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July 5, 2010 1:58 PM   Subscribe

How Goldman Sachs gambled on starving the world's poor - and won This was hinted at last August and in 2008
Merrill Lynch's spokesman said: "Huh. I didn't know about that." He later emailed to say: "I am going to decline comment." Deutsche Bank also refused to comment. Goldman Sachs were a little more detailed in their response: they said "serious analyses... have concluded index funds did not cause a bubble in commodity futures prices", offering as evidence a single statement by the OECD.
World Hunger Facts 2010
posted by adamvasco (99 comments total) 49 users marked this as a favorite

 
pitchfork ... check
torch ... check
ourage ... check

matches ... brb
posted by liza at 2:01 PM on July 5, 2010 [7 favorites]


I got matches.
posted by dabitch at 2:06 PM on July 5, 2010 [5 favorites]


I'm confused. Money doesn't come from nowhere--somebody had to be on the end of this chain, taking the brunt of the economic hit that the decline in trading from an artificial restriction in supply imposed. Who are these people? And what happened to all of the real life food? Was it never grown? Did it rot? Who housed it while it did and why was it never sold in the end, taking the loss?
posted by Bobicus at 2:19 PM on July 5, 2010 [2 favorites]


decline in trading that an artificial restriction in supply imposed.
posted by Bobicus at 2:20 PM on July 5, 2010 [1 favorite]


The best argument against Capitalism and Free Trade can be made in the fact that this happened.

But the best argument FOR Capitalism and Free Trade may be that it only happened once (that we know of - reserving judgment there).
posted by oneswellfoop at 2:20 PM on July 5, 2010 [1 favorite]


We should be outraged about this for a couple of days and then forget about it entirely.
posted by rocket88 at 2:21 PM on July 5, 2010 [22 favorites]


I assume at the end when the food was actually produced there was, say, a flour company who bought the wheat contract so they actually had wheat to mill into flour.

Remember the contracts are for prices on wheat that's currently growing, not for wheat that's been harvested and sitting around.
posted by Zalzidrax at 2:23 PM on July 5, 2010


Could someone smarter than me explain how this derivative speculation led to an increase in actual food?
posted by lunasol at 2:23 PM on July 5, 2010


Text something to someone for my marching orders?
posted by vectr at 2:25 PM on July 5, 2010


"Food Contango" is a truly frightening phrase, since it suggests that speculators really were hoarding food rather than sell it on the spot market. The question is: how many people starved during the year and a half of contango? My sense of things is that that period was actually pretty good for the global poor, calorie-wise: though there were protests about rising food prices, wages for the poor grew apace.

The Ghosh article that actually did the legwork for this opinion piece is much less about Goldman Sachs: from the start, Ghosh places the blame at the feet of our overwhelming neglect of agriculture in the 80s and 90s, and our decision to invest in inefficient biofuels without considering that we're taking food out of people's mouths to feed our cars. But speculators showed up after the damage had been done, and used the historically low prices and sudden shift in demand to justify the bubble. Clearly, they didn't do this maliciously: they lost plenty of money on it themselves. But there's more evil done through ignorance than through malice.... :-(
posted by anotherpanacea at 2:29 PM on July 5, 2010 [2 favorites]


I'm confused. Money doesn't come from nowhere..

Actually, money DOES come from nowhere and that's the problem.
posted by signalnine at 2:32 PM on July 5, 2010 [5 favorites]


lunasol : explain how this derivative speculation led to an increase in actual food?

Because "production capacity" does not currently cause starvation. Even real production could go a hell of a lot further than it does, if not for the fact that we pay farmers to use their milk as fertilizer (aka dump it) and burn their wheat.

So, when the futures on a bushel of soybeans shoot up, and you as Farmer Brown only operate at half (or less) capacity, what do you do? You plant more soybeans. In a sane economy, this leads to a surplus of soybeans, the price of which then drops back down (and over time should level out somewhere in the ballpark of matching supply to demand). In our current Bernanke-corrupted delusion of an economy, it just means lots of people go bankrupt holding bags of soybeans while other people starve to death.
posted by pla at 2:33 PM on July 5, 2010 [11 favorites]


So, when the futures on a bushel of soybeans shoot up, and you as Farmer Brown only operate at half (or less) capacity, what do you do? You plant more soybeans.

