Oil: Saudi Arabia's WMD and Weapon of Economic Revenge

The price of oil on the commodity markets has been dropping precipitously over the past several months to over 5-year lows. This poses many positives and negatives. OPEC member states control over 40 percent of the world’s oil production and while the laws of supply and demand have a considerable influence on prices, they can be manipulated by this cartel. While there are logical economic reasons OPEC is allowing the price of oil to fall, there are also sinister aims which are not as immediately apparent; or which the U.S. media is limiting coverage of.


Right now there are three primary factors that are influencing the decline in price of oil. First, demand is low due to decreased worldwide economic activity (globally, economies are still performing poorly despite some gains) and a small but measurable shift in some regions to other forms of energy. Second is the U.S. which through the massive increases in shale oil production is importing less oil creating a surplus worldwide. Lastly, the decision to retain their market share by the Gulf states who dominate OPEC, leaves little room for large scale decreases in oil production. That last factor also negatively influences other oil producers such as Russia, Iran, Nigeria, and Venezuela. The Gulf states have the financial capital to handle low oil process for the short term; the same can't be said for other countries who are highly reliant on oil revenue to provide for their economic needs. Those states are considerably hurt by all of this.

There is little doubt that Saudi Arabia, Bahrain, and other Gulf states are basking in the damage this downfall in oil prices is doing to Iran's economy. Where years of economic sanctions have been slow in eroding the Iranian economy, the quick decline in oil prices is having a far more sudden effect. Rivals in several ways to the point it was rumored in 2013 that Saudi Arabia was planning in coordination a strike with Israel against Iran, this rivalry I strongly feel is playing into Saudi Arabia's and other states hesitation to decrease oil output. The idea of hurting Iran is an important factor that is one they don't admit but which definitely motivates them. While this doesn't dominate the oil production issue, it does lead the Gulf states to sideline their own economic interests temporarily so as to inflict maximum economic pain on Iran. Iran though isn't the only target.

The Gulf states are not fans of Assad in Syria, in fact they've been working against Assad since prior to the 2011 civil war. On the other hand, Iran along with Russia are Assad's most important allies (keep in mind the list is extremely small). In the face of an economic crisis, where will these countries allocates their increasingly scarce economic resources to, Syria or to domestic concerns? Assad is not tethering on the edge of defeat or victory but is walking a fine line of stability one can say. A sudden decrease in support from Russia or Iran will only injure Assad and put him into a situation where defeat can only be expedited. This alone can have a greater deciding impact on the civil war than years of assistance to rebel factions. Additionally, support from certain Gulf states has been directed at groups which the U.S. would rather not support; the current situation allows for such groups to still receive support in the form of the degradation of the Assad regime by economic means.

Then there is Russia. Russia's economy has been negatively impacted by sanctions due to its involvement in the Ukraine. Again like Iran, true troubles have only emerged due to the decline in the price of oil. In Russia's case, the decline has led to a free fall in the value of the currency, the ruble. Russia's crisis has turned into a currency crisis which is severely impacting planning in a country where the budget is determined by oil selling for over $100 a barrel. At its current price of less than $50 a barrel, one can see the problem Russia is facing.

In the U.S., Americans are celebrating the low price of oil. It's been sometime since we saw gas at less than $2 a gallon and in light of inflation, the decline in cost of gas is quite comforting for our wallets. There is a caveat though. Part of the decline in oil is due to decreasing U.S. dependence on foreign oil through increased domestic production of shale oil. The Gulf states see the economic miracle that has occurred in the Midwest in shale oil and are keen to stop it. The thing with shale is that at the moment it is expensive to produce. At over $65 a barrel, shale is currently uneconomical in the long run if global prices stay the same. Adding to that is the fact that unlike traditional oil wells that don't need to be constantly drilled, shale does and a loss in operating revenue prevents companies from digging such wells. It is a loss of capital for not operations but for investment and expansion that U.S. shale oil companies depend on. A decline in shale oil production brought on by decreased prices will require an increase in the import of oil from foreign countries who can then retain their market share by increasing production while the price stays low enough to prevent a rebirth of shale oil production.

While there are immediately apparent non-state economic reasons why the price of oil is declining, there are other factors that are assisting. OPEC which is dominated by Saudi Arabia is concerned by the declining reliance of the U.S. on foreign oil. Countries which it has less than warm relations with such as Iran and Russia can't operate effectively without oil prices being high. Saudi Arabia itself is not immune from oil reaching low prices but the country has substantial financial reserves to weather the storm just long enough to see other countries flame out. In that sense, oil is the ultimate weapon of Saudi Arabia. It can force a state to abandon its budget in the case of Russia, help cut of support to enemies in Syria by way of Iran, and at least temporarily, fend off competition from the U.S.

Posted by SPBrooker at January 22, 2015 2:03 PM
Comments
Comment #387562

I’ve read that the real issue here is that US engineers shows OPEC how to use fracking to get oil out of older lower performing sites. The caveat is that once they start the process, it really can’t safely be stopped until all of the oil is pulled out, so now they are pumping more oil than is needed and they are unable to stop the process safely.

I am not ready to say this is part of an economic war just yet based on this information, but I’m not sure it’s any different than the myriad of ways the US does the same thing to other economies purposefully… Just take a perusal of the book Confessions of an Economic Hitman for some details.

Posted by: Rhinehold at January 22, 2015 2:13 PM
Comment #387564

It’s a great book, Rhinehold, but I am not sure it applies to this situation.

Nice to see my comments about oil from December showing up now as conventional wisdom. Here is what I wrote November 13th, when the Keystone Pipeline was being debated:

“Oil down to $74 today. Better hurry. Won’t be long before it is no longer financially viable. We’re already in borderline territory, the $65 - 75 range. Below $65, good-bye Keystone, and buh-bye to oil from the Albertan tar sands.

Oh, & C&J, if you see Walker, you might want to explain to him that the pipeline has little to do with oil independence for the US. The oil is intended for export to Europe. The whole point is to give business to Texas refineries. That’s it.

