Every so often, a government agency will do something so outrageous it will shock even even everyday critics of “big government,” as well as draw criticism even from advocates of so-called “good government” intervention.
For the Commodity Futures Trading Commission (CFTC), that moment was yesterday when it filed a civil lawsuit against the respected Intrade online prediction market and its parent company the Trade Exchange Network (TEN) Limited, accusing them — according to a CFTC press release — of being “in violation of the CFTC’s ban on off-exchange options trading.” Intrade and TEN responded in kind by closing off participation by U.S. residents.
In TV critics’ parlance, the CFTC should know it has “jumped the shark,” when it is attacked by prominent election statistics blogger Nate Silver of The New York Times. The Times is the same newspaper whose editorial page showered almost nothing but praise on the CFTC in its previous crusades for “financial reform.”
Yet most of the time when incidents such as this occur, a closer examination of the pattern and practice of the government entity shows that although the action is indeed outrageous and worthy of condemnation, it is not exactly out of step with what the agency already had been doing. In other words, the agency or commission should have stoked outrage much earlier.
This is the case with this action of the CFTC. Its citation of Intrade as an unregistered venue for “off-exchange options trading” — ludicrous as this may sound to Intrade participants who know it’s a simple prediction market — is simply an extension of the position taken by the CFTC that it can regulate virtually any commodity-related activity as a future, option or swap unless Congress provides a specific exemption for this activity.
The CFTC has taken this position — off and on — for decades, but it has been pushed to its logical extremes by Obama-appointed chairman Gary Gensler. Although this is the first action under his tenure to attract this type of attention, it’s not the first to garner Gensler a bipartisan rebuke. Members of Congress of both parties have been shocked, for instance, by his attempts to regulate small farm cooperatives as “swap execution facilities” under the Dodd-Frank financial regulatory overhaul of 2010.
As I have written previously on OpenMarket:
In implementing derivative regulations pursuant to Dodd-Frank, the Commodity Futures Trading Commission has taken actions that have stoked bipartisan outrage. Its definition of “swap dealers” facing costly new requirements was so broad that it may have ensnared even small farm co-ops.
As a result, late last year, the House Financial Services Committee unanimously passed a bill to force the CFTC to regulate as swap dealers only those entities that have a certain number of participants, sparing most farm co-ops from the agency’s reach. Although the bill has yet to clear Congress and is unlikely to do so in the “lame duck” session, it was successful in getting the CFTC to appear to back off on the farm co-ops, although the issue is still unresolved.
Then there was the rebuke of the Gensler CFTC’s “position limits” rule by an Obama-appointed judge in September. These stringent limits on the purchase of energy, grain and metals could have had a devastating effect on strategies for all types of investors, including pensions and exchange-traded funds that serve the middle class. Yet Gensler pushed through this rule without so much as a cost-benefit analysis, claiming he was required to do so by Dodd-Frank. Judge Robert Wilkins of the U.S. District Court for the District of Columbia — appointed by President Obama in 2010 — disagreed and voided the rule. Undaunted, Gensler is appealing the decision, rather than modifying the rule.
All the while that Gensler’s CFTC has been chasing the “demons” of Intrade, farm co-ops, and ETFs, it somehow failed to catch the shenanigans at Jon Corzine’s MF Global — which was cleary under its jurisdiction — that left so many so many high and dry. Allegations are currently being investigated that the CFTC sat on damaging info before MF Global imploded.
George Mason University and Mercatus Center economist Bryan Caplan is right: “If the CFTC really wants to protect market integrity, it should start by publicly admitting that if the CFTC ever served a useful function, that time has long since passed.”
Incidents such as these should serve not just to stoke outrage, but to focus on the usefulness of this alphabet soup of regulatory enforcement agencies. The CFTC never has alleged Intrade committed or facilitated fraud. It claims only that “the requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity.”
Yet what makes the futures markets and securities markets more prone to fraud than other markets that we need specialized agencies to police them?Why don’t we just have a one or two agencies, such as the Federal Trade Commission, to go after all types of interstate fraud? And why is it that you can buy a small business such as a convenience store outright on eBay, but not buy a piece of that business without going through the Securities and Exchange Commission (because it’s a security), or bet on the future of that business without going through the CFTC (because it’s an option, a future, a swap or whatever).
In the end, to truly improve public policy, we must pull off the layer of the outrage to the outrage within.