Except the article is nominally about derivatives on futures contracts, which really shouldn't have anything to do with the actual price of the commoditiy. I think what happened was that there was a surge of money out of real-estate into commodities: this was an old fashioned speculative bubble. The derivatives market was just along for the ride. (Or you could argue that Goldman-Sachs sets up speculative bubbles so it can make a killing on the derivatives market.)

It's strange he didn't talk much about the concurrent oil bubble. Again, just like food, there were structural reasons why the price was going to be going up, now and the future, but they don't explain the spike in prices.
posted by ennui.bz at 2:41 PM on July 5, 2010


Don't you just scream in anger at love non-specific corporate speech? "Serious analyses" indeed. There has got to be a class at the major business schools focusing entirely on making the anger-appeasing, content-free public statement.
posted by JHarris at 2:56 PM on July 5, 2010 [2 favorites]


And rocket88 is right in his hamburgery way. This was a seriously bad thing that caused incalculable human loss. It is not right that it should be forgotten. If anything, the stink over this should outweigh the real estate bubble. It won't of course because this is the U.S. and too many people find it easy to think bad things happen to other people because that's the natural way of things but since we're so great they don't happen here. Or, more/less charitably, because the media thinks those stories won't "play."

But it shouldn't be forgotten.
posted by JHarris at 3:00 PM on July 5, 2010 [7 favorites]


Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin

Article above gives a pretty good picture as to how the wheat prices actually rise as the result of the distortion brought on by future contracts (I'm guessing derivative trading in these contracts only amplify the rise in prices).

The divergence between CBOT futures and the underlying commodity is so great that some grain merchants have stopped bidding for new crops, said Niemeyer, a member of the National Corn Growers Association board. Others won't guarantee a price for more than 60 days.

``We have a fundamental problem with the markets,'' said Kevin McNew, president of researcher Cash Grain Bids Inc. in Bozeman, Montana, and a former Montana State University economist. ``It is very difficult to operate a grain business when the cash prices are below the futures'' by such a wide margin, he said.

The price gap should converge when futures contracts expire and deliveries are settled. Instead, the average premium for CBOT wheat has quadrupled in two years to 40 cents a bushel, compared with 10 cents the prior five years, McNew said.

posted by phyrewerx at 3:06 PM on July 5, 2010 [2 favorites]


These bastards need to be hung for crimes against humanity. When will we have our Judgment at Nuremburg for these fuckers?
posted by pjern at 3:07 PM on July 5, 2010 [9 favorites]


Harpers covered this well recently in "The food bubble: How Wall Street starved millions and got away with it" (behind a subscription wall unfortunately)
posted by Bwithh at 3:09 PM on July 5, 2010 [5 favorites]


This claim seems suspect:
Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer and the global price is high, he'll lose some cash, but if there's a lousy summer or the price collapses, he'll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked well.

Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished.
I'm pretty skeptical that this is true, at least as it is written; there has been speculation in agricultural commodities for as long as those exchanges have been in operation (which I think in the case of the CBOT/CME is like 1850 or so).

It's not clear what regulations the article is saying were abolished, but I'm pretty confident it wasn't a blanket ban on futures speculation in ag products. If I'm correct, it seems pretty misleading, if not outright dishonest, to just gloss something like that over, since it's sort of at the core of the whole issue.

Although it's less interesting reading, this analysis* from the OECD and the University of Illinois disagrees with Hari's thesis. (I also think it may be the one referenced in the email from GS.) It looks like a reasonably rigorous empirical study and, bottom line, does not find sufficient evidence to demonstrate that index fund investment caused the price increases in 2006-2008. The jury is still out on exactly what did cause the increases, and speculation could play a role (and their choice of methodology may not be above criticism), but it's not a straightforward cause-and-effect relationship as some people (in this case Hari) seem to be alleging. It also tries to compare, as Hari does not, the bubble in ag products to that in oil and some other commodities. They seem to think that there is less evidence against an index-investment/bubble relationship in oil than there was in food, which is interesting in itself.**

The most plausible explanation that I've encountered is that there were multiple causes in a "perfect storm" alignment, including not only speculative activity but also supply and input (e.g. fuel) costs, transportation, the weak dollar or future expectations of a weak dollar, and instability in other parts of the economy which led to the increases. That is certainly not as satisfying an explanation as simply being able to blame it on the Jew bankers Wall Street, but would be more in line with other bubbles, which generally don't reduce down to a single straightforward cause, but have multiple causative elements acting in concert.