Unfortunately, demand for oil is dropping in Europe and China, and more importantly, the market is being flooded. I think the Saudis want to kill off competitors while maintaining market share. They can stand $40. Most producers cannot. For many, anything below $70 puts them underwater. So the Saudis will kill Keystone more decisively than anyone ever realized, they will deny revenues to Iran, which unlike Saudi has a large restive population, and they may prevent development of alternative energies, and perhaps most important of all, electric cars.”

Oh. And oil is @ $46 today.

Posted by: phx8 at January 22, 2015 2:43 PM
Comment #387566

Actually, OPEC has stated that they could go as low as $20 if they felt the need to and still be profitable. Obviously they don’t want to do that if they can…

Posted by: Rhinehold at January 22, 2015 5:01 PM
Comment #387568

I welcome the OPEC nations using their resources at cheap prices while we keep more of ours in reserve in the ground.

OPEC isn’t being smart about this…unless there is an unknown agenda.

Posted by: Royal Flush at January 22, 2015 5:40 PM
Comment #387569

RF,
What is to say they don’t have as much or more than us available at higher prices?

Posted by: phx8 at January 22, 2015 6:07 PM
Comment #387573

With the death of King Abdullah yesterday I am more puzzled by how the Saudi’s have been using their clout to control the energy market (cheap oil not only affects the oil market but resonates through other commodities as well). It seems as though the last few months may have been something more than just that though. Perhaps this power flex that the Saudi’s have been wielding was meant to send a message? I am uncertain to whom as I do not have any information on the power structure of OPEC or the Saudi royal family. But it does seem apparent that the Saudi’s can drastically affect the world energy market when they need to. I don’t doubt that King Abdullah’s monarchy was in a descendant track due to his age and imminent demise. But the last few months would seem to indicate that the royal family of Saudi Arabia has made the world aware of how powerful they are and bodes well for King Abdullah’s successor as a person that can wield much influence if necessary.

Posted by: Speak4all at January 23, 2015 9:51 AM
Comment #387579

Obama and the libs on WB take credit for nearly everything going well in the country. OK, let’s suppose that’s true. Logic tells me that they should also take credit for adding $9 trillion to our national debt.

That amount of money should have purchased much more. We can’t trust the dems with the national credit card. They are spendthrifts.

WE WERE SCREWED!

The lifetime share of the national debt for a child born this month is $1,532,026

http://www.budget.senate.gov/republican/public/index.cfm/national-debt

Posted by: Royal Flush at January 24, 2015 5:48 PM
Comment #387580

RF,
The debt racked up before Obama amounted to @ $10 trillion. Ninety percent of that was accumulated by three presidents: Reagan, Bush #41, and Bush #43. It was chiefly racked up through tax cuts for the rich, on the theory their additional wealth would ‘trickle down’ to everyone else. Those cuts were voluntary. They were proactive. They were a political choice.

It did not work, except for the 1% of the richest of the rich, who hardly needed help in the first place.

The debt racked up under Obama was not a choice. It was reactive. It was not any part of a political philosophy. The Obama administration made a tough choice when it came time to bailing out the banks. The banks did not deserve it. The little guy did. But if we did not bail out the banks, we were all going to go through an experience worse than the Great Depression. Bailing out the banks does not jibe with any facet of liberal philosophy, yet that is what liberals like me backed. We saved the country. We saved capitalism. It was ugly. And it came at a very real price.

The good news is that it worked so well, the Obama administration will nearly eliminate the annual deficit by the end of his second term, which means the debt will stop growing. Because growth has been so tremendous, the next two terms of Hillary Clinton should result in reducing the debt all the way down to the target of @ $3 trillion (which is the amount estimated to be necessary to keep credit markets functioning).

Be fair. Blame the people who got us into the situation in the first place, and credit the ones who got us out of it.

Posted by: phx8 at January 24, 2015 6:08 PM
Comment #387583

The debt accumulated under the Obama administration was due not only to the Bush tax cuts, but to the economic collapse. The magnitude of the collapse was due to deregulation of the financial sector, namely, the repeal of Glass Steagall and the an amendment preventing federal oversight of commodities trading.

Recently there have been several attempts to revise history, with feeble efforts to suggest the economic collapse culminating in the credit crunch of September 2008 was not as bad as the recession under Reagan or the First Bush Recession. Expect to see more of this revisionism as time goes by.

Notice what happened with the House GOP? They introduced a bill to essentially repeal Dodd-Frank, and if that went through, it would render us just as vulnerable to an economic collapse as the one we suffered in 2007-2008. And don’t forget GOP Republican Yoder from KS, who inserted a provision into the last must-pass budget guaranteeing Banks taxpayer bailouts in case their next risky investments go bad. That was just horrible. The bill was literally written by CitiGroup. Let’s hope Congressmen Yoder gets a really big job at CitiGroup in return for his betrayal of American taxpayers. Or jail. Actually, jail would be better.

Posted by: phx8 at January 24, 2015 6:24 PM
Comment #387585
The debt accumulated under the Obama administration was due not only to the Bush tax cuts, but to the economic collapse. The magnitude of the collapse was due to deregulation of the financial sector, namely, the repeal of Glass Steagall and the an amendment preventing federal oversight of commodities trading.

Except it wasn’t. And the collapse was not due to the repeal of Glass Steagall which I have repeatedly explained to you over and over again.

