[THS] Democracy Now! Interview: The Food Bubble

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article25955.htm

The Food Bubble:
How Wall Street Starved Millions and Got Away With It

Democracy Now! - July 16, 2010

While Goldman Sachs agreed to pay $550 million to resolve a civil fraud lawsuit filed
by the SEC, Goldman has not been held accountable for many of its other
questionable investment practices. A new article in Harper’s Magazine examines the
role Goldman played in the food crisis of 2008 when the ranks of the world’s hungry
increased by 250 million. We speak to Harper’s contributing editor Frederick
Kaufman.

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MY GOODMAN: We continue with Goldman Sachs.


JUAN GONZALEZ: Well, while Goldman Sachs agreed Thursday to pay $550 million to
resolve a civil fraud lawsuit filed by the SEC, Goldman has not been held accountable
for many of its other questionable investment practices. A new article in Harper’s
Magazine examines the role Goldman played in the food crisis of 2008, when the
ranks of the world’s hungry increased by 250 million. The article is titled "The Food
Bubble: How Wall Street Starved Millions and Got Away With It."


AMY GOODMAN: The author of the article, Frederick Kaufman, joins us now. He’s a
contributing editor at Harper’s Magazine.

Well, explain. We’re talking about Goldman Sachs today, this—they call it a landmark
settlement, but they made more after-hours in trading last night than they will have
to pay. So let’s look at Goldman Sachs and its record overall.


FREDERICK KAUFMAN: Yeah, this is really—it’s really outrageous. And on a certain
level, this reform bill is really a sham, because it does not cover, in any way, shape or
form, what Goldman Sachs—and really, let’s be honest here, it wasn’t just Goldman;
it was Goldman, and it was Bear, and it was AIG, and it was Lehman, it was
Deutsche, it was all across the board, JPMorgan Chase—what these banks were able
to do in commodity markets, really which reached its peak from 2005 to 2008, in
what is now known as the food bubble. And as Juan points out, this is
unconscionable what happened, in the sense that their speculation and their
restructuring of these commodity markets pushed 250 million new people into food
insecurity and starving, and brought the world total up to over a billion people. This
is the most abysmal total in the history of the world.


JUAN GONZALEZ: Now, what were these commodities markets like before the Wall
Street firms got involved? And you have a haunting picture, especially of the
Minneapolis Exchange, what it was before, what it was like. Could you talk about how
things operated and then what Goldman Sachs did precisely?


FREDERICK KAUFMAN: The wheat markets, in particular, in this country are the
outcome of a process of development of over 150 years. And that is why, from about
1903 to 2003, the real price of wheat in this country has gone down. And this was
one of the great reasons for America’s great twentieth century, the fact that we had
cheap food, we had cheap bread. And Goldman, in 1991, came up with a new idea
and a new product, which, as I said before, completely restructured this market and
completely threw it out of whack.


But before we go there, we just have to maybe review for a second a little bit about
how these markets worked and what kept that wheat price stabilized. And Juan, you
mentioned the Minneapolis Grain Exchange, this kind of obscure syndicate in the
Midwest, which is where the price of this particular kind of wheat, hard red spring
wheat, which is the most widely traded wheat in the world, and it’s the most widely
exported wheat from the American continent—we kind of set the world price on this
wheat. This is where it happens. What’s the history of that price being stabilized is
you have, traditionally, in the wheat futures market, two kinds of players: one of the
farmers and the millers and the warehousemen—right? And this, of course, includes
players like Domino’s Pizza and Sara Lee and General Mills, very large business,
capitalist stakes are in this wheat market, right? And they are called bona fide
hedgers, because they’re actually buying and selling real wheat. As the price
fluctuates in the futures markets, you also traditionally have speculators in this
market, people who don’t want wheat, who wouldn’t have any place to put it if they
bought it, but they’re making money off buy orders and sell orders, as the price
fluctuates each day, and hopefully they’re bringing in some money for themselves
every day. That’s the idea.