It's also possible that the commodities (cassava, millet, potatoes) Hari points to as evidence for the bankster theory didn't rise as much as the ones on the exchanges, not because they're not traded on exchanges, but because their price isn't as volatile for other reasons, which could be why they're not traded on exchanges. Commodities traded on exchanges tend to be those which are both fungible and volatile, because they're the ones people have an interest in hedging and speculating on. Although Ghosh may be correct, it's not necessarily the smoking gun all by itself that Hari makes it out to be.

At any rate, that's all not to say that Hari (or the real researchers he's citing who are on the anti-index-fund side of the debate) is flat-out wrong, but the article seems just a little bit axe-grindy and I'm not sure that outrage-bait is the most useful introduction to a very complex topic.

Ghosh's paper—at least the part of it that I've read so far—is pretty good, and seems more nuanced in its conclusions than Hari, so that might not be a bad starting point, particularly if paired or counterpointed by the OECD paper above.

* If that link dies, the article in question is:
Irwin, S. H. and D. R. Sanders (2010), The Impact of Index and Swap Funds on Commodity Futures Markets: Preliminary Results
** A lot of the problems sorting out correlation and causation boil down to availability of data, which leads me to think that a first policy response to these sort of issues would be making more data available for independent analysis. Economics seems to work best when it is done in a statistical/empirical mode, and not a theoretical/ideological ("physics envy") one, and the key to being able to do that is having the data around.
posted by Kadin2048 at 3:11 PM on July 5, 2010 [23 favorites]


I still don't understand how these traders are supposed to have made grain prices rise, except to the extent that volatile prices make it harder for grain merchants to predict future costs. At some point the grain has to be eaten - did these bankers eat it all?
posted by Joe in Australia at 3:17 PM on July 5, 2010


The piece Bwithh linked to is in the current issue of Harper's. It's worth picking up as it gives more background on how commodities trading used to be done.
posted by Strshan at 3:29 PM on July 5, 2010


What Hari is suggesting therefore is akin to saying the outcome of the Grand National is influenced by the number of bets taken on any particular horse.
posted by Electric Dragon at 3:31 PM on July 5, 2010 [4 favorites]


I still don't understand how these traders are supposed to have made grain prices rise,

IANAWSB but... they needed to park their money somewhere where it wouldn't devalue as fast as assets were devaluing everywhere else. But when more people are trying to put more money in grain, than there is grain to buy, the price goes up.
Demand to buy grain went up, even though demand to eat grain was steady.

No, I don't understand either. It makes a kind of twisted sense...
posted by -harlequin- at 3:46 PM on July 5, 2010


"Jew bankers Wall Street"
wow, where'd that come from?
posted by dash_slot- at 3:53 PM on July 5, 2010


Hating Wall Street is not the same thing as hating Jews. Let us be cautious with our parallels, please.
posted by Astro Zombie at 4:02 PM on July 5, 2010 [6 favorites]


It's the biofuels, stupid.
posted by mek at 4:18 PM on July 5, 2010


I still don't understand how these traders are supposed to have made grain prices rise, except to the extent that volatile prices make it harder for grain merchants to predict future costs. At some point the grain has to be eaten - did these bankers eat it all?

What they are talking about is a situation in the options markets called contango as anotherpanacea said. This means that the option future price for grain was higher than the current price. This means that speculators can make a profit by buying grain at today's price and storing it to be sold later at higher prices. So instead of selling food to hungry people, grain piles up in storage in hopes of future profits. This means a shortage of grain on the market which under normal circumstances should bring current prices up and pull grain out of storage. But in a speculative bubble, the future price just keeps going higher, just like the tulip bulb mania. Everyone thinks they can make more money by buying grain and storing it rather than selling it to be eaten today. So the shortage of grain in the current market just gets worse, the current prices go higher and more people go hungry because they can't afford the higher prices. The bankers didn't eat it all -- they just hoarded it so others couldn't eat it.