I’ll go again:

http://www.factcheck.org/2008/10/who-caused-the-economic-crisis/

http://www.bloomberg.com/news/2012-04-26/geithner-says-no-glass-steagall-repeal-cause-in-crisis.html

http://www.businessweek.com/stories/2008-09-23/bill-clinton-on-the-banking-crisis-mccain-and-hillary

Lawrence White and Jerry Markham rejected these claims and argued that products linked to the financial crisis were not regulated by Glass–Steagall or were available from commercial banks or their affiliates before the GLBA repealed Glass–Steagall sections 20 and 32. Alan Blinder wrote in 2009 that he had “yet to hear a good answer” to the question “what bad practices would have been prevented if Glass–Steagall was still on the books?” Blinder argued that “disgraceful” mortgage underwriting standards “did not rely on any new GLB powers,” that “free-standing investment banks” not the “banking-securities conglomerates” permitted by the GLBA were the major producers of “dodgy MBS,” and that he could not “see how this crisis would have been any milder if GLB had never passed.” Similarly, Melanie Fein has written that the financial crisis “was not a result of the GLBA” and that the “GLBA did not authorize any securities activities that were the cause of the financial crisis.” Fein noted “[s]ecuritization was not an activity authorized by the GLBA but instead had been held by the courts in 1990 to be part of the business of banking rather than an activity proscribed by the Glass–Steagall Act.” As described above, in 1978 the OCC approved a national bank securitizing residential mortgages.

Carl Felsenfeld and David L. Glass wrote that “[t]he public—which for this purpose includes most of the members of Congress” does not understand that the investment banks and other “shadow banking” firms that experienced “runs” precipitating the financial crisis (i.e., AIG, Bear Stearns, Lehman Brothers, and Merrill Lynch) never became “financial holding companies” under the GLBA and, therefore, never exercised any new powers available through Glass–Steagall “repeal.” They joined Jonathan R. Macey and Peter J. Wallison in noting many GLBA critics do not understand that Glass–Steagall’s restrictions on banks (i.e., Sections 16 and 21) remained in effect and that the GLBA only repealed the affiliation provisions in Sections 20 and 32. The American Bankers Association, former President Bill Clinton, and others have argued that the GLBA permission for affiliations between securities and commercial banking firms “helped to mitigate” or “softened” the financial crisis by permitting bank holding companies to acquire troubled securities firms or such troubled firms to convert into bank holding companies.


In other worse, no only did Glass Steagall’s repeal not have anything to do with the financial crisis, had it not been repealed, the effects would have been worse.

If you want to look at the actual causes, look towards the Fed, especially Greenspan’s Put that came out of LTCM’s demise, his desire to be liked and pull back on warnings he made at the end of the 1990s and his pushing for more ‘inventive’ lending practices that were called for as the issue, along with other reasons, which I have stated before.

BTW, the real revisionism I’ve been seeing is trying to suggest that Obama had nothing to do with the increased deficits that occurred while he and the Democrats were running things. Even if you were to believe that the Bush tax cuts were the cause of the deficit (they weren’t) then you have to blame Obama and the Democratic congress for not repealing them immediately upon taking office.

BTW, the revenue of the US in receipts in 2005 were 2.15 trillion dollars. In 2014 they are expected to be over 3 trillion… I don’t think we are taking in too LITTLE funds here…

The mismanagement of Medicaid, Medicare and Social Security (which makes up a huge portion of it as I have detailed) along with us being the World’s Military force, as can be seen by this graphic, are more likely the causes here…

In other words, spending more than we take in is the cause.

Posted by: Rhinehold at January 24, 2015 7:23 PM
Comment #387589

Well, Rhinehold, one thing we agree upon- Bill Clinton defended the repeal of Glass Steagall, and continues to do so to this day. Geithner was deep in Wall Street’s pockets too, and we can always count on those people to defend the interests of the financial sector. On one hand, people like Geithner saved the economy; on the other hand, they were responsible to tanking it in the first place, and the way they saved it involved defending Wall Street, and screwing the little guy.

What cannot be explained away is the how the face value of $62 trillion created in credit swaps & mortgage derivatives (and just to put that into perspective, all the real estate in the United States is worth about $14 trillion- or up to $21 trillion by another measure), is how that money ended up outside the investment banks, and in the portfolios of insurance companies like AIG, or abroad in foreign banks- we bailed them out too, you know. There’s a reason the EU is so hostile towards American conservatives and Republicans… Glass Steagall served as a firewall to prevent meltdowns from going beyond any one sector of finance. Without regulation, a $62 trillion dollar shadow banking market ran amok, and then collapsed. Taxpayers picked up the bill.

Posted by: phx8 at January 24, 2015 8:43 PM
Comment #387590

phx8, you aren’t paying attention…

What cannot be explained away is the how the face value of $62 trillion created in credit swaps & mortgage derivatives (and just to put that into perspective, all the real estate in the United States is worth about $14 trillion- or up to $21 trillion by another measure), is how that money ended up outside the investment banks, and in the portfolios of insurance companies like AIG, or abroad in foreign banks

The fact is that this wasn’t because of the repeal of Glass Steagall since that piece of legislation did not and would not have applied to them.

If you want to make the case that some piece of legislation should have been in place to prevent that, make that case. But Glass Stegall had nothing to do with it. In fact, it lessened the effects. But if you do that, then you have to admit that the Democrats who were running both houses of Congress at the time didn’t do anything to put regulations in place before the collapse. They had a full year and a half to do something and didn’t feel that there was anything wrong. In fact, many were saying that the economy was pretty good and they wanted to take credit for it. They didn’t see it coming… Few people did, those people are still being ignored today in favor of the ones who didn’t see it coming then… Odd that.

The ONLY reason Glass Steagall was brought up at the time, and why it still pervails the left wing mindscape is because Lindsay Graham, who was the financial advisor to John McCain’s campaign, was involved it its demise. It was an attempt to pin the whole collapse on to McCain directly and the Republicans. Of course, that ignores a whole lot of history and facts, the Democrats had their hand in the blame jar too, including Clinton and how this goes back to the demise of LTCM, but when you remember that McCain was leading in the polls before the bottom fell out and was trailing afterwards, you have to say that their plan worked. Espcially when people like yourself still continue to push the myth.

Posted by: Rhinehold at January 24, 2015 9:00 PM
Comment #387591

A familiar form of rationalization that conservatives make with virtually every issue: if caught doing something wrong, accuse the other side of doing the same thing without ever acknowledging wrongdoing in the first place.

Did some Democrats side with Wall Street then and now? Yes. Did practically every Republican AND conservative do the same? Yes.

Did liberals? Did progressives?

No.

