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General News    H2'ed 2/4/11

The Egyptian Tinderbox: How Banks and Investors Are Starving the Third World

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Some economists said the hikes were caused by increased demand by Chinese and Indian middle class population booms and the growing use of corn for ethanol.   But according to Jayati Ghosh, professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University in New Dehli, demand from those countries actually fell by 3 percent over the period; and the International Grain Council stated that global production of wheat had increased during the price spike.  

In an August 2009 paper, Gh osh compared food staples traded on futures markets with staples that were not.   She found that the price of food staples not traded on futures markets, such as millet, cassava and potatoes, rose only a fraction as much as staples subject to speculation, such as wheat.

According to a study by the now-defunct Lehman Brothers, index fund speculation jumped from $13 billion to $260 billion from 2003 to 2008.   Not surprisingly, food prices rose in tandem, beginning in 2003.   Hedge fund manager Michael Masters estimated that on the regulated exchanges in the U.S., 64 percent of all wheat contracts were held by speculators with no interest whatever in real wheat. They owned it solely in anticipation of price inflation and resale. George Soros said it was "just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices."  

Nomi Prins, writing in Mother Jones in 2008, also blamed the price hikes on speculation.   She observed that agricultural futures and energy futures were being packaged and sold just like CDOs (collateralized debt obligations), but in this case they were called CCOs (collateralized commodity obligations). The higher the price of food, the more CCO investors profited.   She warned:

 

[W]ithout strong regulation of electronic exchanges and the derivatives products that enable speculators to move huge proportions of the futures markets underlying commodities, putting a bit of regulation into the London-based exchanges will not alleviate anything. Unless that's addressed, this bubble is going to take more than homes with it. It's going to take lives.

What Can Be Done?

According to Kaufman, the food bubble has now increased the ranks of the world's hungry by 250 million.   On July 21, 2010, President Obama signed a Wall Street reform bill that would close many of the regulatory loopholes allowing big financial institutions to play in agriculture commodity futures markets, but Kaufman says the bill's solutions are not likely to work.   Wall Street innovators can devise new ways to speculate that easily dance around cumbersome, slow-to-pass legislation. Attempts to ban all food speculation are also unlikely to work, he says, since firms can pick up the phone and do their trades through London, or arrange over-the-counter (private) swaps.

As an alternative, Kaufman suggests a worldwide or national grain reserve, so that regulators can bring wheat into the market when needed to stabilize prices.   He notes that we actually kept a large grain reserve in the Clinton era, before the mania for deregulation.   President Franklin Roosevelt pledged to maintain a large grain reserve in his second Agricultural Adjustment Act in 1938.

Chris Cook, former director of a global energy exchange, maintains:

 

The only long term solution is to completely re-architect markets. Firstly, cutting out middlemen -- which is a process already under way. Secondly, a new settlement between producer and consumer nations -- a Bretton Woods II.  

S peculative markets today are driven more by fear, says Cook, than by greed.   Investors are looking for something safe that will give them an adequate return, which means something they can live on in retirement.   They need these investments because their employers and the government do not provide an adequate safety net.  

At one time, federal securities were a safe and adequate investment for retirees.   Then federal interest rates plunged, and investors moved into municipal bonds.   Now that market too is collapsing, due to threats of bankruptcy among bond issuers.   Cities, counties and states floundering from the credit crisis have been denied access to the quantitative easing tools used to bail out the banks -- although it was the banks, not local governments, that caused the crisis. See "The Fed Has Spoken: No Bailout for Main Street."

 

Meanwhile, pensions are being slashed and social security is under attack.   Arguably, along with the grain reserves institutionalized under Franklin Roosevelt, we need an Economic Bill of Rights of the sort he envisioned, one that would guarantee citizens at least a bare minimum standard of living.   This could be done through job guarantees when people were able to work and social security when they were not.   The program could be funded with government-created credit or government-bank-created credit, and this could be done without causing hyperinflation.   To support that contention would take more space than is left here, but the subject has been tackled in my book Web of Debt.   In the meantime, the credit needed to get local economies up and running again can be furnished through publicly-owned banks.   For more on that possibility, see http://PublicBankingInstitute.org.   

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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling WEB OF DEBT. In THE PUBLIC BANK SOLUTION, her latest book, she explores successful public banking models historically and (more...)
 

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