Streetwise Professor

April 13, 2016

You Can’t Handle the Truth! Censoring Politically Inconvenient Research at the CFTC

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 2:29 pm

I had missed that the CFTC’s Office of the Inspector General had found that the Office of the Chief Economist had “prohibited relevant but potentially controversial research” on position limits. According to the OIG, during a routine interview with a CFTC staff economist, without being asked, the economist told the OIG that s/he had been prevented from doing research on position limits. According to the OIG, “several OCE economists identified position limits as an example of a topic on which economic research is no longer permitted.” One said: ”you can’t write a report on something that destroys three years of (CFTC) work.”

The basic conclusion is damning:

Several other economists confirmed their impression that OCE is now censoring research topics that might conflict with the official positions ofthe CFTC. Some ofthis censorship occurs on the part ofindividual staffeconomists themselves-when selecting potential topics, they now choose non-controversial ones. However, multiple OCE economists also reported that the Chief Economist has declined to permit research on certain topics relevant to the CFTC mission, including position limits.

Some OCE economists expressed uncertainty as to the purpose of OCE’s research program if the Office is prevented from studying topics relevant to current CFTC rulemaking. Yet OCE economists reported that the Chief Economist has rejected or delayed research paper topic ideas if tey were related to pending rulemaking or could challenge the validity of agency regulations. One OCE economist described the policymaking process as one in which a decision is made and then analysis is done in a fashion designed to support the decision. There is a perception within OCE that the ChiefEconomist is “more Commission-friendly,” and that he discourages research that might offend Commissioners.

During “multiple” discussions with the OIG, the Chief Economist at first admitted that this was so, then backtracked:

He agreed that he had initially rejected a research proposal on position limits on the basis that it was politically controversial. The Chief Economist later stated his belief that the CFTC did not have the data or the in-house expertise to do this project in any event. The Chief Economist explained that this was a matter of discretion, and that he did in fact permit research into politically controversial topics. He provided an example ofresearch into high-frequency trading and instances ofself-trading. When asked, the Chief Economist agreed that the Chairman actively supported this line ofresearch. The Chief Economist also stated that he wanted to be able to take to the Chairman and Commissioners anything he or OCE did.


Chairman Massad has recently rejected the OIG’s conclusion, the statements of multiple staff economists, and the initial gaffe (i.e., truth telling) by the Chief Economist. It wasn’t politics, you see. It was priorities:

“Our Office of the Chief Economist has many excellent economists, the morale there is very good and the work they produce is very good. They often produce things that might conflict with the views I have and the views other commissioners have, but we don’t have any kind of political screen on what we do,” said Massad, testifying before the Senate Committee on Appropriations on April 12.

“We do have, however, priority setting. It’s a small division and we must set priorities. We can’t always have a staff person just do the research they would like to do, as opposed to research we really need to focus on. That’s the only way in which we focus their work,” he added.

To state the obvious: priorities are inherently political. The statement about priorities therefore does not refute the belief of the staff economists that the decision to forbid research on position limits was ultimately political.

Chairman Massad’s assertion also is flatly inconsistent with the opinions expressed by multiple individuals, including his own Chief Economist (before he got his mind right, anyways). Thus, there is certainly a widespread perception in the OCE that permissible research means politically correct research. Either this perception is correct, or Chairman Massad has done a poor job of communicating to the economists the criteria by which research resources are allocated.

In a Washington where everything is politicized, and in particular where Senator Elizabeth Warren clearly attempts to censor those expressing dissenting opinions, and attempts to intimidate and slander those who dare to express such opinions, it is utterly plausible that the economists’ perceptions are very well grounded in reality. I view the economists’ complaint as facially valid, but potentially rebuttable. Mr. Massad’s testimony does not even come close to rebutting their assertions. Indeed, knowing how to decode words like “priorities” from GovSpeak, if anything his testimony buttresses the complaint, rather than rebuts it.

But let me suspend disbelief for a moment, and take Chairman Massad at his word. Just what does that imply?

First, it implies that a position limits initiative that would impose substantial burdens on the industry is of insufficient importance to justify a researcher or two to spend a portion of their time to study. Not to denigrate the value of the economists’ time, but in the scheme of things this does not represent a huge expenditure of resources. If position limits are of that little importance, what is the potential benefit of the regulation? Why does the Commission persist in pushing it if it is not even worth the time of a few staff economists?

Second, what does this say about the Commission’s commitment to carrying out its statutory obligation to conduct a cost-benefit analysis of the regulation?

Third, and relatedly, if the Chief Economist is correct and his staff does not possess “the data or the in-house expertise to do this project” how would it even be possible for the OCE, and the Commission, to perform a valid cost-benefit analysis? In particular, since the proposed research appears to speak to the issue of the benefits and necessity of limits, how can the Commission generally, and Chairman Massad in particular, credibly claim that they have determined that limits offer sufficient benefit to make them necessary, or to exceed their cost, if its own Chief Economist claims that his office has neither the data nor the expertise to perform valid research on the effects of limits?

Position limits have been a political project from Day 1. They remain a political project, as Senator Warren’s recent jeremiad (directed substantially at yours truly) demonstrates. The economic case for them remains dubious at best. Given this history and this context, the assertion that prohibiting CFTC staff economists from researching the issue was politically motivated is all too plausible.

The Risk article that I linked to quotes Gerry Gay, who was Chief Economist under Wendy Gramm in the Bush I administration. Gerry notes that prior to 1993, economics and economists had pride of place within the CFTC. It was viewed as “an economist’s shop.”

