Wednesday, July 7, 2010

How the bankers took food from the hungry.

Yesterday I read the following, quoted in the introduction to Pathologies of Power: Health, Human Rights, and the New War on the Poor by Paul Farmer:
The big bankers of the world, who practice the terrorism of money, are more powerful than kings and field marshals, even more than the Pope of Rome himself. They never dirty their hands. They kill no one: they limit themselves to applauding the show.

Their officials, international technocrats, rule our countries: they are neither presidents nor ministers, they have not been elected, but they decide the level of salaries and public expenditure, investments and divestments, prices, taxes, interest rates, subsidies, when the sun rises and how frequently it rains.

However, they don't concern themselves with the prisons of torture chambers or concentration camps or extermination centers, although these house the inevitable consequences of their acts.

The technocrats claim the privilege of irresponsibility: "We're neutral," they say. (E. Galeano, The Book of Embraces)
"Wow," I thought. "The terrorism of money. That's a stiff charge." Then I read an article from Johann Hari today:
At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."
Why did this happen? Neither supply nor demand changed enough to account for it. Biofuels production accounts for some of it, but only a fraction. The main cause is financial speculation.

This is not a matter of crop futures, which most of us are familiar with. With crop futures a farmer and a trader enter into a contract in which the farmer agrees to sell a share of his crop to the trader at a fixed price on a fixed date. Both the farmer and the trader share in risk, since the crop may or may not be worth the price fixed in the contract.

Futures did not cause this food crisis. In the 1990s, the investment banks (like Goldman Sachs, Merrill Lynch, and Deutsche Bank) won the right to trade derivatives on these futures contracts. That is, the trader could sell his contract to another investor, who could then sell it to another investor, and so on. Like the mortgage backed securities which were a prime cause of the 2008 meltdown, these derivatives have lost all real connection to meaningful transactions and become high priced lottery tickets. They don't produce anything of value. They only serve to enrich those who hold them.

So when the bankers started moving out of the collapsing real estate market in 2006 they moved into what they believed were safer investments, like these food contract derivatives. This increased demand, which increased the price of the derivatives, which pulled up the price of the crops. The price only fell when investors started pulling their money out of the market as part of the general meltdown.

Thus the financial speculators and investment bankers literally starved millions of human beings, practicing the terrorism of money.

Links:
The Pathologies of Power by Paul Farmer
"How Goldman gambled on starvation" by Johann Hari

7 comments:

  1. I had no idea. I had chalked it up to biofuels, population growth, and exports to rich countries. What's it going to take to stop this trade in things that don't exist?

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  2. I don't know. Re-regulation would be a start, but I don't think there is sufficient political will. Wall Street contributes a lot to congressional campaigns, after all. (Though - good news! - the Democrats are losing that support.)

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  3. Mention was made of "man-made actions." Has anyone considered that most food production is made of man-made actions? Without irrigation, fertilizer, and farming machinery, how many of these people would have food in the first place?

    Somehow, the idea was given that these people having enough to eat was somehow naturally occurring, and not based upon man-made actions. Then something man-made invaded the picture and interrupted this naturally-occurring process. Then, somehow, things went back to normal.

    Never was it asked whether the called for interventions could have a chilling effect on food production. If governments did do a lot of regulation, and it resulted in mass starvation, do you imagine they would take responsibility? I can tell you what would happen. The crisis would be used to argue that they need more power to prevent such starvations. And who knows to what end the power would actually be used.

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  5. I didn't take the "man-made actions" line in that way. I think the person was saying that the sudden spike in food scarcity and high prices was not due to a naturally occurring famine or drought or whatever. It was a man-made, not natural, crisis.

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  6. Well, part of the reason the term man-made was used was to fix human guilt on this. On the basis of statistical correlation.

    But I am suspicious here. Let's take another line: "Like the mortgage backed securities which were a prime cause of the 2008 meltdown, these derivatives have lost all real connection to meaningful transactions and become high priced lottery tickets. They don't produce anything of value. They only serve to enrich those who hold them."

    What kind of lottery ticket only enriches its holder? If there's one out there, I want one. Notice how he destroys his own analogy when he talks of enrichment. But I must confess that the only point of analogy I find that holds is moral disapproval. Though even the grounds of disapproval don't match. When we disapprove of people spending money on the lottery, it is usually not because they are greedy, but because they are foolish.

    If such derivatives have really "lost all real connection to meaningful transactions," then how did anyone get hurt? For harm to occur, there must still be some connections between the buying and selling of derivatives and the buying and selling of crops. What kind of connection was there between these derivatives and what happened with the food?

    My point is less that what Hari says is wrong and more that nobody could probably know whether or not he was right, as it isn't really clear what he is or isn't saying.

    For more analysis, you can try this:
    http://ftalphaville.ft.com/blog/2010/07/05/278451/its-a-zero-sum-game-mr-hari/

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  7. The Alphaville post makes a very solid argument and I'm certainly not knowledgeable enough to argue with them. I knew when I was writing this that the weak point was the connection between futures prices and crop prices.

    On the other hand, you can't blame me for suspecting the conclusions of the Financial Times and the OECD. They have a strong interest in finding that the investment banks and other investors are not at fault. I realize that's an ad hominem argument.

    Even if it turns out that Hari's case is mistaken, I'm sure it wouldn't be much trouble to find other cases where bankers have enriched themselves by harming the powerless.

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About Me

I'm Rachel's husband and Darcy's daddy. I'm a Hoosier, an accountant, and an Episcopalian. Politically, I'm a progressive who believes in the preferential option for the poor. I use the blog as a sort of journal - to interact with my reading and sketch out ideas.