(Sept.-Oct. 2008 GroundSwell)
?FRONT RUNNING? AGAINST HUMANITY IN THE OIL
MARKETS
by Stephen Zarlenga, Valatie, NY
?Front-Running is an insiders? term for an often illegal, always
immoral practice in commodity and other markets. Here?s what
happens:
A broker holding a client?s order to buy at a
certain price, instead buys for himself just in ?front? of it. The clients
order isn?t filled and the broker has an unfair advantage over other traders
because he controls the client?s order which will buy the position back from him
and protect his trade from a loss.
The client loses the opportunity to gain,
where his order is never filled if the market moves away from his order
point. If some participants can trade with little or no risk, over time
everyone else is hurt.
Because Exchange Members? margin requirements
are only about 1%, the front running brokers have a possibility of great gain
quickly with almost no risk of loss.
Why is this important to ?public policy??
?Front running? is one way to view what
criminal Enron executives did to California. They had the client?s non
cancellable, inelastic ?orders? to buy electricity and they grabbed the
available supply in front of that, restricted the delivery process and extorted
higher prices; blaming price rises on ?market forces.?
Enron was bad enough, and Sarbanes-Oxley was
passed to hold corporate officers criminally liable - a good law as judged by
the corporate types screaming for its repeal. But apparently it didn?t go
far enough as judged by the present bold attack against humanity taking
place.
The manipulation of energy markets has
widened from cheating the people of California, to a deadly attack on all
humanity. That?s what allowing speculation in oil futures is doing
today. These markets aren?t providing ?price discovery? as apologists like
to claim. They?ve driven the price of oil to destructive levels. The
damage has already been immense.
We?ve seen the devastating effects oil prices
have had on airlines; trucking; food delivery and production; on average
families trying to keep up with living costs; on restaurants and hotels
Americans can no longer afford. Add your examples. It?s the
speculation and hoarding that does it. Exxon couldn?t grab $12 billion record
2nd quarter profits if their costs of obtaining oil were rising.
And so I put
aside an outline for this paper when it appeared Congress would do its job ?
rescue the world economy from this pernicious vandalism, by limiting
speculation in oil futures to a few contracts per account.
That?s all it would take to stop the nonsense.
There?s no reason to allow
speculators to position themselves between the world?s limited oil supplies, and
those who have to use that oil to keep the world economy functioning. Such
speculation leads directly to hardship, starvation, death and warfare.
?Congress will finally fulfill its responsibility to act.? I thought, but the
measure failed in the Senate with 50 for, 43 against, and 7 not voting!
Why didn?t Congress act?
If this scenario is so clear and
harsh, how could the Senate refuse to act? Are they a gang of
demons?? No, but something potentially worse ? we?re confronted with a bad
idea that many people believe in ? the sanctity of markets!
The vote exposes a faulty methodology - an
ideology based on false axioms; a false view of markets that?s been strongly
promoted, not questioned; with its negative effects not understood; that view
gives markets a sacred character:
Don?t try to legislate against what the
market does ? market forces will crush your laws. (Its
omnipotent!)
Don?t try to instruct market behavior;
it has inputs from millions of participants and knows more than your regulators
ever could! (Its Omniscient.)
Do the right things and the market will
reward you; misbehave and you will be punished! (Its
benevolent.)
Well, omnipotence, omniscience and
benevolence are attributes of a god, and Senators don?t often fight
with god!
What?s sorely missing from these
beliefs and assumptions is evidence!
Where?s the evidence that removing
regulation from the airline industry had good effects?
Where?s the evidence that
removing FCC restrictions on media ownership had good effects?
Where?s the evidence that
removing government regulation from any industry has had good effects?
Of course it?s worse than that. It
goes beyond a lack of evidence because there?s plenty of evidence to the
contrary! Holding those beliefs requires ignoring loads of evidence:
ignoring the damage done to the airlines by deregulation; the damage done by
media concentration; the continuing damage done to America?s middle class;
ignoring: (insert your favorite)
How can proponents of unregulated markets
justify ignoring the facts? Its crazy, but it?s also a necessary part of
their false methodology which loves theory but avoids experience ? the
facts. One of their leading ?lights,? economist Ludwig Von Mises, carries
it to extreme levels actually claiming that facts cannot disprove his
theories! So we are dealing with momentous errors of judgment and
methodology. Though these men are in the U.S. Senate, they are
thinking like scared children. But such errors belong in children?s sand
boxes, not our nation?s halls of power.
This battle over methodology is an old
fight. We even see it in our nation?s beginnings. Ben Franklin?s 1729
essay ?The Nature and Necessity of a Paper Currency? gave the correct
methodology when he summarized the ideas used to help Pennsylvania set up its
paper money system in 1723 rescuing her from a prolonged usury crisis. Franklin
told the world:
?Experience, more
prevalent than all the logic in the world has fully convinced us all that paper
money has been of the greatest benefit to the country.?
Maybe as some Senators voted against stopping
oil speculation, perhaps a more human inner voice rebelled against what they
did. Was that voice stifled by an unholy combination of greed &
selfishness, assuaged by their comforting though unsupported belief in the
utility of unbridled selfishness and greed? The false notion that
selfishness ?works??
The Senators are not demonic, but their
ideology, summarized as ?Market worship,? which ignores the human part of the
resulting tragedies, certainly is.