The real estate market began its downward slide in 2006. I don’t think any legislation could have stopped the slide once it started. Bear Stearns was one of the chief originators of the various mortgage derivatives, and it was already in trouble in 2007, but continued issuing them. The stock markets began its decline in October 2007. Bear Stearns collapsed in the spring of 2008.

Because the Federal Reserve was forbidden by legislation- specifically, an amendment inserted into a budget bill by Phil Gramm, one of the sponsors of the repeal of Glass Steagall- because of that amendment, the mortgage derivatives were traded without supervision, without oversight… Shadow banking. When Bear Stearns collapsed, the liquidity of the shadow banking markets began to dry up. By the time Lehman Brothers was allowed to go down in the fall of 2008, it was too late.

Could the Democratic Congress that came into power in 2006 have prevented this? No. First, the primary responsibility for maintaining order in markets belonged to the Federal Reserve. By 2006, most of the mortgage derivatives had already been issued, and by mid-2006 the Bush “ownership society” bubble in real estate was already on its way down. Second, if the Democrats had somehow come up with a miracle cure, it would have faced a filibuster by Republicans and a veto by Bush.

How long did McCain lead in the presidential polls? Lol. Hope he enjoyed his 15 minutes of presidential polling fame. By the way, guess who was McCain’s economic advisor? Yep. Phil Gramm.

“In a July 9, 2008 interview on McCain’s economic plans, Gramm explained the nation was not in a recession, stating, “You’ve heard of mental depression; this is a mental recession.” He added, “We have sort of become a nation of whiners, you just hear this constant whining, complaining about a loss of competitiveness, America in decline.”
Phil Gramm, Wikipedia

It is hard to find someone who got more really big things wrong than Phil Gramm. He was almost Bush-like in his ability make a mess of things.

Posted by: phx8 at January 25, 2015 12:37 AM
Comment #387592
I don’t think any legislation could have stopped the slide once it started

The only one rationalizing anything here is you, phx8. It’s all the Republican’s fault! The Democrats in charge of both of the House and Senate were powerless to do anything for a year… Powerless Democrats, a topic I hear a lot from apologists, perhaps there’s a problem with Democrats in general then?

Because the Federal Reserve was forbidden by legislation- specifically, an amendment inserted into a budget bill by Phil Gramm, one of the sponsors of the repeal of Glass Steagall- because of that amendment, the mortgage derivatives were traded without supervision, without oversight… Shadow banking.

And that amendment was? Details are important…

I assume you are talking about H.R. 4541/5660 and S.2697/3283. The one that created the CFMA and prevented SEC regulation of the credit swap market and instead left the regulation to the CFTC (Commodities Future Trading Commission). The bill that was passed in the house with only 60 nays, some of them Republicans…

I’m not sure how that is ‘no supervision or oversight’, but maybe you could explain it to me?

Of course, you have conflicting information on that… Some say “The Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole,[6] specifically stated that CDSs are neither futures nor securities and so are outside the remit of the SEC and CFTC.” Except, that’s now how the law read. The only exemptions were for commodities like oil and corn. The CDSs were covered by title 4 and as a result were the responsibility of the CTCF. At least, that’s how I read it.

But it doesn’t matter… Because that wasn’t the problem. See, most companies would never get involved in such devices, because the risk was too high. Especially after what happened to LTCM. Unless two things happened.

1) The interest rates were near or at 0. Because, unless interest is that low, where banks have basically free money since they can overleveredge, there is little gain in using the devices.

2) They are told repeatedly that they won’t actually have to incur the pain of down side of engaging in that risk.

Unfortunately, both of those things happened. Rates were at near 0 because after the economic dip at the end of the Clinton Administration, mainly because of the .com bust AND the failure of LTCM, pressure was put on the FED to ‘get the economy going’ instead of naturally letting it recover on its own. Then 9/11 happened and the idea of raising rates was tabled to prevent a ‘catastrophe’.

And, Greenspan made it clear, both with his bailout of LTCM and Bear Stearns in 1998 and with announcements made afterwards, that he would save any large organization that ran afoul of using CDSs.

You see, even before the CFMA and repeal of Glass Steagall, the problem was already being put into play. LTCM’s demise was done before those two pieces of legislation and involved, you guessed it, CDSs. The biggest loss they took were on swaps, $1.6 billion…

You point to these two pieces of legislation as be the ‘cause’, when it reality one had NOTHING to do with it and the other just missed the chance to do more… The regulative process before that was not capable of doing anything about them either as evidenced by LTCM.

Had we allowed LTCM to fail and not bail them out, sent a message to the other firms that this type of behavior would not be rewarded, we would not have seen any of this going on in the 2000s…

But… well, that would have looked bad to Clinton’s administration, wouldn’t it? You know Clinton, who signed both of these pieces of legislation? Along with nearly every Democrat at the time? The CFMA was approved with unanimous consent, only 2 people objecting, after only 60 congressmen voted against it.

Do you understand yet? Hindsight might tell us that there was more that could have been done to prevent the problem, but the reality is that very few people saw the problem. AND, had we not required the banks to mark their assets to market values and had continued to use Fair Value Accounting rules that we had used for decades before (and prevented an economic collapse in 1987 during the S&L crisis by doing so) there would have been no real hit taken by the banking industry… But that change was only made after the Presidential election was decided…

if the Democrats had somehow come up with a miracle cure

The real issue here is not that they couldn’t have done something, they most certainly could have. They just didn’t see a problem…

That’s the real issue I have here with your rants, you act as if the Democrats and liberals and progressives were calling for changes before 2008. They weren’t. Please, feel free to show me the Democrats standing up and saying that there was a problem… What department was she in charge of again? Had they been in power since 2002 they wouldn’t have re-introduced Glass-Stegall (hell, they STILL haven’t) and they wouldn’t have changed the CFMA…

The only person you can point to is perhaps Brooksley Born.