Now, the key here is that both the bona fide hedgers and the speculators, every time
they buy, they’re also selling, and every time they sell, they eventually buy. So their
positions are cleared off at the end of the day, OK? Goldman, we have to
understand, and a lot of these banks, are not interested in the particular structure of
any of these markets. I think it’s a lot of mistake people make when they think about
how these bankers are working. We think that they’re actually interested in the
markets. We think that they’re—no. What they’re after are very large pools of cash
for themselves. They’re after accumulating huge pools of money that they can do
with whatever they like on a day-to-day basis. Right? And so, Goldman, in 1991,
came up with this idea of the commodity index fund, which really was a way for them
to accumulate huge piles of cash for themselves. It wasn’t really about the markets,
anyway. The market was just an excuse. And so, the fact that they threw these
wheat markets out of whack didn’t really matter to them.


How did this work? Instead of a buy-and-sell order, like everybody does in these
markets, they just started buying. It’s called "going long." They started going long on
wheat futures. OK? And every time one of these contracts came due, they would do
something called "rolling it over" into the next contract. So they would take all those
buy promises they had made and say, "OK, we still—we’re just going to—we’ll buy
more later. And plus we’re going to buy more now." And they kept on buying and
buying and buying and buying and accumulating this unprecedented, this historically
unprecedented pile of long-only wheat futures. And this accumulation created a very
odd phenomenon in the market. It’s called a "demand shock." Usually prices go up
because supply is low, right? That’s the idea. There’s not a lot of supply, so the price
goes up. In this case, Goldman and the other banks had introduced this completely
unnatural and artificial demand to buy wheat, and that then set the price up. Now, a
lot of people are saying, "Oh, it was biofuel production. It was drought in Australia. It
was floods in Kazakhstan." Let me tell you, hard red wheat generally trades between
$3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it
broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per
bushel. This is completely beyond the pale, particularly at a—


JUAN GONZALEZ: Almost ten times its historic price.


FREDERICK KAUFMAN: Yeah. It was just completely out of control. And, of course,
the irony here is that in 2008, it was the greatest wheat-producing year in world
history. The world produced more wheat in 2008 than ever before.


And here’s the other outrage of it, which is that at the time that Goldman and these
other banks are completely messing up the structure of this market, they’ve
protected themselves outside the market, through this really almost diabolical idea
called "replication," which is what I discovered when I was looking into how they had
structured this. What they do—let’s say, Juan, you want me to invest for you in the
wheat market. You give me a hundred bucks, OK? Well, what I should be doing is
putting a hundred bucks in the wheat markets. But I don’t have to do that. All I have
to do is put $5 in. Good-faith promise. And with that $5, I can hold your hundred-
dollar position. Well, now I got ninety-five of your dollars. What am I going to do with
them? Well, what Goldman did with hundreds of billions of dollars, and what all these
banks did with hundreds of billions of dollars, is they put them in the most
conservative—no fools, they—they put them in the most conservative investments
conceivable. They put it in T-bills. And then what did they do? Well, now that you
have hundreds of billions of dollars in T-bills, you can leverage that into trillions of
dollars. This is what I’m talking about, large pools of cash for themselves. And then
they take that trillion dollars, they give it to their day traders, and they say, "Go at it,
guys. Do whatever is most lucrative today." And so, as billions of people starve, they
use that money to make billions of dollars for themselves.


JUAN GONZALEZ: And the result was, as the price went up, that there were food
riots around the world.


FREDERICK KAUFMAN: Yeah.


JUAN GONZALEZ: And what about the human dislocation that occurred?


FREDERICK KAUFMAN: Yeah, in 2008, there were food riots in more than thirty
countries. The global price of food rose over 80 percent. This had an effect not only
on wheat, but on corn, on soy, on cooking oil, on rice. You know, people talk about
globalization. "We don’t need to set prices or have tariffs, because we’re globalized.
You know, people can buy their wheat, anyway." Well, gee, guess what happened.
When the price of wheat started to go through the roof, something new, which was
something old, came up, called "nationalism," and people said, "OK, sorry, we’re
closing our wheat, and we’re setting up tariffs." And you had—you had riots. You
had hunger. You had a disaster. You had a global disaster, because, remember, in
America, we’re spending maybe 15 percent of our weekly paycheck on food, right? I
mean, maybe you remember, a couple years ago, why was that dozen eggs so
expensive? Why was that milk so expensive? Why was that meat so expensive? That’s
15 percent. For most people on the earth, they’re spending more than 50 percent of
their daily income on their daily bread. And when their daily bread moves up 80
percent, they’ve just moved right into the ranks of the food insecure. And it was not
only in Burkina Faso. This was in America. You had 49 million hungry families in
America. You had one out of five children in America at soup kitchens. You had a
million hungry people in Los Angeles.


