Naomi Klein on the Bailout

Naomi Klein (The Shock Doctrine) posted a column at CommonDreams.org that captures a lot of the spirit surrounding the bailout, at least from those who think that Main Street should not bail out Wall Street.

A choice quote reflective of a lot of public sentiment:

This spectacle necessarily raises the question: if the state can intervene to save corporations that took reckless risks in the housing markets, why can't it intervene to prevent millions of Americans from imminent foreclosure? By the same token, if $85bn can be made instantly available to buy the insurance giant AIG, why is single-payer health care - which would protect Americans from the predatory practices of health-care insurance companies - seemingly such an unattainable dream? And if ever more corporations need taxpayer funds to stay afloat, why can't taxpayers make demands in return - like caps on executive pay, and a guarantee against more job losses?

Futures, I mean insurance, I mean futures...

The Sunday NY Times business section had two stories which had an interesting overlap.

First, Gretchen Morgenson, in reporting on how Fairfax Financial Holdings profited from credit derivatives, described those financial instruments as "insurance contracts that allow investors to bet for or against a corporation's bonds." (Good luck getting anyone in the financial industry to give you an opinion in writing calling a derivative "insurance.").

The second piece, by Nelson Schwartz, reported on Congressional efforts to control energy prices. Of note, Rep. John B. Larson proposed legislation that would ban unregulated (over the counter) trading in energy futures where the parties would not take delivery of the commodity, i.e. the positions would be settled in dollars. This proposal is fascinating in its own right, but where it gets very interesting, and how it really relates to the first article is in this quote from John Damguard, the president of the Futures Industry Association.

"The over-the-counter markets are a very important part of the way industry and institutions manage risk."

Well, he certainly makes over the counter deals sound a lot like insurance. Of course, most of the trades entered are not for true hedging purposes, e.g. futures purchased by airlines, but are instead large, heavily leveraged bets sold by traders and investment banks to investors seeking above market returns. And of course, if these deals were actually "insurance" as opposed to speculation, they (and the dealers who package and sell them) would fall under an entire class of regulation.

So, if we shouldn't regulate over the counter deals because they fill a important need of managing risk, then why aren't they regulated as insurance? It seems like the insurance industry should get on this one, and use a favorable bill to steal part of an industry away from Wall Street.

Gas prices....who's to blame?

Yesterday was filled with stories about how gas and oil prices are reflecting supply and demand, as opposed to being driven up by speculation, and that the "windfall" profits go to the oil producers and not traders on Wall Street.

Bloomberg reported a different angle in this story that:

Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The House hearings have tried to investigate the effect of speculation on the commodity pricing of oil.

So who is to blame? Consumers who allow oil and gas to exist in an inelastic market? Producers who (supposedly) fail to increase refinery production? The Fed and the Bush Administration for a weak dollar? Wall Street for driving up futures through speculation? In the end, it is, as always, a combination of all these, and the only power left to consumers is to consume less.