Now eventually, the hoarders get burned when the bubble bursts and prices crash, but that is cold comfort to the people who have already starved to death. The whole idea of futures markets is to reduce volatility for farmers and consumers. So instead of swinging between, say, $10 and $20, the price stays closer to the average of $15. This prevents farmers from going out of business when prices drop to $10 and consumers from starving when prices go to $20. The futures market normally works well, but when too many speculators get involved you get catastrophic bubbles that hurt lots of innocent people.
posted by JackFlash at 4:29 PM on July 5, 2010 [24 favorites]


The most plausible explanation that I've encountered is that there were multiple causes in a "perfect storm" alignment

I'm beginning to think these are regular storms, and we have a shitty boat.
posted by eddydamascene at 4:42 PM on July 5, 2010 [1 favorite]


The FPP is pretty weak sauce. Some random blog with no data makes the claim that Goldman was responsible for a huge asset bubble and the subsequent starvation of millions. Many factors and participants drive the global commodities markets. I think the urge to blame Goldman Sacks is part of a pattern of resurgent antisemitism where by Jews and Jewish sounding firms are blamed for the woes of the world markets.
posted by humanfont at 5:18 PM on July 5, 2010


Awesome. I agree the thesis is sort of weak - but lets not make Goldman a victim of anti-semitism here. Only someone stuck in 1964 thinks of Goldman as a "Jewish Bank" - and they are still hoping to get that second round at William Witter or Dillon, Read.
posted by JPD at 5:37 PM on July 5, 2010 [2 favorites]


Could someone smarter than me explain how this derivative speculation led to an increase in actual food?

Well, I'm not exactly a "believer" in the idea that new kinds of speculation (i.e. the dreaded index funds) had all that much to do with the sudden increase in prices, though I imagine they may have contributed a small fraction. For one thing, to repeat phyrewerx' quote above: the average premium for CBOT wheat has quadrupled in two years to 40 cents a bushel, compared with 10 cents the prior five years. Yes, that is about the kind of magnitude I remember seeing in some of the actual visible discrepancies people were arguing about back in 2008. Meanwhile, the price had gone up by more than 500 cents a bushel. Somehow I don't think 30 cents lower would've stopped many food riots. But aside from that, speculation in general does obviously contribute a fair bit to the market settling on a price, as all its proponents will tell you, so it is certainly involved.

The saying is that "the cure for high prices is high prices." It was certainly true this time around: high oil prices dramatically suppressed OECD demand and hurried along some mega-projects to produce more, contributing to a big price drop; high wheat prices dramatically increased supply as everyone rushed to produce more. World wheat production for 2009/10 is estimated this past year as about 11% higher than the 2007/08 level (while consumption is apparently also up, but by only 6%).

Getting around to the fpp link way up at the top of the page....

It didn't happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn't because demand grew either.

Consumption had been higher than production for several years. It didn't require any big change in supply or demand to force prices higher (unless you count stocks as supply): It just required that to continue for a while. That is to say, stocks were getting lower every year, for many years in a row. In early 2008 they were still for some agricultural commodities at levels that looked dangerously low despite a pretty good crop that year iirc. Finally in the 2008/09 season (as the IGC tells it) this came to an end with total grain carryover stocks up 25% in just one year, thanks in part to the higher prices of the previous couple of years. Estimates made it apparent that this was going to happen before the crops were actually in, of course. By a strange coincidence, that happened about the same time as the futures prices started falling as quickly as they had risen.

It's true the growing demand for biofuels was gobbling up much-needed agricultural land - but that was a gradual process that wouldn't explain a violent spike.

In economics, demand and supply curves are rarely represented accurately by straight lines. A gradual process can very possibly explain a violent spike, like you can gradually walk forward until you fall off a cliff. One rather important role of futures market speculation is to make it more expensive to take each step forward, before you actually do get to the edge of the cliff; that is, to sound a warning (which the world did successfully respond to) before global grain stocks actually went to zero.

Not that biofuels demand growth was actually all that gradual. In the USA it ramped up from barely significant levels to a third of all the corn the nation could produce, over about one decade.

It's more complicated than that, and obviously the market is not perfect. And the many other crazy things going on in the world of financial markets certainly makes it more complicated to figure out exactly what was going on. But to suggest that supply and demand had literally nothing to do with it is completely absurd.

Finance found its Wasteland moment in the 1970s, when it began to be dominated by complex financial instruments that even the people selling them didn't fully understand. As Lanchester puts it: "With derivatives... there is a profound break between the language of finance and that of common sense."

