Democrats Eye Wall Street Rule to Fight Inflation

Rep. Ro Khanna (D-CA), seen outside the White House at an April 27 rally calling for student-debt cancelation, is targeting Wall Street swaps speculators for driving inflation.


(Image: Photo by Paul Morigi / Getty Image for We The 45 Million.)

A handful of congressional Democrats are turning their attention to an arcane loophole that TYT previously reported is driving high prices for gas and food. Rep. Ro Khanna (D-CA) told TYT that he wants the Biden administration to close the loophole, which lets Wall Street speculators gamble on commodity prices, driving inflation.

The Biden administration could bring down gas prices as much as 25% just by acknowledging the problem, a former Commodity Futures Trading Commission (CFTC) official said last week. Michael Greenberger, the CFTC's former director of trading and markets, gave a virtual talk hosted by Americans for Financial Reform (AFR), during which other organizations indicated they're launching new efforts to close the loophole.

During his remarks, Greenberger told participants that Sen. Maria Cantwell (D-WA) was aware of the issue and interested in pursuing it. Another participant, former Commodity Markets Oversight Coalition Chair Jim Collura, told TYT that he briefed Rep. Paul Tonko (D-NY) after Greenberger's talk and Tonko expected to raise the matter with House leadership. (Neither Cantwell's nor Tonko's offices responded to requests for comment.)

Public Citizen's Tyson Slocum has also voiced concerns about how the loophole is letting big financial firms overwhelm healthy price-setting with massive volumes of commodity-based swaps -- essentially bets on commodity prices. The issue isn't just gas and food; minerals and anything else traded on commodity exchanges are affected.

In healthy markets, buyers and sellers set prices by finding middle ground between them. One party wants low prices, the other wants high prices. But thanks to an obscure CFTC passage -- Footnote 563 in regulatory guidance -- buyers and sellers of oil and other commodities are outnumbered something like ten-to-one by Wall Street traders, none of whom have a genuine buyer's incentive to keep prices low, because few of them ever actually buy it; they mostly bet on it.

Because deregulated traders dramatically outnumber them, genuine buyers and sellers are virtually irrelevant now when it comes to setting prices. That, Greenberger says, is what's causing Ukraine and other supply issues to create disproportionately large impacts on prices: Wall Street is amplifying spikes where a functioning futures market would cushion them.

The resulting, persistent inflation has dragged down the public economically and dragged down Pres. Joe Biden politically. On Sunday, for the first time ever, the national average for gas prices hit $5 a gallon. Biden's polling, meanwhile, is carving out new lows.

As Axios noted, Biden's policy responses so far, "have failed to curb the upward climb of gas prices." That's because the Biden administration's actions have mostly been responses to claims by the oil industry and its Republican allies that the issue is supply.

But that's not the case, as Greenberger and others have been pointing out for months. If supply were the problem, prices would be easing.

The problem also isn't corporate greed, as Democrats have suggested. Or, at least, it's not the corporate greed Democrats have in mind.

In healthy markets, price gouging would inspire competitive under-cutting. In theory, an opportunistic gas company could try to scoop up new customers by low-balling their price-gouging competitors. But even if some wholesalers did that -- Russia, for instance -- it wouldn't move the market price, because gas company sales are a drop in the bucket compared to Wall Street's bets.

As Greenberger said in his talk last week, oil companies may benefit from spiking prices, but they're not the primary mover.

And Greenberger has more than a little experience with the issue. He played a similar role back in the aughts when gas topped $4 a gallon, pointing out a regulatory weakness called the Enron Loophole that let Wall Street speculate on energy. In 2008, both presidential candidates, Sens. John McCain (R-AZ) and Barack Obama (D-IL) pledged to close the Enron Loophole. Prices came down.

As Greenberger, who now runs the University of Maryland Center for Health and Homeland Security, documented in a 2018 research paper, it took a while for the Obama administration to catch on to the newest loophole: Footnote 563. By October 2016, however, the Obama CFTC had found the loophole and had begun the process to close it before it could trigger a global financial crisis. As TYT reported, Pres. Donald Trump's deregulatory crusade led first to the delay of that fix and then to its death.

Today, Greenberger says, the Democratic-dominated CFTC could take quick action to revive that fix. But despite Obama's experience -- when Biden was at his side -- and despite the intense political pressure to address inflation, there's no evidence Biden knows about Wall Street's role, let alone what to do about it.

