SEC & CFTC Combo Equals Economy Collapse

[JimofPennsylvan]

Some members of Congress are talking about combining the Securities & Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) into one agency. This is a titanic size stupid idea. America needs dramatic overhaul of its regulatory laws and institutions for its financial industries, changes that haven’t been seen since the 1930’s that healed the country from the Great Depression. But what is critically important is that it be done smartly or we’ll eventually be back at the brink of a world wide financial market collapse like we were during the week of September 29th of this year and next time we may not be so lucky to avoid the catastrophe of unimaginable scope that we had faced. This regulatory change the nation desperately needs can’t just be make big government regulatory organizations, make a whole bunch of rules that penalizes everything that legislators can think of and penalize in the severest manner so elected officials can brag to voters that they are on the job. The nation needs smart, tough and balanced changes to the regulatory scheme for these industries. The nation needs leaders that are not going to let financial industry lobbyist or political party platforms write the legislation making these regulatory changes; rather, the nation needs leaders that are strong, with good common sense and independent that will make changes based on the merits of the issues, changes that fix the problems we know of, create mechanisms that will catch and fix future problems when they arise and preserve America’s strong financial markets and preserve the strong capital and wealth creating features of these industries that have made the U.S. the greatest nation in the world.

There is a multitude of reasons why combining the SEC and the CFTC is a stupid idea. First, the stock market and the commodity market compete for investor dollars. Presently, the SEC regulates the stock and bond markets and the CFTC regulates the commodity market. If the government charges one government agency to regulate both markets, the government is creating a built in conflict of interest where a conflict of interest matters because the CFTC has the ability to curtail speculative investment in commodities, the management of such an agency will always have to be choosing between stock investors and commodity investors; the right direction the government should be following is to facilitate America’s regulatory agencies being able to make their regulatory decisions solely based on the merits of the issues not interjecting this politics dimension, stock investors over commodity investors or vice versa; this combining agencies into one idea violates economics 101. The wrongfulness of uniting these agencies is magnified in an even more alarming manner when one considers that U.S. regulatory law must be changed to stop the volatility in the oil commodity markets, there is no option here, because the current commodity market system readily allows for oil price spikes and when oil prices spike it not only causes extreme hardship on American families with increased fuel and food prices but it really hurts American businesses, the American economy cannot take it, and America can’t drill its way out of this problem in the next ten to fifteen years it is not humanly possible to bring enough supply of oil on line or cut demand in that time frame to create enough of a gap between supply and demand to create stability in oil prices in the commodity system we currently have. The regulatory laws have to be changed to give the CFTC a vast amount of additional power to reduce speculative investment in oil that unduly drives up oil prices whether it be from speculative investment in the oil future contracts, the options on oil future contracts, swaps based on the commodity of oil or any other derivative investment based on the commodity of oil; if anyone says different they are not giving straight talk. Now if there was one regulatory agency that had regulatory authority over both the stock and commodity markets and it had this essential new power to reduce speculative investment in commodities at its discretion, the management of this regulatory agency would always be under dangerous pressure from stock investors to use that power to shut off speculative investment in commodities even if there wasn’t an unwarranted increase in commodity prices that would justify use of that power which if the agency succumbed to the pressure would result in undue low commodity prices resulting in shortages in certain commodities over the long-term and higher prices over the long-term plus it would likely result in buyers and sellers of commodities moving their business to foreign commodity exchanges resulting in hurting U.S. financial industries and almost certainly causing higher prices for American consumers based on those foreign markets being more susceptible to speculators unduly driving up prices.

Another reason why combining the SEC and the CFTC into one agency is a bad idea is that the current problem with the CFTC is that it is woefully underfunded they haven’t had the resources to adequately investigate and prosecute abusive speculative behavior. From what the public can garner from the media, the SEC doesn’t seem like it has significant excess resources, in fact it is pretty clear the SEC needs to be doing more tasks than it currently does like checking more to make sure the financial statements of businesses whose stocks are traded in U.S. exchanges are more accurate and clear in communicating how leveraged they are and the degree to which they are engaged in hedging and speculative activity. Putting two agencies who need more funding into one agency will likely result in vital and important regulatory tasks competing for limited resources with the result of one or more tasks likely being inadequately funded and the American people seeing resulting abuses and failures in the system.


There is a huge amount of work to do in overhauling the regulatory framework of our nations financial industries and the nation needs strong, independent leaders, leaders that aren’t looking to acquire edges or points that will help them win reelection to office but recognize that the different parties in these industries have legitimate interests, whether it be investors, financial institutions, businesses, hedge funds (they loan capital where banks won’t and create businesses and jobs), etc. and if the government fails to do right by these interests it will hurt America’s job and wealth creation in the long-run. The list of needed action is extensive.

The government needs to mandate the use of clearing houses for credit default swaps so if one party in a credit default swap defaults their isn’t a domino effect of defaults on other parties that invest in swaps or what is a more pressing concern fear of such a domino effect; a clearing house blocks a domino effect because it pays the counterparty to a swap the monies owed by a defaulting party. The government needs to mandate the use of clearing houses for commodity swaps, one of several reasons being so that regulators can gage or get a clear picture on whether or not speculative activity occurring in the swap market is unduly driving up commodity prices. The government needs to regulate investment banks and banks that have investment bank divisions to insure that they are conducting the proper risk analysis and staying within the financially safe results region of these analysis when it comes to these investment bankers selling currency swaps to businesses throughout the world so that the world never again sees foreign non-financial companies investing in currency swaps where their liability is so great when the currency swap investment goes bad they end up in bankruptcy or financially devastated. The government needs to insure all financial institution have adequate cash reserves so that when there is drops in financial markets or increases in mortgage default rates, financial institutions don’t face huge losses of investor and creditor confidence causing cascading effects that can cause credit markets to freeze up and financial institution stock prices and stock and bond markets to fall dramatically. The government needs to insure that non-financial institutions that are going to engage in speculative activity in Wall Street investments communicate it loudly and clearly to the public so their stock and bond holders and their creditors can have fair notice to determine if they want to go for the ride. The government needs to insure that investment devices that Wall Street offers are financially sound in all respects: no more auction rate securities like the one the world’s seen collapse this year, no more bonds based on sub-prime mortgages represented as typical bonds. The federal government needs to revise the regulatory oversight of the banking industry to make one strong agency in this area; today there is so many different federal regulatory agencies for banks and bank-like institutions there isn’t really one strong agency that is checking all institutions in the entire industry and has the power to enforce needed oversight throughout the entire industry and strongly advocate publicly for the proper regulatory oversight of the entire industry.