Statement of Senator Tom Harkin, (D-IA), Chairman Committee on Agriculture, Nutrition, and Forestry
Hearing on Regulatory Reform and the Derivatives Markets
“Although we see hope in the strong economic recovery steps we have taken, we are still struggling through a grave economic downturn. The lack of sufficient regulatory authority and oversight regarding the financial markets is widely acknowledged as a key factor in the global economic crisis.
“It is not credible to assert that the markets and present regulatory system have worked when the federal government has had to inject some $4 trillion into the system to stave off a total collapse of the economy. Recent problems indicate the need for fundamental reform: the 2008 run up in oil prices left our economy bruised and our nation keenly aware of not only its dependence on foreign oil but its struggle with speculation in the markets; volatile agricultural commodity prices, high input costs, and problems with the wheat and cotton markets have exposed vulnerabilities in our agriculture futures markets; and possibly most problematic, our national economy has been held hostage by poorly regulated financial markets and the shockingly irresponsible behavior of some market participants, particularly when it comes to financial derivative products like credit default swaps and other over-the-counter derivatives. It has become obvious that we must restore proper regulatory oversight if we are ever going to get this economy rebuilt on a solid foundation.
“Simply put, the derivatives markets must work properly. Agriculture futures markets are fundamental to the functioning of every aspect of the agricultural economy. Financial services account for as much as 20 percent of our economy and if those markets aren’t healthy or properly regulated, our economy suffers. The Commodity Futures Trading Commission plays a vital role in providing oversight in keeping these players honest. And if we don’t invest in the regulators and the enforcers to expand that oversight to the over-the-counter markets, we will continue to pay a heavy price.
“It is imperative that we pass strong financial regulatory reform in this body, and not just piecemeal, patchwork reform, but comprehensive and fundamental reform that brings full transparency and accountability back to the markets. Earlier this year, I introduced the Derivatives Trading Integrity Act. The bill would require all futures contracts to trade on regulated exchanges. Exchange-traded contracts are subject to a level of transparency and oversight that is just not possible in over-the-counter markets. For many years, derivative contracts have traded very efficiently and openly on regulated exchanges. We have seen the damage done by moves to circumvent properly regulated derivatives trading.
“It is also not sufficient to assert, as many swap dealers do, that the market for credit default swaps functioned properly, and has experienced no major problems during the current crisis. As conceived by derivatives traders at J.P. Morgan in 1994, the CDS was designed to assist in the smooth functioning of the credit market, and presumably to make it easier to raise capital by issuing corporate bonds to fund investment in the production of goods and services. The facts belie that claim. While the total face value of CDS contracts more than tripled between 2005 and 2008, the share of gross private domestic investment in U.S. GDP stagnated and then fell by more than 15 percent as of the end of 2008.
“Nor do I agree with those who assert that more rigorous regulation of these markets will tend to discourage innovation or hamper our economy. If financial innovation improves the ability of companies to hedge their risks, or improves the functioning of the market, then the incentive for creativity will be there, but if the prime motivation for innovation is to speculate, to avoid taxes, or assume reckless risks, the public has an interest in regulating that sort of creativity.
“We must protect consumers and lower systemic risk, enhance the price discovery function of these markets, reduce excessive speculation, and give the regulators the authority and information they need to keep the markets free of fraud and manipulation. In doing so we will maximize the economic value of the derivatives markets by making sure they are structured to manage risk rather than magnify risk, and guarantee that bad actors are held accountable.
“We have a lot a work to do on legislative reform and it is imperative that we all work together to come up with a solution that will bring transparency, accountability, and stability to our derivatives markets. So I welcome this hearing and this testimony. I thank each of the witnesses for coming here today and look forward to hearing their thoughts.”