Many things have indeed changed in the past few decades, not entirely for the better, but the commodities futures of the sort discussed are not really among the more prominent examples. They been around since (*checks google*) oh, say the mid 18th century. The CBOT itself has been around since 1864.

The moves to restore the pre-1990s rules on commodities trading have been stunningly sluggish.

1990's eh? I thought it was supposed to be the 1970's when everything went wrong. Perhaps, just to be safe, we should go back to pre-1864 rules. Most likely, I suppose, the author is thinking of some half-remembered reference he heard to the Commodity Futures Modernization Act, which is the one that always gets pointed to (or it seems to me it was back when this was a hot topic). I'm not expert enough to comment on it really, it has more to do with "over-the-counter" derivatives, swaps, reporting requirements and so on; not so much the kind of plain vanilla exchange-traded futures actually described in the article. Repealing that would be fine with me, might even do some good for all I know. But anyone expecting such a move to stop food prices spiking higher next time demand gets ahead of supply, they're going to be disappointed.
posted by sfenders at 5:45 PM on July 5, 2010 [3 favorites]


Awesome. I agree the thesis is sort of weak - but lets not make Goldman a victim of anti-semitism here. Only someone stuck in 1964 thinks of Goldman as a "Jewish Bank" - and they are still hoping to get that second round at William Witter or Dillon, Read.

Well the CEO, CFO, COO, Vice Chairman and at least two of the three Executive VPs are all...eligible for Israeli citizenship, as it were. Not that there's anything wrong with that.

Threatening to lynch them sounds awfully like a hate crime.
posted by codswallop at 6:16 PM on July 5, 2010


When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked well. Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into 'derivatives' that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born.

Okay then. On reading more carefully, I see that I had skipped over the whole the Farmer Giles bit, in the middle of which the writer demonstrates conclusively that he has absolutely no idea what he's talking about. Oh well.
posted by sfenders at 6:18 PM on July 5, 2010 [1 favorite]


Well the CEO, CFO, COO, Vice Chairman and at least two of the three Executive VPs are all...eligible for Israeli citizenship, as it were. Not that there's anything wrong with that.

ohmigod Jews on Wall Street!!!!

Paulson?
Corzine?
Whitehead?
posted by JPD at 6:25 PM on July 5, 2010


Well the CEO, CFO, COO, Vice Chairman and at least two of the three Executive VPs are all...eligible for Israeli citizenship, as it were. Not that there's anything wrong with that.

How many people do you think are aware of that? I wasn't. It's absurd to say that hating Goldman-Sachs is anti Semitic. There are pretty concrete reasons not involving race for hating wall street right now. For that matter, why are you keeping track of who belongs to which race (which is a silly concept anyways)?
posted by dibblda at 6:30 PM on July 5, 2010 [1 favorite]


Well the CEO, CFO, COO, Vice Chairman and at least two of the three Executive VPs are all...eligible for Israeli citizenship, as it were. Not that there's anything wrong with that.


No. That's not how this works. If you want to actually try and make an argument that any of this anger and criticism has ANYTHING to do with Goldman being considered a Jewish firm, go ahead. Otherwise, all you are saying is that as Jews, any criticism of them is inherently anti-Semitic, and as a Jew, I'm calling shenanigans on this.
posted by Subcommandante Cheese at 6:32 PM on July 5, 2010 [11 favorites]


Limit Up.
posted by ovvl at 6:49 PM on July 5, 2010


Here is one study demonstrating how anti-semitism has been a key element of anti-Goldman criticism. There is a growing trend in populist/left wing circles that combines anti-Israel, anti-capitalist politics with rhetoric of blood libels and international conspiracies which have always been the first part of an anti-semetic wave. I think this fpp feeds that meme. It singles out Goldman, who was but one of many speculators in the market. It directly blames them for starvation of millions. The accusation clearly is designed to provoke outrage at Goldman Sachs and I think given the total lack of real evidence backing the assertion and large weight of evidence presented, asking why Goldman is reasonable.
posted by humanfont at 7:13 PM on July 5, 2010


That's not a "study." That's a news article quoting Yahoo message board crap at random. Wait 'til you see my study of racism on YouTube and the 78,000 distinct patterns of it that I spotted.
posted by raysmj at 7:21 PM on July 5, 2010 [1 favorite]


Okay so the counter-argument is that the thing that all these traders do for a job has no real effect on anything, or at least that it's so complicated that nobody really understands whether or not it has an effect on anything.

