More on Regulation and the Transaction Tax

Bart Chilton recently penned an editorial in the Chicago Tribune.  It was entitled, “Deal or No Deal?”.  I think I can answer that question.  No Deal!

There is no need to beef up the CFTC, especially with a tax that will hamper and disrupt one of the most efficient industries on earth.

Chilton and the rest of the regulators inside the Beltway are blind to how the financial crisis even happened.  It wasn’t the fault of the stock or futures markets.  It wasn’t even the fault of the OTC market.  All fingers point to government subsidies that planted the seeds for excesses in certain markets to occur, causing a melt down.

Without Fannie and Freddie we don’t even get into this mess. The imbalances were created by the US government.

The Fed sets the value of interest rates.  Fannie and Freddie provided the backstop to the whole operation.  Certainly, the banks and ratings agencies played a part; but they were reacting to the incentives put in place by our regulators.  What makes Chilton think the CFTC or any other regulator is so smart it won’t happen again?   The proof is in the pudding. Centralized government control over just about anything is destabilizing and bad for the marketplace.  It results in significantly higher costs and much more red tape.

Secondly, there are already plenty of checks and balances in listed futures to police the marketplace.  Exchanges are self regulatory organizations (SRO).  They have entire staffs dedicated to rooting out deceptive trade practices and finding people trying to scam the marketplace.  They do a really good job too.  Why?  Because exchanges are charged with providing orderly fair markets for their customers.  If the market is slanted, customers go away.  Exchanges don’t earn as much profit.  The profit motive keeps them hungry to track down nefarious people looking to pollute their marketplace.   Exchanges also own clearinghouses.  Clearinghouses are dependent on customers being square with the marketplace as well. Clearing is the backbone of trading, any misstep in clearing and markets will go haywire.  There hasn’t been a misstep since futures began trading in 1849.  The market always has opened.

Third, there is an independent organization called the National Futures Association (NFA).  Everyone in the futures industry that conducts business must join the NFA.  They are financed via fees and dues from market participants.  The NFA is already carrying out the service that the CFTC wants to do.  In effect, Chilton wants triple regulation on the marketplace.

We might be better off with no CFTC at all.   I encourage all Congressman and Senators to starve the Dodd-Frank bill.

UPDATE

In a complimentary piece, the Wall Street Journal talked about board directors and independence.  If your eyes glaze over when people talk to you about the ins and outs of financial markets, imagine if you were a director on a board.  Ironically, “11/12 of Merrill Lynch’s board were independent.”

I have not written much about the make up of exchange boards, that’s for another piece.  But independence isn’t necessarily a best business practice when it comes to an exchange.

Read the WSJ piece, it will give you another reason to dislike the CFTC.

tip of the hat to Downtown Josh Brown at The Reformed Broker


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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