That is a fair statement. What happened in 1993? The Clinton administration took over, and (as Gerry notes) de-emphasized economics. I remember distinctly an article in Futures Magazine that solicited the opinion of many industry figures as to the changes the new administration would bring. Ex-CFTC Commissioner Philip McBride Johnson’s statement sticks in my mind. This is almost an exact quote, though it is from memory: “We can now get rid of the economists and put the lawyers back in charge.”

That’s exactly what happened then, and with a few exceptions during the Bush II years, has remained true ever since. Just as Clemenceau said that war is too important to be left to the generals, the DC set established that regulating the markets is too important to be left to the economists. What’s more, particularly in the Obama administration, starting with Gensler’s tenure as head of the Commission, it was determined that certain kinds of lawyers had to be in charge, and they had to follow marching orders from politicians. Do not forget that Gensler was only able to overcome skepticism about his Goldman background by pledging fealty to the Democratic senators on the relevant committees, and to their agenda. Truly independent regulators get crushed. (Remember the fate of FCC head Tom Wheeler when he strayed just a little bit off the party line on net neutrality?)

Keep that in mind when attempting to determine the true story of the disapproved research on position limits. It has been determined that you can’t handle the truth.

Update: Note well that the CFTC economists’ concerns about acceptable research extend beyond position limits. It is clear that several believe that policy-relevant research is discouraged, at least if it could contradict existing or pending regulations. If that’s in fact true, it would be fair to ask why the hell the CFTC has economists anyways. Economics has a vital role in informing policy on markets. The economists could pay their lifetime salaries many times over by stopping or correcting one misguided regulation, or even one misguided piece of a broader regulation. (I recall a quote from Coase that an economist could pay for his lifetime salary by just delaying a bad regulation a day.) The only real reason to have economists at the CFTC or any agency is to provide critical evaluation of pending or existing rules and regulations. It is beyond absurd to preclude economists from working on exactly those things, when they could upset some politically-driven regulation.

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  1. Craig,

    The major shift–I believe–and few know better than you, was with the Gensler regime and the controversy with long onlies following the 2008 spike in crude oil. CFTC staff put out a detailed report refuting the widely held belief that the growth of long only commodity funds caused the spike in crude oil. However, politicians on the left (and a few on the right) convinced themselves that the market was manipulated by the size of these funds.

    Commissioner Bart Chilton dismissed the study by the Commission and cited much weaker researched papers (as you pointed out several times), to back the notion of position limits and what qualified as a bona fide hedge.
    Several years ago Neal Kottke nicely summed up what goes on here in an interview: “An amazing thing that I have observed over time is that those that wish to legislate behavior are victim to the wish becoming father to the thought: if I wish to do this, then I think I can.”

    Comment by Daniel Collins — April 14, 2016 @ 10:05 am

  2. SWP:

    The brilliant regulators insist that licenses be in order.

    The Commissioner is played by SWP (w/ valid questions). Massad is impersonated by Cloussea here.

    “How could a blind man be a lookout?”

    “How could an idiot become a policeman?”

    The answer is instructive.

    Be well, Dr,
    VP VVP

    Comment by Vlad — April 14, 2016 @ 2:25 pm

  3. Why should economics be immune from the prostitution by ideology that has destroyed climate science. Harkens to the great debate in the Indiana legislature over a bill defining pi as 3.2. At that time truth triumphed over politics but truth is currently bested by progressive intellectualism

    Comment by pahoben — April 14, 2016 @ 4:10 pm

  4. @Vlad
    Your link was great. I have to find those films on disc.

    Comment by pahoben — April 15, 2016 @ 3:06 am

  5. I was around at the beginning when the CEA was transmogrified into the CFTC. It was indeed lawyers mostly from the SEC looking to build a new a bureaucracy and consequently find a quick way to the top of the GS schedule. Chicago, at the time was the most important and biggest CEA office. There wasn’t much in Washington, but that changed on day 1. Lawyers came in in Washington, hustled to Chicago and started an agenda to make Washington the big dog. None really had a clue how markets worked, but that didn’t stop them. Off they went baying at the moon and chasing their figurative tails. Good times!!

    Comment by d wolfe — April 16, 2016 @ 12:57 pm

  6. […] – You can’t handle the truth! Censoring politically inconvenient research at the CFTC. […]

    Pingback by Further reading - SFO Assets — April 17, 2016 @ 10:47 am

  7. Just a small point, but I thought it was George Stigler rather than Coase?

    Comment by Traveller — April 18, 2016 @ 12:43 am

  8. @Traveller-It may well be. I was going on memory. If you have a cite I’d appreciate it. That quote (whoever uttered it) comes in useful quite often.

    The ProfessorComment by The Professor — April 18, 2016 @ 4:57 pm

  9. SWP, looks like you were correct after all. Here is a reference (about Coase actually) that attributed the quote to Stigler.

    But then this is this interview with Stigler where he says that ‘if an economist delays the adoption of a bad law by one week, he has earned his lifetime salary several times over.’ He attributed it to Coase.

    So I think its probably the case that Stigler helped popularise an important point which Coase originally made.

    In any event, a great quote and reminded me of two great economists.

    Comment by Traveller — May 9, 2016 @ 12:34 am

  10. @Traveller–Thanks so much for bird dogging that. I think you are right re provenance, and definitely right re two great economists.

    Stigler popularized the idea of the “Coase Theorem” and was the source of the story about Coase’s presentation at Chicago where before his seminar the faculty in attendance voted unanimously (or nearly so) that he was wrong, and after his seminar they voted unanimously that he was right. Coase didn’t like the term Coase Theorem, but Stigler did him a great favor by pithily summarizing the idea with that epithet.

    The ProfessorComment by The Professor — May 9, 2016 @ 9:48 pm

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