Forbes: Are We Shocked That Wall Street Hoarded Ethanol Credits?

September 18, 2013

Loren Steffy, September 16 – Discovering that Wall Street is gaming the market for ethanol credits is about as shocking as finding gambling in Rick’s Casino. The New York Times reported Sunday that traders for large banks and other institutions hoarded the credits as new, stricter federal standards forced refiners to buy more of them. The result: a 20-fold spike in the price of the credits in six months. The only bank identified by executives in the piece, JP Morgan Chase, denied that it was stockpiling credits, yet the idea that Wall Street would game the market was a concern even before the government created ethanol credits eight years ago.

Once again, we have created a false market and then greet with surprise the notion that Wall Street would exploit it. You can’t have a free market when the basis for that market is fiction. In the article, Thomas O’Malley, chairman of PBF Energy PBF +1.18%, expressed surprise that Wall Street banks “helped transform an environmental program into a profit machine.” As he told the Times:

“These things were designed to monitor the inclusion of ethanol in the gasoline pool,” Mr. O’Malley said. “They weren’t designed to become a speculative item. For the life of me I can’t see the justification for it.”

The justification, of course, is that Wall Street saw an chance to make money by exploiting the naiveté of environmental policy disguised as a market. Markets, after all, are driven by the desire to make money, and it seems the designers of the ethanol credit put their policy interests ahead of market fundamentals. This is the same problem with the cap-and-trade proposals to limit carbon emissions,by the way. Lawmakers, environmentalists and policy wonks keep believing that crunchy granola capitalism — environmentalism flavored with free market imitations — is a way to sell regulation across the political spectrum.