In fact, on Monday, the Washington Post reported that Biden is privately both frustrated and skeptical about his own administration's work. Chief of Staff Ron Klain, the Post reported, has directed agencies to identify price-cutting measures they can take. (The White House did not respond to TYT's requests for comment last month or for this story.)

The irony is that, according to Greenberger, the Biden administration doesn't have to do much more than say a few words in public to have a dramatic impact on gas and other prices. In his talk, Greenberger said, "If they just [say], 'Hey, this is going on, this is bad, we're gonna look at it,' I think the price of oil would go down at least 10% upon that acknowledgement, maybe 25%."

That's because just the prospect of regulatory attention could spook the banks and other big financial firms betting on gas prices. (Greenberger cites Goldman Sachs, Citigroup, Bank of America, and JPMorgan Chase; Slocum says private equity is also in the game.)

Until now, there's been little evidence Congress sees the problem. Despite a long wait before the White House submitted its CFTC nominees, the Senate agriculture committee took additional months to vote on their confirmation. And even today, it's not clear whether Biden's new appointees at the CFTC have caught on, despite Klain's request, and even though Chair Rostin Behnam is a veteran of the past fights over Footnote 563.

As a member of the House Agriculture Committee, however, Khanna sits on the subcommittee that has CFTC oversight. And Khanna last week told TYT he's backing Greenberger.

In a statement, Khanna said, "I'm concerned about the role Wall Street speculators are playing in driving the price of oil and food futures."

And Khanna may not be alone. In an email, Collura wrote that, after the AFR call, he "had the opportunity to explain Footnote 563 to Congressman Paul Tonko (D-NY20)." Collura said that "[Tonko] was alarmed to say the least. ... He promised to bring it to the attention of the Democratic leadership." (Collura works for the New England Fuel Institute, which attended Greenberger's talk, but was not speaking for the organization, which has taken no position on the issue.)

Khanna also endorsed Greenberger's claim that deregulation of swaps is exacerbating inflation. As Khanna put it, "Lax regulation on swaps has been a windfall for banks and contributed to price spikes. I support reforms like the one proposed by the Obama administration in 2016 that would close this loophole."

As Greenberger laid out in his 2018 paper, the International Swaps and Derivatives Association carved out the loophole for themselves as the CFTC was translating the Dodd-Frank Wall Street Reform law into rules and regulations. The upshot: Wall Street's biggest banks were able to escape regulation of virtually all their swaps by executing them through affiliates that they claimed were overseas and claimed weren't backed up by their parent firms. Neither of those claims was true, and in some cases the affiliates themselves barely existed beyond a piece of paper.

Greenberger's short-term remedy is for the administration to address the problem publicly. The long-term fix is to re-regulate those swaps. A number of advocacy groups told TYT they're now looking at that.

A spokesperson for Accountable.US told TYT that their organization "was present on the [AFR] call and our team is exploring the deregulation angle."

Dr. Steven Suppan, senior policy analyst for the Institute for Agriculture and Trade Policy (IATP), also participated in last week's call. In an email afterward, he echoed Greenberger's diagnosis, calling TYT's report on it, which was shared during the call, "a public service to connect current commodity price levels and volatility to the failed Trump cross-border swaps rule."

Suppan's email noted past IATP engagement on this issue. In 2020, for instance, the IATP wrote to the CFTC warning that rules were needed to prevent the rise of "a system that amplifies the price responses to ... shocks." The letter, Suppan wrote at the time, was in response to Trump's CFTC proposing new policy that would (and later did) kill the 2016 proposed Obama-era rule.

AFR's call with Greenberger was titled: "Deregulation Driving Inflation." According to the invitation, "too little attention has been paid to how the Trump administration enabled Wall Street manipulation of commodity prices."

The Footnote 563 loophole, the invitation said, "allows big banks to dodge U.S. regulations, making it possible to manipulate prices in some of the most volatile sectors that help drive inflation. Professor Greenberger will walk us through how we got here, what it means for inflation, and what we can do to fix it."

After the call, AFR Senior Policy Analyst Andrew Park told TYT, "For all the finger pointing about the causes of inflation, both the commodities and banking regulators should be looking into how closing this critical loophole for commodity swaps could stomp out this unproductive speculation across several critical commodities, that in turn, have raised the prices billions of people pay for fuel and food across the world."

Jonathan Larsen is TYT's managing editor. You can find him on Twitter @JTLarsen.