To which I say: Get a real job.
posted by Skwirl at 7:23 PM on July 5, 2010 [3 favorites]


Here is one study demonstrating how anti-semitism has been a key element of anti-Goldman criticism.

Um, no. That link was to an article, not a study, which is entitled "Anti-Semitism Rife on Yahoo Message Boards." It includes a few people at the ADL saying that they're concerned about it.

Listen, I'm no fan of the recent trending towards belief in conspiracy narratives and the way they've entered the mainstream of late. But this, this is something very different.

There is a growing trend in populist/left wing circles that combines anti-Israel, anti-capitalist politics with rhetoric of blood libels and international conspiracies which have always been the first part of an anti-semetic wave.

There's a strong, existent strain in (politically) conservative Jewish discourse that identifies anything anti-Israel, or anti-capitalist, as anti-Semitic. The argument you seem to be making, I would say, falls pretty squarely into that.
posted by Subcommandante Cheese at 7:25 PM on July 5, 2010 [4 favorites]


From the New York Sun. Get the fuck out!! a neo-con newspaper thinks Goldman is being persecuted for being Jewish!!!

You know Lehman and Bear were Jewish firms too. Ohmygod it is a cabal. Except that oh yeah - David Einhorn the shortseller who most most vociferous about LEH?....Einhorn, Einhorn...hmm. Must be self-loathing.

Seriously Goldman gets blamed because them and Morgan Stanley are the last ones standing and Goldman has remained much more profitable. I think some of the Goldman blame is misguided but I certainly don't think that most people think of them as "the jewish firm"
posted by JPD at 7:31 PM on July 5, 2010


Matt Taibbi is the new Hitler.
posted by ryoshu at 7:38 PM on July 5, 2010 [1 favorite]


I love how that 2-word troll got plucked right out of a 9-paragraph post. It's like an easter egg hunt, and everyone is just jumping up and down yelling "We found it! We found it!!"
posted by Devils Rancher at 7:52 PM on July 5, 2010 [1 favorite]


A related story to corporate ethics and screwing over the poor... When I was at university the student guild lobbied succesfully for a campus-wide ban on all Nestle products.

The story was that Nestle would go into poor countries with a marketing campaign to encourage mothers with new-borns to use their products instead of breast feeding. This was done in the form of freebies.

The freebies didn't last forever, however, and once the mother's milk supply dried up due to non usage, they would have to pay for the Nestle products.

I'm a little bit dubious, being student polics and all. Plus things like needing a good water supply for their powdered products. Anyone else hear of this? I still don't know how true it was.
posted by uncanny hengeman at 7:55 PM on July 5, 2010


"Food Contango" is a truly frightening phrase, since it suggests that speculators really were hoarding food rather than sell it on the spot market.

I remember Bob Geldof bailing up Maggie Thatcher at some sort of press conference or meeting. He must have been an invitee, because he was fairly much in her face.

He was badgering her about a big stockpile of potatos that were about to rot, IIRC. And why they couldn't be shipped to Africa.

Her response was a combination of:

*a look of distain, almost disgust
*that's not how ecomomics works
*speak to the hand
*get a haircut, hippy!
posted by uncanny hengeman at 8:06 PM on July 5, 2010


I have some strong doubts about the FPP author's thesis.

First, this statement is dead wrong:

"Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into 'derivatives' that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born."

The reason I know this is that twenty-five years ago, I was already trading lumber, wheat and corn futures as a speculator without any help from GSachs. Commodity speculation through the futures market has been around for ages. Oh, and futures are *already* derivatives. I didn't do it for long because I wasn't any good at it. The role of the speculator is to absorb risk, in the hopes of making a profit. (I absorbed too much risk, hence my hasty exit :).

The weird thing most people don't know about commodity futures is that the vast majority of the contracts are never "delivered". So when I (as a speculator) buy a December contract for corn (5,000 bushels being the standard contract), I am most likely buying it from a speculator who does not have any corn at all. When December rolls around, I do not take delivery of the corn. The seller of the contract doesn't have it (in the typical case). Instead we settle the difference between the initial and final prices in *cash*. That, as far as I'm aware is how the vast majority of futures transactions work out. There is no hoarding because there is nothing to hoard.

