and here we sit in a huge economic slump. And this was again enabled by the Commodity Futures Modernization Act of 2000 (and the Gramm-Leach-Bliley Financial Services Modernization Act). The Obama administration is moving to fix this hole by amending the act and pushing derivatives trading in to a visible and regulated forum.
So, there you have it. One bit of legislation written by greedy lobbyists and then overseen by a pro-business/anti-regulation administration has done a whole world of hurt. So millions of lives affected, people have even lost their lives over these things... you take someone's wallet by threatening to hit them with a stick? Years in prison. Let your friends steal billions from the little guys? As of 2009, Gramm is employed by UBS AG as a Vice Chairman of the Investment Bank division whose job is to "support the business in their relationships with key clients." (Get the Senator a job as a high-paid professional schmoozer.)