Here’s what happened to her for asking for oversight of CDSs…

http://www.rooseveltinstitute.org/new-roosevelt/financial-reform-warrior-brooksley-born-warns-more-crises-come

Financial regulation, even against fraud, was strenuously opposed by Federal Reserve chairman Alan Greenspan, Treasury Secretary Robert Rubin and Undersecretary Larry Summers, who is now the top economic policymaker in the Obama White House.

Hmmm, imagine that, Larry Summers was one of the leaders against the calls for increased CDSs regulation…

By the way, guess who was McCain’s economic advisor? Yep. Phil Gramm.

Ah, so now we know that you didn’t even really read my comment at all… Seeing as I already stated that and why that was the reason people were looking at Glass-Steagall as the culprit when it wasn’t. Oh well…

Posted by: Rhinehold at January 25, 2015 1:45 AM
Comment #387594

It is easy to throw blame, and not so easy to even balance our national budget; much less reduce our debt.

The left wants more taxes and more spending. Been there, done that, it doesn’t work.

The left finds it objectionable that those who pay taxes should get a partial refund from time to time. The left finds it admirable to increase taxes to provide more for those who pay no taxes. How strange is that?

Posted by: Royal Flush at January 25, 2015 12:04 PM
Comment #387595

“No provision of the Commodity Exchange Act
shall apply to, and the Commodity Futures Trading Commission
shall not exercise regulatory authority with respect to, a banking product if the product is a hybrid instrument that is predominantly a banking product…”

“SEC. 407. ø7 U.S.C. 27e¿ EXCLUSION OF COVERED SWAP AGREEMENTS.
No provision of the Commodity Exchange Act (other than section 5b of such Act with respect to the clearing of covered swap agreements) shall apply to, and the Commodity Futures Trading Commission shall not exercise regulatory authority with respect to, a covered swap agreement offered, entered into, or provided by a bank.”
COMMODITY FUTURES MODERNIZATION ACT OF 2000
https://www.sec.gov/about/laws/cfma.pdf

The markets for mortgage derivatives were virtually nonexistent during the Clinton administration. This came about during the Bush administration, as part of an overarching philosophy of deregulation. It came about because of the CFMA and a the housing bubble, which led to a lot of bad risk management decisions… the ol’ garbage in, garbage out. In addition, the ratings agencies colluded with the issuers of various instruments.

Posted by: phx8 at January 25, 2015 12:05 PM
Comment #387599
“No provision of the Commodity Exchange Act”

You are cherrypicking and misunderstanding some legal jargon here, phx8. It’s unfortunate, I believe that all laws should be understandable to the average person, but that isn’t the case.

Not regulated does not mean no oversight… Any excluded security was still subject to the CFTC’s antifraud and antimanipulation authority as well as and still subject to certain recordkeeping, price dissemination, reporting and related requirements.

The markets for mortgage derivatives were virtually nonexistent during the Clinton administration.

Except that LCTM was brought down, and nearly took our financial markets down, by derivatives…

This came about during the Bush administration, as part of an overarching philosophy of deregulation.

Again, BS. It came about because as interest rates became near 0, they became worth the risk… It was once explained during LCTM’s foray into them, that derivatives were like trying to pick up nickels while a bulldozer was coming at you.

However, as the nickels became dollars with the ability to over leverage an account and along with knowing that the Greenspan Put was in place thanks to LTCM, they became something some institutions decided were worth doing. It had NOTHING TO DO with deregulation. The regulations in existence BEFORE the CFMA would not have prevented anything that happened. That’s the part you aren’t getting.

It came about because of the CFMA and a the housing bubble, which led to a lot of bad risk management decisions…

Again, the derivatives market wasn’t being properly regulated properly BEFORE the CFMA. Don’t you get that? You say they weren’t an issue during Clinton (even though they were) and that they became a problem because of deregulation, even though there was inadequate regulation of the derivatives market than before the CFMA was in place.

Again, brick wall…

Do you even understand how big of a deal the Greenspan Put was?

Finally, you keep wanting to blame the CFMA on Bush when it was all done BEFORE he took office. Clinton and Summers were the ones who were pressuring Born to sign on, she resigned instead. But no, it must have been Bush, who wasn’t in office yet, that did all of this *rolls eyes*

Posted by: Rhinehold at January 25, 2015 4:10 PM
Comment #387600

Heck, even Paul Krugman started to finally come around to the notion that the housing bubble was just a shifting of the stock market bubble from the last 1990s… We never actually fixed that problem and the issue with LCTM, etc. We just shifted it to the Housing market. It wasn’t deregulation, it was improper regulation… The FED can’t fix everything, nor should it be trying.

http://www.nytimes.com/2005/05/27/opinion/27krugman.html

Posted by: Rhinehold at January 25, 2015 7:48 PM
Comment #387601

http://money.cnn.com/2005/09/22/markets/credit_derivatives/index.htm

Credit derivatives, complex investments based on the value of corporate bonds, have soared in popularity on Wall Street,
sparking regulators to step up their scrutiny of this rapidly growing marketplace
. Derivatives are investments that derive their value from something else, such as stock options that trade based on the price of an underlying stock. Credit derivatives are bought by investors as protection against a possible default on an underlying bond. One of the most common credit derivatives, a credit default swap, calls for the seller to pay if the underlying bonds go into default. The swaps are akin to insurance for investors, and supporters say they help spread and manage risk. (See correction). The credit derivatives market overall was worth about $8.4 trillion last year, and has roughly doubled in each of the last three years, according to the International Swaps and Derivatives Association, an industry group.

Greenspan said in a speech last spring. “These parties include both derivatives dealers that act as intermediaries in these markets and hedge funds and other nonbank financial entities that increasingly are the ultimate bearers of risk.”

Greenspan also acknowledged the benefits of derivatives, noting their risk-management features were “key factors underpinning the greater resilience of our largest financial institutions.”

But regulators have also raised concerns. Last week, the Federal Reserve Board of New York met with several Wall Street firms to discuss its worries that the contracts are not being processed in a timely way, the Fed announced.

The regulators worry that a series of big corporate defaults, while unlikely, could nevertheless pose substantial risks to financial markets — with ripple effects on interest rates and the broader economy.

