New report claiming Volcker rule will damage commodity markets is misleading, says MIT professor

On Wednesday IHS/CERA, released a report that claims shutting down commercial banks’ ability to “trade” in commodity futures markets will have drastic negative effects on these markets. The report throws around numbers surely meant to scare people away from reform:

The other authors estimate that freezing commercial banks’ ability to trade in oil and gas futures could lead to:

• A $7.5 billion reduction in natural gas development and a related loss of 182,000 jobs;
• A cumulative rise in electricity costs of $5.3 billion per year;
• The closure of two East Coast oil refineries;
• A 4-cent-per-gallon increase in East Coast gasoline prices;
• A loss of $34 billion in gross domestic product;
• And a loss of $12 billion in federal tax receipts.

MIT professor John Parsons called the report a “hatched job” meant to mislead and direct attention away from financial reforms in a recent blog post:

“There are 2 essential fallacies at the heart of the IHS report. And many other ones, too, but let’s focus on the essential ones.

First, the report assumes its conclusion. The Volcker Rule bans banks from proprietary trading. But the Volcker Rule does not ban anyone else from proprietary trading. The IHS report assumes that when banks stop proprietary trading, no one else will step in and do so.

That’s a ridiculous assumption. Let’s look at other industries where governments sometimes regulate which institutions may and may not operate – take alcohol sales, for example. Suppose a state were to ban grocery stores from selling alcohol. Does that mean alcohol would not be sold? Obviously not.

So why does IHS assume that if bankers stop providing this service, no one else would step in to do so. The report never explains.

It’s a long, bloated report. But only after 91 pages (electronic count)… in the conclusion no less … do the authors get around to addressing the critical assumption. When they do, all they can say is:

U.S. banks’ deep knowledge of the complexity of energy and financial markets cannot be replaced quickly.

Quickly? So now, the issue is quickly? So finally, at the end, the authors tell us that the real issue is just the speed of implementation. Does IHS mean that the Volcker Rule would be a good idea, but we must implement it slowly, so as to give new businesses time to step into the breach? Certainly the Executive Summary does not seem in line with that nuance in the conclusion.

Anyway, is that even true?

There is no analysis leading to that assertion. All of the analysis in the report was wasted on calculations that assumed the conclusions. None was spent on supporting it.”

Read Parsons’ full post here.