On July 11, 2008, the price of oil rose to $147 per barrel, a record high. Gas stations engaged in hot pursuit as the price of a gallon rocketed past $4. All hell was about to break loose.
The country's largest banks had already begun to implode through arrogance and ineptitude. Now the oil market had moved in with a thundering uppercut.
Airlines and trucking firms watched their costs punch through the roof. So did every other business great and small, because 90 percent of American goods are shipped in some form or another.
"That was the breaking point of the economy," says Tyson Slocum, director of the energy program at Public Citizen, a Washington, D.C., government-watchdog group. "That's when businesses said they could no longer fuel their trucks and that fuel costs were overwhelming their payroll."
So began a surge of layoffs that would push well into the next year.
America's political leaders could only muster a simpleton's response. Demand had outstripped supply, they claimed. And it was all the fault of radical environmentalists. If they'd only let us drill for more riches offshore — or on protected lands in Alaska — we could all go back to cranking Toby Keith in our Chevy Tahoes.
It was a fabulous, made-for-TV narrative. Who can forget Sarah Palin shaking her fist at the Republican National Convention, exhorting the legions to "Drill, baby, drill!" What began as a rallying cry soon became an article of faith at cafés and kitchen tables, executive suites and editorial meetings.
There was just one tiny problem: Absolutely none of it was true.
In four short years, the price of oil had risen nearly 400 percent. For this to be a natural occurrence, it would have required a sudden, massive increase in world oil consumption — coupled with equally massive shortages in production. None of which had happened.
"I asked the senior official at Goldman [Sachs] at the time. There were no supply-and-demand issues that could remotely explain the doubling and doubling again of oil prices," says Dennis Kelleher, a former international securities lawyer. "In order to justify that, it would literally take the discovery of China on the demand side or the loss of Saudi Arabia on the supply end."
And those politicians who were bleating about environmentalists? What they conveniently forgot to mention was that millions of acres had already been approved for drilling in the United States but remained untouched. The demand just wasn't there.
The boys on Wall Street must have had a hearty laugh over this. After all, they knew oil prices had ceased to have anything to do with supply and demand. Eight years earlier, they'd been granted the right to make huge, unregulated bets in the oil markets. Now they'd driven gasoline to the brink, just as they had with the mortgage industry.
The funniest part: All those finger-pointing politicians were their accomplices. This was an inside job.
A senator goes whoring
It happened on the night of December 15, 2000. The country was in tumult over the Bush-Gore election. This diversion offered Republican Senator Phil Gramm of Texas an exquisite opportunity to push American financial stability back 100 years.
That evening, Gramm inserted a 262-page amendment into the Commodity Futures Modernization Act. Leaked e-mails would later reveal that it had been written by lobbyists for Enron, Goldman Sachs and the Koch brothers, Kansas billionaires who would later fund the Tea Party movement.
Gramm had turned his office into a subsidiary of Wall Street. From 1997 to 2002, the securities and banking industries had lathered him with $640,000 in campaign contributions. His biggest sugar daddies weren't from Texas; they were Credit Suisse, Morgan Stanley, Bank of America and Goldman. And he was more than willing to step-and-fetch-it on their behalf.
Big oil, big banks and big speculators such as the Kochs wanted to make monster bets in the futures markets. But they wanted to do it in secrecy — without any government regulation.
The futures markets are where the world trades its raw materials, from wheat to oil, coffee to cattle. They were designed not as toys for banks or speculators, but for merchants who actually use those products.
Before a farmer plants his oats in spring, he can agree to sell them to Kellogg's at a set price come fall, the same way Southwest Airlines can lock in a price now for a delivery of fuel in January. This allows companies to set their costs and income long-term, so their businesses — and their customers — aren't regularly blown up by wild price swings. Everyone has a stake in keeping prices stable.
Which is why futures had been heavily regulated since the 1930s, when Wall Street last incinerated the U.S. economy. Up till then speculators had regularly terrorized the country by artificially driving up prices and hoarding things such as grain.
