Carbon Trading Is Just Another Derivatives Scam by The Other Katherine Harris

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The Other Katherine Harris

by The Other Katherine Harris
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Dandelion Salad

The Other Katherine Harris’s blog
May 21, 2008

Being so often sold to the highest bidder, governmental legislation has been a product for a long time, but lately it’s deliberately spinning off other products, too.

Mind you, these aren’t products in any rational sense. Nothing tangible will be produced – not a road, not a sofa, not even a sandwich. Just money and other paper for elites who’ll trade so-called “new assets” created out of whole cloth (or, rather, dirty air) will result if supporters of the Lieberman-Warner climate change bill have their way. Its cap-and-trade provisions will commodify pollution in America into the basis of an “industry” so immense that $150 billion will supposedly spring into being during its first year (and $3 trillion between now and 2050).

These figures in fact represent fictitious value that will have to be sucked out of the productive economy somehow. That’s how trading derivatives always works. The principle was elegantly encapsulated by a gentleman who commented last month on one of Ambrose Evans-Pritchard’s columns in the London Telegraph. He was specifically addressing derivatives associated with commodities like oil and food, but the same trick lies behind the mortgage securitization scam and any other bubble. Walt O’Brien wrote (emphasis mine):

… Derivatives are a means of introducing superfluous layers of financing to otherwise pretty tame trades in commodities. On a straight commodity exchange for a tanker owner or freightforwarder who … wants to move a couple of million gallons … oftentimes a factor is used (something now called “accounts receivables financing”). The tanker owner … (makes) a deal with the factor and the buyer where … the tanker owner takes receipt of the full value of the cargo less the factor’s discount — usually 3 to 7 percent simple interest – and … the tanker owner and/or freightforwarder know they are paid for the cargo and aren’t held up in demurrage at the dock while the greedy buyer tries to starve them out for a lower rate per gallon. If a derivatives trader is involved, the deal is between the fuel supplier and the trader. The trader fronts the cargo in transit with bank money … chats up the value of the cargo in transit and adds as much as 30-40% of non-value-added cost to the cargo in the process, which the trader then pockets, and the banker pockets … associated fees and interest. How many layers of useless and unnecessary derivatives trading can you plotz onto a commodity trade? Answer: in theory, an infinite amount; in practice, the highest number of … re-re-re-financings I’ve seen is 15 layers of needless trades on one consignment. This … trade boosted the cargo cost — not value, as the cargo price for the carrier and cargo owner in transit did not … change at all, though the cargo owner, to cover the derivatives had to stick the customer with his price plus the derivatives trades — by a factor of 12 times true cost. The bourses of the world are starving … the black and Asian world through extortion of unnecessary money while ruining the value of your currency… Annual payouts to derivatives traders looks to be at US$62 trillion, according to this Economist article (“Taming the Beast” in the April 19 -25 edition). That $62 trillion, if expressed as food, energy and metals commodities, could be the vehicle for the New Millenium to move forward in hope and in earnest, but instead is going to golf turf fees, amusing clarets and…eco-tourism by really fat and greedy people who constitute about .005 percent of the population.

Sadly, what’s due to be bruited about soon in Washington is NOT whether we should launch ourselves into this lunacy at all, but merely who’s to be handed how much of the first $150 billion in fairy money: chits representing the “right” to pollute at a certain level. Of course the polluters want them free, claiming their charges to consumers will rise horribly otherwise. Other proponents – including environmental groups and both Democratic presidential contenders – want the chits auctioned off to generate some form of public benefit. Conciliators of course favor splitting the difference. See Marc Gunther’s recent analysis for a wealth of detail.

The fundamental problem is that almost nobody’s saying hey, let’s stop and think before creating another Mad Max market to rob everyone else blind for the sake of the players; couldn’t we just pass a law that simply says you WILL reduce pollution by x amount within y timespan, or be subject to penalties?

Exactly the same aversion to laws with no payola for the bankers, traders and mega-corporations is apparent in our government’s approach to alternate energy — setting things up in such a way that big business controls it and has already spun off a myriad of derivatives in solar and wind power (a subject for another day) – and equally apparent in how our legislators are dealing with the housing meltdown.

As Dean Baker pointed out this week, we needn’t create yet more mortgages to be securitized, sold and resold, in order to avert foreclosures. The simple solution would be a law allowing residents to remain in their homes by paying fair market rent. This would prevent a further price-depressing glut on the housing market and also prompt banks to renegotiate their customers’ mortgages, rather than become landlords. Instead, Congress is tussling with a complex bailout proposal that would have the Federal Housing Authority guarantee new lower interest rate mortgages and put taxpayers on the hook for another $1.7 billion (or, as the ranking Republican on the Senate Banking, Housing and Urban Affairs Committee, Richard Shelby (R-Ala.), prefers, swipe those funds from assistance to low-income renters).

I can see no surer route to utter ruin for most people than keeping the “structured finance” contingent in the catbird seat, sucking the world’s real economy dry with more and more derivative schemes. However, our elected representatives in Washington lack a grain of economic sense or are completely in thrall to Wall Street. Either way, it’s probably far too late to stop carbon trading here, given that it’s so entrenched in Europe. Normally our Pig Men lead the world – off various cliffs, in case you’ve been dozing since before the dotcom bust – but, in carbon trading, Europe has the jump on us. Lured by an annual volume that reached $50 billion last year, Morgan and others have already crossed the Pond to play.

And, yes, you’re throwing candy to the same beasts if you buy carbon offsets. We need real laws, not tricky financial mechanisms.



3 thoughts on “Carbon Trading Is Just Another Derivatives Scam by The Other Katherine Harris

  1. Walt O’Brien’s description and analysis of derivatives based on commodities is wildly incorrect. If he has PROOF that some commodity price was increased by a factor by 12x, I would like to see it. That’s ridiculous. Further, it makes no sense that the price of a commodity would change between the time it is loaded on a ship and when it is unloaded. No buyer would make such a contract. Walt’s prejudice and bias are apparent when he makes rude and ridiculous comments about traders being fat.

    This does not change the fact that creating carbon credits out of thin air is a bad idea. Walt O’Brien is not helping your case.

  2. This is a great article in how it ties the actions of the traders in future oil prices to the financial markets.
    This is where I get off of capitalism.
    The money supply of the country could be put to better and more productive uses than the re-re-re-re-re- CAPITALIZATION of transactions that do NOTHING for the real economy.
    $63 Trillion.
    $63 TRILLION went to people who did nothing but create another layer of financial paper for ignorant people to bet on.
    Now, I said the country’s money supply, as if it was the money supply of this country, and its people, and its government.
    Of course, it is because it is not our money supply that it is used in such a wasteful and shameful manner. Fewer people getting richer and richer.

    If it ever does become our money supply, then we can see that the priority of its use is to benefit the greater number of Americans, and not the fewer.

    The Chicago Plan.

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