But but but, there were no regulators! How could this be, how could regulators be ‘stepping up their scrutiny of the market’ when weren’t regulating it!? I don’t understand!

The problem is actually learning the issues instead of trying to make a case that Republicans R Bad, Democrats R Good…

Posted by: Rhinehold at January 25, 2015 8:04 PM
Comment #387602

Rhinehold,
Read the CFMA. It is short.

I know you are invested in the idea that Democrats cannot be right and Republicans cannot be wrong, but sometimes, that is how it turns out.

By itself, the housing bubble would have been bad, but it would not have been catastrophic. The catastrophe came about due to mortgage derivatives.

Posted by: phx8 at January 25, 2015 9:32 PM
Comment #387603
Read the CFMA. It is short.

I have read it, and more importantly I understand it better than you do apparently. Nothing I have stated has been wrong, what the regulators were prevented from doing was to have to approve/disapprove every single CDS. Because of the nature of those devices, every one is customized and very difficult to parse, it makes automatic standardizing of them impossible. However, the CTCF *STILL* had access to any excluded security, they were still subject to the CFTC’s antifraud and anti-manipulation authority as well as and still subject to certain recordkeeping, price dissemination, reporting and related requirements.

From an article discussing the Obama Administration’s attempt to do something about them (and realize that they still haven’t done much about those devices):

Regulators already had the power to demand access to banks’ books before the financial crisis; the problem was that they lacked the staff and skills to understand the complex structured products those banks were manufacturing and trading. As a result, custom products become a way for market participants to hide risks from oversight, and a potential means for systemic risks to build up out of sight.

The problem is that too many people just don’t understand the issues here.

I know you are invested in the idea that Democrats cannot be right and Republicans cannot be wrong, but sometimes, that is how it turns out.

And how would I be invested in that? Sure, I would like for the Democratic party would stop being idiots and working to violates everyone’s individual rights so that they could someday once again be a viable alternative to the Republican party, instead of just the more sex friendly wing of the Republican party, but considering how many ways I’ve detailed the Republicans being wrong, it’s hard to make any sense of your comment…

Oh, it wasn’t based in any kind of reality and only meant to flash your peen at me? Well, imagine that… Good on ya there, phx8. Hope it makes you feel better, it’s just another example of how you and reality are only passing acquaintances…

By itself, the housing bubble would have been bad, but it would not have been catastrophic. The catastrophe came about due to mortgage derivatives.

No, the derivative by themselves wouldn’t have been bad either, had they hadn’t been required, through regulation, to mark them at market values. Had they been marked using previous accounting rules (as they were in 1987) then we would have had barely a hiccup in the economy. But because they had to be marked to market values, and the market had collapsed, BILLIONS of assets were instantly wiped off of the books of a lot of banks… So they couldn’t loan. The actual numbers were roughly $500 billion of assets were destroyed overnight, even though 80% of them were backed by hard assets.

You can tell the truth to this by the actions that have been taken since 2008.

Glass Stegall - still not reinstituted.
CDSs - still not really regulated.
MTM Accounting Rules - Changed in March of 2009 (after the election) resulting in an almost immediately end of the recession and the overnight paying back of the TARP funds by the banks.

In fact, do you want to know what the result would have been had those same rules been in place in 1987? (If you want to have a better understanding, read the entire testimony by William Isaac, former FDIC chairman, his testimony should be required reading…).

http://www.williamisaac.com/wp-content/uploads/2010/05/Testimony-MTM-House-Financial-Services-3-12-09-WIsaac-Final.pdf

The underlying economic problems of the 1980s in the U.S. were more serious than the economic problems confronting us this time around – at least so far. The prime rate exceeded 21%, and the economy plunged into a deep recession in 1981-82, with the agricultural sector in a depression. Unemployment approached 11%.

These economic problems led to massive problems in the banking and thrift industries. The savings bank industry was more than $100 billion insolvent if we had valued it on a market basis, and the S&L industry was in similar condition. A bubble burst in the energy sector, and a rolling real estate recession hit one region after another.

Continental Illinois (the seventh largest bank) failed, many of the large regional banks went down (including nine of the ten largest banks in Texas), and hundreds of farm banks failed, as did an even larger number of thrifts. Three thousand banks and thrifts failed from 1980 through 1991, and many others went out of business through mergers.

It could have been much worse. The money center banks were loaded up with third world debt that was valued in the markets at cents on the dollar. If we had marked those loans to market prices, virtually every one of our money center banks would have been insolvent. We instead marked them to our estimate of their true economic value.

If we had followed today’s approach during the 1980s, we would have nationalized nearly all of the largest banks in the country and thousands of additional banks and thrifts would have failed. I have little doubt that the country would have gone from a serious recession into a depression.

His explanation of 2008 during that testimony:

The dark cloud on the horizon was about $1.2 trillion of subprime mortgages (most had been securitized), about $200 billion to $300 billion of which were believed to be held by FDIC-insured banks and thrifts. The rest were spread throughout the world.

The likely losses on these assets were estimated by regulators to be roughly 20%. Losses of this magnitude would have caused pain for banks that held the assets, but would have been quite manageable, particularly for an industry that had after-tax earnings of roughly $150 billion in 2006 and had capital of $1.4 trillion.

How did we let this serious but manageable situation get so far out of hand – to the point where several of our most respected American financial companies have been put out of business, sometimes involving massive government bailouts?

People are assigning blame for the underlying problems – greed, inept regulation, rating agency incompetency, faulty monetary policy, unregulated mortgage brokers, and too much government emphasis on creating housing stock, particularly for lower income borrowers.

I believe one of the biggest culprits is MTM accounting. MTM rules dictate that financial institutions holding financial instruments available for sale (such as mortgage-backed securities, preferred stock, and bonds) must mark those assets to market. That might sound reasonable if you ignore every other moving part in bank financial statements and the fundamental nature of the banking business.

What do we do when the markets for those assets, which might be thin in the best of times, freeze up and only a handful of sales occur at extremely depressed prices? The answer until recently from the SEC and FASB has been: mark the assets to market even though there is no meaningful market. The accounting profession, scarred by decades of costly litigation, keeps forcing banks to mark down the assets as fast and far as possible.