So, I mean, it is unconscionable that Wall Street has completely lost touch with the
reality. They’ve forgotten that there is their mathematical formula, there’s virtuality,
on the one hand—"Gee, I can make a lot of money by making a formula"—and on
the other hand, there’s reality. There are real things that they are affecting, and
they’ve completely forgotten about it, to devastating effect.


AMY GOODMAN: What do you think needs to be done?


FREDERICK KAUFMAN: Well, the solution is interesting, and it certainly is not going to
be solved by the financial reform bill we’ve just seen, because, of course, the people
I talk to at the Minneapolis Grain Exchange and all over, they’re already prepared for
every single trade being exchange-traded. The people at the Minneapolis Grain
Exchange have already prepared 50,000 exchange-traded slots for anything that
people want to trade. Now, when I was talking to the hedge fund guys and the
traders and all my contacts on this, and I said, you know, "What if Wall Street—I’m
sorry, what if the federal government regulates you?" they just laugh. They literally
laugh. They scoff at federal regulators, because they’re like, "By the time they get
around, they figure out what we’re doing, we’re so far beyond it." And in fact, the
commodity index funds, the long-only commodity index funds that I looked at now,
they’re already dinosaurs. They’re onto second-, third- and fourth-generation
reiterations of this. There’s no way the federal government is going to be on top of
them, because they’re so far ahead.


So, what’s the other possibility? The other possibility is simply outlaw it, say, if you’re
a bank, you’re not allowed a stake, you’re not allowed a stake in actual commodity
markets. And I said to these guys, you know, "What if they just outlaw you?" And
once again, rather unsurprisingly, their reaction is outright laughter, because it takes
them about ten seconds to get over that problem. Either they make a phone call to
London and do all their trading out of the London Exchange, or they do an over-the-
counter swap with a Cargill or a Nestlé or a bona fide hedger, and it’s taken care of.


So what’s the solution? I think the best solution that’s been floated around in
Washington in the groups I’ve been close to is an actual international or national
grain reserve. I mean, we actually in this country, before this kind of mania of
deregulation, had a farmer-owned grain reserve under the Clinton administration,
real grain held back, so that in times of a bubble like this, regulators can say, "Look,
you know, we have plenty of real wheat. Here’s a hundred million bushels of wheat.
We can bring it to the market. We can bring that price back into a stable band." And
this is, I think, in some ways, the best solution: real wheat to counter virtual
madness.


JUAN GONZALEZ: Well, yet, as you were saying, that the Wall Street firms are always
able to devise new ways to get around regulation. I was reading in today’s paper on
the new bill, the financial regulation bill, that the banks have already devised new
methods. For instance, that they are no longer able to charge such exorbitant
interest rates on credit cards, so now they’re going to begin imposing fees on
checking accounts. And they just come up with an immediate new solution to keep
making huge amounts of money and getting around the regulators. So, even with
this reserve situation that you raise about creating grain reserve, are there potentials
for the Wall Street firms to figure out a new way to continue to control and make
money off the food supply?


FREDERICK KAUFMAN: Well, I think the theory behind what you’re saying, Juan, is
called "market capture," in the sense that whenever you have a group of people, be
they in the auto business or in the healthcare business, whenever they fear
regulation from the government, this group is, of course, the most at-risk group.
They are the ones who put more of their resources into understanding this regulation
than anybody else, more of their lobbyists, more of their money into understanding
what’s going on, and therefore, they’re the ones who ultimately—the people whose
interest it touches most intrinsically are the ones who then capture that reform,
market capture. So what I like about the grain reserve is that it’s actually outside of
the purview, outside of the financial purview. As I said before, it’s no longer in the
realm of the virtual; it’s no longer in the realm of the numbers. It’s actual real wheat,
and you can actually bring it to bear. You can bring it to markets. There was a
complete madness for hard red spring wheat in 2008, when you had international
orders coming in from Nigeria, from all over the world, and there literally was the
perception that there was no wheat out there. And so this thing, as you say, goes up
and up and up and up and up. If there is actually somebody who can say, who can
bring real wheat and calm these markets, you’re going to save lives. It’s not just that
you’re going to save mortgages or that you’re going to save, you know, finances; it is
that, literally, you no longer have those outrageous numbers of starving people on
earth, most of them women and children.