As well, the FPP author tries to imply that the futures market was somehow deregulated into something more dangerous. This is wrong as far as I know. Futures trading is high-risk but not as wild-west as the CDO and credit default swaps that brought down the financial sector. Futures trading is done through exchanges and they enforce strict counter-party standards. If you start to take losses on your positions, you must immediately cough up more cash or you'll be kicked out of the market. This type of enforcement was actually what was missing from the newfangled thermonuclear derivatives trading that resulted in e.g. AIG taking on more bets than it could pay off.

What likely caused the increase in food prices was the action of speculators as a whole, not just Goldman Sachs. It was one more mini-bubble in the final spasms of the Great Credit Bubble of the late 2000s. When oil shot up past $130 a barrel, there was plenty of talk about how this would result in permanently higher food prices. That belief was probably strong enough to ignite a price surge. How so? When you buy commodity futures you need only put down ~one tenth of the actual cost of the contract. In 2008, credit was easy to get and everyone had a get-rich-quick attitude. Guess what some people were doing with their juicy home equity loans? Yup, commodity trading. Add easy money to 10-to-1 leverage and a financial plan based on "The Secret" and it's no surprise that they blew up the commodity markets.

It would be interesting to see Goldman Sachs' trading book in commodities for the time period. I would guess they had sizeable positions but I would doubt they had a corner on all of the food futures markets.

Incidentally as someone has mentioned upthread, the eventual plummet of agricultural prices meant that *a lot* of speculators had their asses handed to them.

Yes, the skyrocketing food prices meant terrible hardship for third world countries. But the villain of the story isn't Goldman Sachs so much as the insanity of the credit bubble itself.

p.s. Also contango has been mentioned upthread to describe the price surge. But contango is normal iirc in most commodity futures. The future delivery price of a commodity is usually higher than the spot price because of carrying costs (storage etc). In fact, if there was, say a corn shortage you would get something called "backwardation" - the current ('spot') price becomes higher than the futures price.
posted by storybored at 8:33 PM on July 5, 2010 [13 favorites]


The reason I know this is that twenty-five years ago, I was already trading lumber, wheat and corn futures as a speculator without any help from GSachs.

He's a speculator! Get 'im!
posted by Pope Guilty at 9:33 PM on July 5, 2010 [3 favorites]


Speculation in grain prices was illegal in the middle ages for exactly this reason: it left the poor starving.

Sometimes, we have a lot to learn from the past.
posted by jb at 10:33 PM on July 5, 2010 [1 favorite]


Harpers link : The food bubble: How Wall Street starved millions and got away with it. By Frederick Kaufman, from Harper's reposted at Re-Imagining Economics

humanfont ^: I don't think you can call Johann Hari "some random blogger". You can add yourself to the list of people who dislike him. He will probably be unimpressed. The article references Peter Wahl who has written extensively on Third World issues for a German Policy Institution and Jayati Ghosh who is a highly respected economist. Hey but swinging dicks can play their little games and brown people starve to death so there's nothing too serious there then. But wait a minute one authority is a German and the other is a Hindu so all this must be antisemitic. Blow it out your ass as they say where you come from.
posted by adamvasco at 12:25 AM on July 6, 2010 [2 favorites]


storybored is correct: standard futures contracts are tools for predicting the marketplace. They allow farmers to know how much food to plant, and buyers to know how much they are going to have to pay next August. They are a good thing, when the marketplace is working correctly.

Futures are like options, except that the contract HAS to be fullfilled. But it is easier to explain them as options.

An option is a contract between two people, Joe the Consumer and Phil the Producer. Joe sells a contract to Phil that says "I will give you $2 right now, for the option to buy your product for $100 in August." He has bought the right to buy a product at a set price, but not the obligation. Now August comes and you can get this thing on the open market for $105. Phil lost on the deal- instead of being able to sell it for $105, he has to sell it for $102 (the $100 price plus the $2 he took before). Joe wins because he just paid $102 for something that he can turn around and sell for $105. The other scenario is that if the thing is trading below $100, it is better for Joe to call the $2 lost money and walk away. He bet and lost. Meanwhile, Phil keeps the $2. He can keep the thing, or sell it and make in essence $2 more than the market price.