This is contrary to everything we know about bank regulation. When there are temporary impairments of asset values due to economic and marketplace turmoil,
regulators must give institutions an opportunity to survive the temporary impairment. Permanent impairments should be recognized, but assets should not be marked to unrealistic fire-sale prices. Regulators must evaluate the assets on the basis of their true economic value over a reasonable time horizon.

If we had followed today’s approach during the 1980s, we would have nationalized nearly all of the largest banks in the country and thousands of additional banks and thrifts would have failed. I have little doubt that the country would have gone from a serious recession into a depression.

Some advocates of MTM accounting gasp at the thought of suspending the rules. They assume it would result in a loss of transparency and an overstatement of values.

Quite to the contrary, it is the use of MTM accounting, when markets are not functioning properly, that has produced terribly misleading accounting and disclosures that value assets well below their true economic value.

If you want to blame the Republicans for something, and I am sure that you do, use this instead:

http://nreionline.com/mag/real_estate_congress_expands_marktomarket

In 1996 they moved the federal housing market to mark-to-market accounting, starting the further moving of these devices to mark-to-market rules and putting into place the real reason that the collapse of the housing bubble caused problems throughout the entire banking industry…

Posted by: Rhinehold at January 26, 2015 12:44 AM
Comment #387605

BTW, if you want to assume that Isaac is some ‘Republican apologist’ and ardent deregulator since he doesn’t agree with DailyKOS commenters, read these two quotes about him:

“Bill Isaac throws down the gauntlet to Bush, Paulson, Obama and Geithner… their fixes and bailouts, he argues persuasively, were wrongheaded and very expensive.”
Ralph Nader

“I would respectfully urge President Obama: read this book. Emulate success. Invite Bill Isaac to Camp David. Spend time debriefing this real-world financial expert. What other effective bank regulator, besides Paul Volcker and Bill Isaac, do you know who fixed our broken financial system for two Presidents—Carter and Reagan? Nothing speaks louder than success.”
Rep. Marcy Kaptur (D-OH)

“Bill Isaac has dedicated his life to the public policy arena. He thinks straight, and he talks straight. Washington must read Senseless Panic to learn the lessons of the past and set the course for the future”
Lawrence Kudlow

In 1978, at age 34, Isaac was tapped by President Jimmy Carter to serve as the youngest-ever member of the board of the FDIC. The position proved to be full throttle from day one – in fact, on his first day in office at the FDIC, Isaac was called down to Puerto Rico, where one of the territory’s largest banks, Banco Credito, was set to fail.

“Isaac is widely credited, including by President Reagan and former Fed Chairman Paul Volcker, with helping to maintain stability in the financial system during a period of severe stress.”

So appointed originally by Carter, praised by Volcker and Nader… Maybe, just maybe, you could help yourself by listening to what he has to say?

Posted by: Rhinehold at January 26, 2015 1:06 AM
Comment #387606

BTW, about the $500 billion being wiped off of the balance sheets of banks overnight, you have to remember that by law, the banks have to have 10% of all lending on their books as hard assets.

That means that with $500 billion being lost as assets, thanks to mark-to-market accounting, that $5 TRILLION of lending assets were lost…

The problem, remember, were that banks weren’t lending. The fact is that they couldn’t by law. Not until those rules were relaxed.

Posted by: Rhinehold at January 26, 2015 1:12 AM
Comment #387647

Oh, poor banks. Shadow banking found itself starting to lack liquidity when Bear Stearns saw two mortgage derivative mutual funds go down in fall 2007, but it took another year for the shadow banking system to collapse, resulting in the credit crunch in September 2008.

In the recent must-pass budget bill, Republican Yoder from Kansas inserted an amendment giving back FDIC backing for their derivatives trading. Liberals and Democrats like Senator Warren cried foul, but the bill had to go through. It would have been the worse alternative for the budget bill to fail. The amendment was written almost word for word by CitiGroup and inserted by REPUBLICAN Ron Yoder.

Remember, sometimes it really is black and white. When it comes to this, Republicans bad, Democrats good.

Posted by: phx8 at January 27, 2015 11:47 AM
Comment #387648

LOL…the huge storm predicted by computer models for the East Coast failed to materialize.

As with MMGW, garbage in, garbage out.

Posted by: Royal Flush at January 27, 2015 1:15 PM
Comment #387649

RF, still looking out your window for climate change? The weather and climate change are not the same.

Posted by: Speak4all at January 27, 2015 2:51 PM
Comment #387650

Similar computer models

Posted by: Royal Flush at January 27, 2015 3:18 PM
Comment #387651

The amount of Carbon Dioxide humanity is producing is measureable, and some of it is being absorbed by the oceans, resulting in a measurable change in temperature, and perhaps more importantly, PH. When the PH changes enough, it prevents pteropods- small ocean creatures at the base of the food chain- from using their process of calcification to form their shells.

It is measurable. It is simply chemistry.

The arctic food chain could start collapsing as soon as 2016.

http://en.wikipedia.org/wiki/Ocean_acidification

There is only one way to stop this, and that is for humanity to drastically cut CO2 emissions.

Posted by: phx8 at January 27, 2015 4:11 PM
Comment #387652

Let’s go with Algore’s plan. It only costs $90 TRILLION. Chump change for libs.

Posted by: Royal Flush at January 27, 2015 4:13 PM
Comment #387653

Last year in an op/ed the NY Times wrote an article title…”No More Snow”. The MMGW folks are always good for a laugh. Libs make a living predicting catastrophe.

Posted by: Royal Flush at January 27, 2015 4:34 PM
Comment #387654

Speaking of the Saudi’s:

RIYADH, Saudi Arabia (AP) — For first lady Michelle Obama, just a few hours in Saudi Arabia were enough to illustrate the stark limitations under which Saudi women live.

Joining President Barack Obama for a condolence visit after the death of the King Abdullah, Mrs. Obama stepped off of Air Force One wearing long pants and a long, brightly colored jacket — but no headscarf.