AMY GOODMAN: We’re going to leave it there. I want to thank you very much for
being with us. "The Food Bubble" is Frederick Kaufman’s piece in Harper’s Magazine,
"How Wall Street Starved Millions and Got Away With It." We’ll link to it at
democracynow.org .

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RBHoughton's avatar

RBHoughton · 2 days ago
Kaufman is right. In fact we used to keep reserve stocks intentionally to stabilise
prices. Back in the days when a politician (Harold MacMillan in UK) could publicly talk
about “the unacceptable face of capitalism,” the British government had what were
called “buffer stocks” of foods and minerals and these ensured no capitalist could
derange prices. We should revisit that.
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Dirk's avatar

Dirk · 2 days ago
We hear about evil. If anyone want to know what evil looks like - it looks like this.
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jerrygates7's avatar

jerrygates7 · 2 days ago
Juan Gonzales Amy Goodman and Frederick Kaufman talk about Banks with cash on
hand to invest in food stores and how they drive up the cost of bare essential staples
such as wheat.

Buyers of any given commodity pay the market price for goods set by the supply and
demand for that product and certain other variables such as ease of distribution to
consumers. When positions for buys are garnered with a small holding payment such
as five or ten percent, buyers buy ahead of the market to drive up the price of
something they control haveing only paid for the right of position, not the right of
ownership of the product. This is leveraging of commodities that starves the market
with the minimun down payment to raise prices which drive the poor firther into
poverty, sending money from subsistance only living standard peoples in poverty
stricken regions into the pockets of Wall Street investors in house in Goldman Sachs,.

Kaufman doesn't call this cornering the market, but it is and if it is unregulated we
have a situation in US Investment, banking and insurance that is as much a ponzi
scheme as Madoff's empire but allowed by US buisenness friendly Administrations
due to their subserviance to campaign contributors from these respective industries.
Wall Street is putting the nation who made them wealthy on a diet by manipulating
staples of subsistance for profit far over and above what Farmers would make if they
took their products to hard markets themselves and cut out their middle men, and
buyers, distribution hibs and financiers.

What makes it possible for Bankers to drive up food prices then is their connections to
large corporate farms which monopolise market share, then capitalise on their
monopoly by buying up smaller farms crops into distribution hubs owned by Bankers,
literal grain silos owned by middle men who trade small farms product with that of
huge corporate farms regardless of local market demand, the product is leveraged in
the larger international market's supply and demand parameters.

High prices for food stuffs paid by consumers in poorer regions do now however
translate to fair profits by smaller farms, in fact the leveraging of products ranging
from milk through potatoes to Wheat by wall street firms pre buying to hold for the
"starved market price" sends distributors buy prices down, farmers getting squeezed
by the commodities markets while consumers pay ever higher prices for food stuffs
shows clearly that middle management of commodities by futures buyers whose
ownership by proxy of distribution hubs for processing to market is a monopoly by
association,which is callusion between government and private enterprise with the
intention to monoplolise the market and product to extort ever higher profits from
staples of existance. USERY is what this is but perhaps as Frederick Kaufman avers,
quite above and beyong any reasonable margins of profit,free market subjugation of
staples to their greed makes for huingry people and demoralised masses ready to
revolt.

What the recent bill of lading in DC shows as a response to such graft is weak kneed
resistance that leaves hard regulation to future "owners" of seats of decision making,
committee's discussing this business that report their findings to legislators whom
ignore them then go on with business as usual, the poor be damned, this is
capitalism, free market style and it fails both farmers and consumers of the products
but rewards people who masterbate and clean up with hundred dollar bills . Nice
nation ya got their mercans starve the African poor, ruin Asian nations to secure
commodities that will eventually inpoverish nearly all dark skinned people to feed
whites their fat assed meals of caviar and servant served carcasse of peon. Fuch
capitalism and the freaks that defend it, is what this is....