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Behind Gas Price Increases, Obama's Failure To Crack Down On Speculators

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Listen to the conventional wisdom and President Barack Obama is powerless to arrest soaring gasoline prices, even as they imperil his political fortunes, the still-tepid economic recovery and the ability of ordinary Americans to pay their bills. Oil prices supposedly reflect the omniscient judgment of the market. What the market sees now is the prospect of a military strike on Iran and an attendant disruption to the global oil supply.

But the supply-and-demand story of gas prices is largely a fairy tale. Academic experts, commodity specialists and members of Congress identify one thing that the president could do immediately to alleviate pain at the pump: He could unleash a serious-minded, subpoena-wielding probe aimed at frightening the Wall Street speculators who are responsible for most of the climb in gas prices.

This is not news to the president, who has already fingered speculators for price spikes while twice ordering up a consequential investigation. But Attorney General Eric Holder -- the man tasked with overseeing the probe -- seems either to have mislaid the memo or construed it as an invitation to indulge the administration's usual modus operandi on most of its initiatives, from its impotent anti-foreclosure efforts to its weak stab at financial regulatory reform. That is, hold a press conference, talk tough and ooze empathy for struggling victims -- then hope everything gets fixed up by itself.

Earlier this month, the president called on Holder to "reconstitute" the Oil and Gas Price Fraud Working Group, the body that the attorney general first convened at Obama's direction nearly a year ago. "Reconstitute" seemed an odd verb, given how the group by all indications seems to have never really been constituted. As McClatchy Newspapers reported, the group has met no more than five times since its inception and has never made a public report on its activities. (Somewhere -- presumably far from any windows -- Dick Cheney is giggling.)

Yet, if the president's choice of word can be taken at face value, the working group was at some point either disbanded or, more likely, forgotten. Either it looked into speculation and came up empty, telling Obama not to worry. Or it didn't really look and found nothing by design. Or it did find worrisome activity but didn't do anything about it.

This is bad governance and terrible politics at a time when gas prices seem to be shaping up as a defining issue in a presidential election year. (Only fools put themselves between the American electorate and its fleet of gas-guzzling SUVs). More than anything, the Obama administration's hollow promise on the investigative front increasingly looks like an enormous missed opportunity: Had the task force really barged into Wall Street offices in search of people needing to be held to account, it might well have taken some of the momentum out of gas price increases.

"The manipulation inquiry, even if it just has the appearance of being taken seriously, would drop the gas price immediately," Michael Greenberger, a finance expert at the University of Maryland School of Law, told me on Wednesday.

"A serious investigation in and of itself has historically shown that the speculators pull back and the price drops," Greenberger added. "If there is evidence of manipulation and subpoenas are issued, and the FBI is investigating, it will drop even further. If indictments are brought, the bubble will collapse. We don't see the investigation that the president wants done."

Greenberger is more than a just another credential-laden specialist willing to be quoted. In the late 1990s, he oversaw the division of trading and markets at the Commodity Futures Trading Commission. There, he and director Brooksley Born sounded the alarm about the dangers of a then-exploding trade in the unregulated financial instruments known as derivatives. They were steamrollered by Alan Greenspan, Robert Rubin and Larry Summers, who together ensured that Wall Street's casino proclivities were allowed to build to disastrous levels, unobstructed by annoying bureaucrats. This resulted in hundreds of billions of taxpayer dollars eventually being showered on major financial institutions to avert a meltdown.

These days, Greenberger is consumed by the impact that speculators are having on energy markets. He is hardly alone. A recent Forbes analysis found that speculation was responsible for increasing the price of oil by more than one-third. A policy brief by former International Monetary Fund researcher Mohsin Kahn, now a senior fellow at the Peterson Institute for International Economics, concluded that the steep runup in oil prices during the summer of 2008 was driven predominantly by "speculation." A paper by Kenneth J. Singleton at Stanford Business School pinned much of the oil price boom on "the financialization of commodity markets," meaning the influx of commodity index funds unleashed by Wall Street.

"There are 50 studies showing that speculation adds an incredible premium to the price of oil, but somehow that hasn't seeped into the conventional wisdom," Greenberger said. "Once you have the market dominated by speculators, what you really have is a gambling casino."

Traditionally, regulators have proceeded on the assumption that a commodity market is healthy when commercial players -- those whose businesses really need the good being traded -- comprise about 70 percent of trading volume, while pure speculators are limited to 30 percent. But these days, estimates suggest that ratio has reversed, a reality that virtually guarantees an upward spiral of prices.

Commodity markets are supposed to bring together willing parties with opposite concerns -- say, a factory owner who frets about rising fuel prices and a fuel producer who worries about a drop in the price. They agree to a trade in the future at a price that gives them both a hedge. But as major Wall Street institutions have poured into commodities markets, offering investors ways to profit from price increases, these banks have wound up holding the short side of those bets: When the price rises, they have to pay up. Needing a way to profit themselves from that outcome, they have gone into futures markets directly and bought up contracts for fuel, driving up the price.

Now, Holder is once again tasked with taming this casino-like market and restoring order. But even after Obama's call for the task force to reconvene, it has met only once and only via teleconference, a source familiar with its deliberations told me.

For Obama, the point of throwing the assignment to Holder was to leverage the Justice Department's formidable investigative resources. The Community Futures Trading Commission also has jurisdiction, but that agency has been overwhelmed with rule making to implement the Dodd-Frank financial reform bill. The commission passed one weak rule that increases its authority to limit speculators in the market. But its resources are meager. Republicans have starved it through the budget process to ensure that Wall Street -- land of infinite campaign cash and future sinecures for unemployed Hill denizens -- continues to be a regulation-free zone.

What has Holder been doing with his resources? Is the FBI looking into the impact of speculation? Has the task force used its subpoena power to examine the trading documents at issue? The White House referred questions to the Department of Justice. The Justice Department never returned my calls, though a spokeswoman previously told the National Journal that Holder's task force "is aggressively focused on identifying civil or criminal violations in the oil and gasoline markets, and ensuring that American consumers are not harmed by unlawful conduct."

In recent days, Democrats on Capitol Hill have conveyed their strong displeasure to the White House that Holder appears to be mailing it in, according to people involved. This pressure campaign prompted Obama to return to the podium to call for fresh action.

Much of Washington now views Holder as a man merely counting the days until he clears out his office, cognizant that -- whether the boss wins re-election or not -- he is moving on. His task force has been run with all the urgency of a guy contemplating what amusing story to recount when his office mates gather around the sheet cake to say goodbye.

The rest of us, alas, are still here, still constituted into a nation living in fragile economic times, hoping gas prices will not send the unemployment rate climbing anew. The world is fraught with enough dangers. A leadership vacuum inside the single office that has the power to work for American consumers ought not be one of them.

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