Under the kingdom’s strict dress code for women, Saudi females are required to wear a headscarf and loose, black robes in public. Most women in Saudi Arabia cover their hair and face with a veil known as the niqab. But covering one’s head is not required for foreigners, and some Western women choose to forego the headscarf while in Saudi Arabia.

As a delegation of dozens of Saudi officials — all men — greeted the Obamas in Riyadh, some shook hands with Mrs. Obama. Others avoided a handshake but acknowledged the first lady with a nod as they passed by.

Saudi Arabia imposes many restrictions on women on the strict interpretation of Islamic Shariah (shah-REE’-yuh) law known as Wahhabism. Genders are strictly segregated. Women are banned from driving, although there have been campaigns in recent years to lift that ban. Guardianship laws also require women to get permission from a male relative to travel, get married, enroll in higher education or undergo certain surgical procedures.

Ain’t no rag heads gonna tell Michelle my belle what to wear. You got Obama bowing to them and Michelle my belle telling the Saudi’s “up yours”. You gotta love Obama’s foreign policy.

Posted by: George at January 27, 2015 10:11 PM
Comment #387657

George, as a matter of fact I do think Obama’s foreign policy is very good. I was also glad to see the First Lady ignore the requisites of the outdated approach to women. Well done Mrs. Obama, well done. Hey at least President Obama was not laying a big wet one on anybody except probably his wife. I am sure that they discussed how they would handle this and reached a mutual agreement.

RF, you seem to have some inside knowledge on the computer system modeling done for weather forecasting and climate change predictions. Perhaps you could share the algorithms and logic used for this modeling? Maybe even some of the source code for the programming used? Of course I have a feeling you would use something that you heard on Fox News or read on Daily Caller or Breitbart or Red State. I am a liberal and I don’t make any money off of predicting catastrophes but I do gain satisfaction of understanding a danger and attempting to avoid an undesirable outcome. Is that what you mean?

Posted by: Speak4all at January 28, 2015 9:27 AM
Comment #387669

Speaks4nobody, let’s take a look at your comments:

Hey at least President Obama was not laying a big wet one on anybody except probably his wife. I am sure that they discussed how they would handle this and reached a mutual agreement.

First, I doubt that Obama ever lays a wet one on Michelle my belle. I figure she will divorce him as soon as they leave office.

Secondly, the only agreement those two reached was Michelle my belle telling Obama what she was going to do.

Thirdly, there is such a thing as ignoring the customs and “LAWS” of another nation; and then there is purposely throwing it in their face.

Why would she even show up to the meeting if she knew the Saudi’s stand on women? She did so because it was a chance to “in your face” the king of Saudi.

Her attitude was simply rude and confrontational. Especially when you consider Obama’s attitude of groveling on his knees and kissing the king’s ring like he was the Pope. What we have with Michelle my belle and Obama is two opposite ends of the spectrum.

Posted by: George at January 28, 2015 2:43 PM
Comment #387671

GeorgiePorgiePuddingandPie, I will try to address your concerns individually.

First/Your insight into the Obama’s relationship is astounding but somehow doesn’t ring true as we all know you would have no idea what they do but just want to say silly stuff.

Secondly/Again another astounding observation rooted in ignorance.

Thirdly/We also have customs and Mrs. Obama was making them aware of ours. She does this where she travels all the time. And I like it.

She did so as the First Lady of the United States of America.

Obama groveling? Was it anything like this?

Her attitude is something I and many other Americans, men and women, applaud.

Posted by: Speak4all at January 28, 2015 3:16 PM
Comment #387672

Pictures are now being published of Laura Bush and Hillary Clinton in Saudi not wearing scarfs. This is just another one of those typical faked stories intended to generate ill will towards the Obamas.

Posted by: phx8 at January 28, 2015 3:40 PM
Comment #387673

Yes, the hypocrisy is astounding but expected. Hey wait a minute wasn’t this country supposed to be destroyed by now? I guess that’s why there is all of this hue and outcry over anything our President does, he didn’t destroy the country like they had planned on. Oh well just wait until they have to refer to Madame President. That is going to be lots of fun. I am certain the conservative/republican/teaparty types will be just as gracious as they have been with President Obama.

Posted by: Speak4all at January 28, 2015 3:49 PM
Comment #387674
Remember, sometimes it really is black and white. When it comes to this, Republicans bad, Democrats good.

So, Bill Clinton and Larry Summers, who were the ones who pushed through and agreed with the repeal of Glass Steagall and the CFMA, which you erroneously say created the ‘shadow banking’ and took down the economy, aren’t Democrats?

I don’t think you understand the meaning of the phrase ‘black and white’…

BTW, under Obama’s administration, ‘shadow banking’ and the ‘shadow economy’ has risen to new record highs… It’s over $2 trillion dollars now and is what is largely credited with the gains we are starting to see, finally, in the ‘recovery’.

It’s once again, “I don’t like Republicans and it’s all their fault” while using meaningless rhetoric and showing continued failures to understand even the basic things…

Posted by: Rhinehold at January 28, 2015 3:53 PM
Comment #387675

I guess you could say that it is up to the First Lady if she wants to accept the customs of the Host country or not. But from the photos I saw shows Michelle’s disgust with being in Saudi Arabia. It was like lets get this over with so I can go back home.

Posted by: Rich KAPitan at January 28, 2015 4:01 PM
Comment #387677

Well, it was a funeral, KAP.

Posted by: phx8 at January 28, 2015 4:46 PM
Comment #387680

Funeral or not phx8, she still had a disgusted look. Do you go to a Funeral with a disgusted look on your face phx8? Or do you go with at least a look of condolence?

Posted by: Rich KAPitan at January 28, 2015 4:59 PM
Comment #387682

*sigh* This is what people are talking about…? Really?

It’s the reality show mentality that has pervaded modern politics…

Who Gives A Rat’s Ass? Geesh…

Posted by: Rhinehold at January 28, 2015 5:28 PM
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