[R-G] [BillTottenWeblog] "Front Running" Against Humanity in the Oil Markets

[Bill Totten]

by Stephen Zarlenga, Director

American Monetary Institute

Dedicated to the independent study of monetary history, theory, and reform

"Over time, whoever controls the money system controls the society".



"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 one
percent, 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 second 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 fifty for, 43 against, and seven 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. It's omnipotent!

Don't try to instruct market behavior; it has inputs from millions of
participants and knows more than your regulators ever could!  It's
Omniscient.

Do the right things and the market will reward you; misbehave and you
will be punished! It's 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 US 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 and 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.

American Monetary Institute
Post Office  Box 601,  Valatie,  New York 12184
Tel: 518-392-5387, email: ami at taconic.net
http://www.monetary.org


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