Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding codirector of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His books include A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the US and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. And in Washington as we speak, the House and the Senate are negotiating the finance reform bill. One of the most controversial issues is how to deal with derivatives trading. And this began, really, out of the agricultural sector, where farmers would hedge their bets on their crops by buying short or buying long and somehow protect themselves from the swings of the market. Of course, the derivatives market has now gone far beyond farmers and helped lead to the financial meltdown. To help us talk about derivatives, what's happening in Washington, and particularly how this affects what we pay for food is Bob Pollin. He joins us from Amherst, Massachusetts. He is the codirector of PERI institute there, which is an economic and policy think tank. Thanks for joining us, Bob.ROBERT POLLIN, CODIRECTOR, PERI: Hi. Thank you for having me.JAY: So talk about where we're at in the process quickly, and then focus in on this whole question of commodities and how it affects what we pay for food.POLLIN: Yeah. It's very direct. It is about Wall Street speculation, but it's also about how Wall Street speculation affects ordinary people. The commodities futures market, as you said, has been around for a long, long time. It really started as a way, as you said, for farmers to stabilize their businesses, because when they started planting their crops, they didn't know what the price was going to be when the harvest came six months later or however long later. So the commodities future market enabled them to fix in a price in advance. That's the notion of a future; it's a commodity's future pricethat's the future contract. So that was really the purpose. But what happened, especially after the year 2000, the commodities futures market was deregulated, along with the rest of financial markets. And what happened is that the commodities futures markets became another object for Wall Street speculation. That is, Wall Street traders came into the market to buy these futures contracts or options on food products, on oil products, on minerals because they thought that they could gamble on them in the way that they gambled on other contracts, like the ones that we've heard aboutthe mortgage-backed securities and the credit insurance swaps that have been so prominent in the discussion around the crisis. Now, the particular thing about commodities futures is that they also directly affect everybody's lives. I mean, everybody on the planet is involved with the price of oil and the price of food, and these things have become major objects of speculation, especially since 2006. The price of oil rose between 2006 and mid-2008 by 71 percent. We remember that as $4.00 at the pump for gasoline in mid-2008. The price of food between 2006 and 2008 went up by over 40 percent. That led to a severe food emergency around the world. The UN estimated that 130 million people faced malnourishment as a result of this price run-up. So this is the market that affects people most directly in the things that they buy every day, and this market needs to be re-regulated.JAY: Now, there's very little discussion about this in the media orI don't even know how much they're focusing on this in the conference committee. Most of it seems to be about whether they're going to separate derivatives trading from banking. But in terms of really regulating what happens to the commodities market, I have not heard a lot about it. I mean, to what extent is this on their agenda?POLLIN: This has not been a focus of discussion. But the good news is, I mean, if you regulate derivatives markets in general, including the swap market, including the market for credit insurance, that also will apply to the commodities market. So the Senate version of the bill that is being debated in the reconciliation conference now does have features that will help regulate the commodities market much more fully than the House bill. So in terms of some kind of effective response to this severe speculation on the commodities futures market, we need a legally tight version of the Senate bill to prevail over the House bill. Up until 2000 it actuallyyou know, the Commodity Futures Trading Commission, which is the Washington government organization charged with regulating commodities futures, they did a reasonably good job.JAY: But if the issue really is to help farmers stabilize their prices, why not focus legislation on stabilizing farmers and keep Wall Street out of food speculation altogether?POLLIN: That is certainly one of the possible things. It's not possible now within the current bill, because, you know, the Senate version and the House version haven't addressed that. But, you know, the question is: to what extent is the trading going to take place on exchanges? That's really important, as opposed to having the trading take place over the counter, which means essentially unregulated. If the trading takes place on exchanges, the commodities future market exchanges, if it takes place through these standard clearinghouses, and if there are tight regulations within those exchanges, for example that traders have to have margin requirements, which means they have to put up a significant amount of cash before they start trading, if there are limits on the extent to which any given trader can control the market, those things will inhibit the formation of price bubbles in these markets. And that will work pretty well for the food market, as well as oil. Of course, oil is also just as important a staple for people throughout the world as food. Those two things need to be controlled.JAY: People are watching these hearings on C-SPAN and they want to focus on finding out whether what you're suggesting actually is going to be in the bill. What should they be listening for? How are they going to know if what's in the bill is effective or if it has loopholes people can drive trucks of food through?POLLIN: Okay. Well, first and foremost we start withyou know, the big debate at this point, where we are, is between the Senate version and the House version. So the clear thing that we need to look for is the extent to which the Senate version is prevailing. The Senate version has much stronger features that are going to prevent the kind of excessive speculative activity. So number one, the Senate version. Now, what are the things within the Senate version? There is actually some concern even within the Senate version that there is a loophole whereby if a trader decides to trade over the counter, outside of the legal exchanges, there's no punishment. So we've got to make sure that people can be very severely punished for not following the rules. That's step one. Then step two: what are the rules? Step two is we want, to the maximum extent, all trading done on exchanges, all trading done under the auspices of the Commodity Futures Trading Commission. Again, it's not perfect, but it worked reasonably well up until 2000. Those would be the basic things. Now, these other things are slightly more technical but crucialthat there be significant capital requirements for the clearinghouses that manage these regulated exchanges, that there be significant margin requirements, that is, the amount of cash you have to put in as opposed to borrowing in order to participate in trading, and that no trader has an unlimited amount of trading capacity. And finally, there is this one component to the overall derivatives feature of the bill, which is to strip banks from being involved in the swap derivative market. Now what's the logic there? That these swap markets, the credit default swaps that were so instrumental in AIG in almost bringing down the global economy, those things have to be taken out of the hands of banks because banks are subsidized. Banks are subsidized because of a default insurance that we give to banks through FDIC, Federal Deposit Insurance. Banks are subsidized, effectively, through these kinds of bailouts. So if the banks are going to be in line for subsidies, they cannot be involved in the derivatives market in the way they were. So that's called 716. That's the Blanche Lincoln amendment to the bill, number 716, which is important to keep in. So those would be the things that people should look for.JAY: Okay. Well, in the next segment of our interview, let's talk about what should be in this bill that's not in the bill. I mean, one of the issues I raised is you can have even good regulation, but if you have a Bush-Cheney regime and a Cheney gets to appoint who the regulators are, you'd wind up with the BP disaster in the Gulf even though there was a regulatory regime. So in the next segment of our interview, why don't you rewrite the legislation? Please join us for Bob Pollin's finance reform on The Real News Network.
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