But the stock-market crash of 1929 offered Congress a teachable moment. The men of Wall Street could not be trusted. It wasn't just their eagerness to screw their fellow countrymen. Their occasional bouts of breathtaking incompetence made them dangerous to themselves as well. So rigorous laws were enacted to protect both the nation and the banks that ran it.
The futures market would be policed for the next 70 years — until that night in 2000, when Phil Gramm handed the keys to Enron, Goldman and the Kochs. The amendment passed without hearings or public notice. Democrats, practicing their patented brand of acquiescence, were happy to ride shotgun. President Bill Clinton signed it into law.
They were "bipartisan, effete snobs who thought they knew better than everybody," says Mark Cooper about Congress. He's the director of research for the Consumer Federation of America, among the many who warned Washington that it was playing with matches near dynamite. He'd soon be proven spectacularly correct.
Gramm's amendment became known as the "Enron Loophole," named for the criminal empire that was then America's seventh largest company. Though Enron would soon crumble in a heap of avarice and fraud, Gramm & Co. had unleashed the parasites, allowing them to prey on American commerce.
Prior to the change, speculators were generally kept to no more than 30 percent of any given market. Anything beyond that became dangerous. That's because they have no concern for the things they're buying or the people who use them. They're simply betting on price swings. The more volatile the market, the more money they make. Most sell well before they'll ever take delivery of, say, a load of sugar.
Yet Congress had set them free. Banks such as J.P. Morgan and Lehman began to rally large, institutional investors to bet on oil. It took them just five years to pervert the market's very purpose. By 2005 they'd set off a buying frenzy that launched prices into the stratosphere.
Sherri Stone, vice president of the Petroleum Marketers Association of America, likens it to buying a home. Under normal conditions of supply and demand, you might have a few other people bidding for the same house. "But with speculation, now you have 200 other people bidding for that house. You're going to pay an enormous price for this house."
By the time the economy began to collapse in the summer of 2008, speculators had cornered a stunning 81 percent of the oil market. Some had even begun to hoard fuel, just as the robber barons had done a century before. Olav Refvik, a top trader at Morgan Stanley, became known as the "King of New York Harbor" because he was leasing so much storage space.
Yet the bankers' incompetence would once again prove dangerous to themselves and everyone else. They'd already sabotaged the housing market. Artificially high fuel prices were the second prong of their attack.
The U.S. economy was officially in free fall.
Meet America's dumbest bookies
Think of Wall Street banks as not much different than your neighborhood bookie. After all, there's little difference in betting on Starbucks stock or a football game. The smart ones realize they can make a handsome living just sitting back, wisely setting odds and making a killing off of the transaction fees.
But what separates the two is that bankers violate a cardinal rule of the bookmaking trade: They're degenerate gamblers themselves. And history says they're very much in need of adult supervision.
In just the last 25 years, the financial industry has gone from the savings-and-loan crisis to the tech-stock bubble to the accounting-fraud scandals to the mortgage-industry collapse. Pepper in a ceaseless string of criminality — from Drexel Burnham Lambert to MF Global — and you realize the industry has routinely set off large bombs in the U.S. economy for a quarter century.
Worse: The pattern is accelerating.
This reign of depravity just happens to correspond with deregulation, the legacy of Ronald Reagan. Surely he was right to reduce the red tape and paperwork garroting small business, the nation's largest and most stable employer. But his disciples took it as a one-size-fits-all theory. The people benefiting most were those who could afford to buy senators like Phil Gramm.
Deregulation of the futures markets would solely serve America's greatest welfare queens, Big Oil and Big Finance. Over the years both had purchased competitive advantages from Congress, making a mockery of the free market. America's five largest oil companies receive $20 billion in welfare annually, largely through tax breaks afforded to no other industry. Big Financiers pay half the personal tax rates of their brethren at community banks. Despite buying off the umpires, they still couldn't stand on their own two feet.
"Nine of the largest financial institutions in the world failed" in 2008, says William Black, a former bank regulator turned economist at the University of Missouri-Kansas City. "That should petrify people. All of them pulled the pin on their own grenades."