"We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob." -FDR 1936

So, if we minimize government and leave things to the private sector things go right, right? Well, evidence says otherwise.

The Commodity Futures Act of 2000 was the legislation that led to out of control energy speculation. This piece of legislation led to both high gas prices and the Enron crisis that gave the state of California rolling blackouts and crippled it's economy.

For simplicity I'll refer to the legislation as CFA2000 from now on.

So what is a future?  A future is an agreement on a commodity (gas, electricity, grain, ect) to be delivered on a specific price up to a certain time.  The idea behind this is to stabilize prices, consumers would be a little upset if they went to a gas station on Monday to pay $3.25 a gallon only to return that Friday and find that the price was down to $2.25 a gallon.

Ok, let's break this down.  How did the California energy market work before the Commodity Futures Act of 2000?  Electricity was sold much as it is in the rest of the nation, we utilize private power companies or power co-ops who are heavily regulated and must apply for rate hikes.

What did the new rules mean?  The new rules allowed a company like Enron to buy and sell energy on a privately owned and operated market.  And this trading was immune from regulation by the Securities Exchange Commission (SEC), a federal watchdog that looks for price gouging and price manipulation.

The "Enron loophole" in the bill was in Section 2(h) which listed 2 exemptions from the CEA2000: "oil and other 'energy' products." were excluded.  And this addition in the legislation sealed the deal.

Here's footage of the CFA2000 before the House.

And it wasn't even 6 months later when things began to quickly unravel, as you can see below.

When the Enron trader tapes surfaced, you had energy traders talking about these sorts of things:

Trader: “If you took down the steamer [from a generating unit], how long would it take to get it back up?”
Supervisor: “Oh, it’s not something you want to just be turning on and off every hour. Let’s put it that way,” another says.
Trader: “Well, why don’t you just go ahead and shut her down.”

Here's another:

Trader 1: “They’re fucking taking all the money back from you guys? All the money you guys stole from those poor grandmothers in California?”
Trader 2: "Yeah, Grandma Millie man. But she’s the one who couldn’t figure out how to fucking vote on the butterfly ballot."
[Laughing from both sides]
Trader 1: "Yeah, now she wants her fucking money back for all the power you've charged right up, jammed right up her ass for fucking $250 a megawatt hour."
[Harder Laughing]

Watch CBS News Videos Online

::::GASP!:::: This means there is evidence with less regulation private entities will in fact gouge consumers?  My heart be still!  I've heard all of my life that the government is the bad guy has no place in the economy, does this mean that a corporation can exert force against people and shut down an entire state's economy?

One of my lifelong mentors and I have conversations/discussions about the government's role in the marketplace, he feels as if the government should be minimized in the marketplace.  When I bring up things like Enron, his response his something along the lines of "well that's an extreme example, what about all the times that companies don't fraud consumers?"  Yeah, and my response to that is this, if one company is able to commit a level of fraud so large that it cripples the world's eighth largest economy and sends it into a major economic crisis we better rethink how much power individual corporations have over our lives, the fraud perpetrated on California cost the state in between $40bn to $45bn.  That's the equivalent of saying "well look at all the nuclear weapons we've produced and only used them twice."  Yeah, and when we used those weapons, the consequences became so apparently awful we did everything within our power to make sure we didn't have to use them again.

Want to go a step further and add insult to injury?  This same piece of legislation also deregulated and relaxed restrictions on over the counter (OTC) derivatives.

They were behind the 2008 Financial collapse and there was criticism of this deregulation from the beginning.  These derivatives are basically bets against a default.  The scenario I'm about to set up would be equal to an insurer selling fire insurance to a fire prone area with no ability to pay the insure when their building burns down.  So in our model, when the housing market began to burn down in 2007, our fire insurer started to pay on those policies but when the a great deal of the fire spread the insurer couldn't cover all of the building policies and the government had to step in and loan the fire insurance company money to cover all of the buildings it didn't have the money to insure.  Sound kidda nutty?  Yeah it really should.

Here's a simple model from one of my favorite movies, Ocean's 11 (the new one).  Remember, the team knew there would be a certain amount of money in the casino's vault, Nevada state law told the casino for every chip you have in your house and table there has to be a corresponding amount of cash in your vault to cover it in case the you're forced to cash out.  The problem with OTCs was there was no regulation forcing the banks to follow the same sane rules. Then, when the players at the casino "Wall Street" bet against the Lehman Brothers collapse cashed in, AIG didn't have the money to cover the Wall-Street winnings.

Can we get even crazier? WHY YES! We can! Under current law (as of April 4th 2010) there has been no reform requiring transparency to the holders of OTCs, to the government, or the general public.

Let's go just a step further down the path of psychosis, those who placed bets against Lehman Brother's demise actually made money.

That's right folks, we've invented and fostered a system in which people were lured through fraud (so said the FBI) into houses they couldn't afford:  "The FBI investigates Mortgage Fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and Mortgage Fraud reporting, <span style="font-weight:bold;">80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.</span>"

They were then evicted from those houses because they couldn't pay, the banks who backed those mortgages (ie Lehman Brothers) failed because they couldn't carry the massive amount of defaulted mortgage debt (toxic assets), the insurance banks (AIG) that were there to save the investment banks couldn't pay because they didn't have the leverage against their OTCs, basically there were too many chips out on the table and not enough money in the vault.  So to save the stock market and the toxic mortgages-OTCs the federal government (you and I) stepped in to prop this clearly broken system back up and make a bunch of rich people even richer.

And if nothing is done in regards to reform, this will happen again.  I for one think we have a President who is smart enough to see this system needs a massive overhaul, we went through this once before in the 1930's.

PBS' Frontline has a great piece below called The Warning there were those in the Clinton administration who saw trouble on the horizon and tried to warn us; Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] tried to raise a red flag but was silenced by those who advocated deregulation and less government interference.

So, when people scream about "big government" ask them to pick a history book up and instruct them to find the 'boom and bust' economies, they didn't exist under a regulated market.

Originally posted to sshepard06 on Sat Apr 24, 2010 at 02:02 PM PDT.

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