Lubrication, heating oil...
Sean Cota runs a family-owned heating oil business in Vermont. He says using derivatives purely to speculate on the price of oil has hurt his business and consumers' wallets.[Brett Neely, "Businesses Differ on Derivatives Reform," Marketplace, 2010.04.20]
SEAN COTA: We calculate that this unregulated market has encouraged speculative fervor that costs about a $1 per gallon.
Neely's report pokes some other holes in the theoretical capitalist defense of unregulated derivatives, which seems about all the GOP can muster as it fights this latest really good idea from Democrats. Neely notes that derivatives were "boring and safe" for centuries. Deregulation happened only in 2000. Hmm... credit was plenty liquid in the twentieth century, wasn't it?
Neely also notes that, under deregulation, derivatives have operated in a distinctly uncapitalist fashion. Outside of exchanges, banks set prices, keep them private, and prevent buyers from getting information about the risk involved. Capitalism requires a free flow of information right alongside capital. But the big five banks that control most of the derivatives don't want us to get information and compare prices:
Because there's not efficient pricing [in the current system], these big five derivatives dealers can really charge through the roof for these derivatives products and that's one big reason why they've been so profitable [David Min, quoted in Neely, 2010].
Neely finds a good capitalist from the Chamber of Commerce to defend unregulated derivatives:
The whole point of the exercise is to transfer that risk somewhere else so that you can be in the business of producing beer or making widgets or whatever it is you do [David Hirschmann, quoted in Neely, 2010].
Hold on: transfer the risk?! I thought risk was an inherent and necessary part of being in business. You don't get to make beer or widgets without risk. If I choose to produce art or make speeches for a living, I don't get to transfer my risk to someone else. I assume the risk that people just won't buy enough of what I'm selling to keep me in paint and shiny shoes... right?
Perhaps I misunderstand capitalism. But the more I listen to conservative arguments against regulating derivatives, the more I hear a vague theoretical declarations that ignore the facts of what unregulated derivatives have wrought. In practice, unregulated derivatives look like an inherently anti-capitalist financial product, one that withholds the information buyers need to make good choices, removes the risk the market needs to check unwise actions, and threatens the stability of the free market economy.
"Boring and safe"—that's what derivatives regulation gets you. And after the excitement of seeing your mutual funds wiped out in the recession, couldn't you use some boring and safe?
Update 17:02 CDT: Senator Grassley from Iowa joined 12 Dems on the Senate Ag committee in approving derivatives regulation today. Grassley is no Olympia Snowe; his vote may be a sign that Republicans see it's time to stop saying no to ideas that will be good for the economy.