Now futures contracts are just like that, except that the contract must be fulfilled. Either the product must be bought, or a settlement paid. In essence, the contract has a "WTF, I grew all this corn and now you aren't going to buy it?" clause. This settlement is based on the actual price the corn is selling at. If it is higher than the contract price, Phil pays Joe to go away so he can sell it for more. If it is lower, Joe pays Phil to go away.

There are four types of market participants: buyers and sellers, and hedgers and speculators. The buyers pay the lowest possible price and the sellers get the highest possible price. The hedgers buy early to lock in a price, the speculators bet against that locked in price. In a normal marketplace, each side balances the other out. By the time the corn is harvested and ready to deliver, the price reflects the actual demand for the product.

Where it breaks down is in market friction. When that intermediate trading that occurs before settlement gets so out of whack that nobody can predict what's going to happen, when settlement time comes, people are either paying too much or stuff goes unsold because the producers made too much stuff thinking the prices were real.

But the effect of that friction is fairly limited. There is always the natural demand versus production. Nobody is going to buy stuff they can't use. For the most part, it isn't possible or worth it to horde a commodity. The storage costs are too high. People end up paying a few percent high or low on any given month.

(This all assumes that the majority of the players in the marketplace are generally honest. If you get Enron-style market manipulation, all bets are off.)

But what DOES happen is all that volitility makes the processors of the commodities nervous. If the prices they end up paying are going up and down every month, they charge more at retail so they have the cash to cover the monthly spread. *Their* marketplaces are usually not nearly as competitive as either the commodity or the retail marketplace. So they have more ability to keep those prices going up. (The gasoline refiners are a prime example. There are thousands of crude producers and millions of gas stations, but only a few refiners. THEY control the price, not the speculators.)

So, my point is, Goldman might have caused the food price rise, but not directly or on purpose. They can't speculate unless there is someone else willing to speculate on the other side, and speculation doesn't affect the final price of a commodity nearly as much as it might seem. Unless they were breaking some marketplace rules, this can't be a case of old white guys raising food prices to make money and kill poor people on a lark.
posted by gjc at 4:20 AM on July 6, 2010 [8 favorites]


so the counter-argument is that the thing that all these traders do for a job has no real effect on anything, or at least that it's so complicated that nobody really understands whether or not it has an effect on anything

Derivatives do have an effect. They fuck everything up. Here's why.

There's this feedback mechanism that operates in markets, called a price signal. It's not perfect - no market mechanism is perfect - but essentially what a price signal does is limits consumption (and, over a longer period, stimulates extra investment in production) when supply is short. Price signals are the mechanism that, in general, are held to make markets outperform central planning.

As a producer, the way you fuck up a price signal is by hoarding, and persuading all your competitors to do likewise. If everybody's holding product back from the market, the price goes up, and all the producers earn more per unit. In general, there will be an optimum amount of hoarding - hoard too much, and your sales volume goes down enough to offset the increased price per unit. If there are lots of producers, there's also a strong incentive for individual producers to break any hoarding agreement, since it becomes possible to take advantage of the price rise caused by everybody else's hoarding and sell all your own stuff at higher-than-usual prices. So hoarding doesn't, in practice, fuck things up all that much unless there are only a very few producers in a given market and they're all in tight with one another.

As a derivatives trader, though, you can utterly fuck up the price signals associated with just about any commodity. A futures contract is an agreement to supply X quantity of product at time T for a predetermined price P, regardless of the supply and demand levels actually in force at T. In effect, it's a bet on what the market will be doing at T. If you buy a futures contract, you're betting that the product is generally going to be selling for more than P at time T, so you get to screw your supplier; if you sell one, you're betting that the spot price will be cheaper than P so you get to screw your customer. Businesses like futures contracts because they seem to make future costs predictable, and "certainty" is the new black.

But if a commodity's supply conditions are in fact inherently uncertain enough to attract an amount of futures trading comparable to or exceeding the trade volume in the commodity itself, then the overall effect of those trades is to delay the reaction of price to supply, in some cases to the point of almost complete decoupling. The price paid for X quantity of product at time T will end up having more to do with what the futures traders have been up to than what the supply situation is. And as anybody who has ever tried to design a self-regulating, closed-loop feedback system knows, the more delay you design into what's supposed to be a regulatory feedback loop, the harder it is to avoid it going out of control and exhibiting wild, chaotic oscillation.

Once you start trading in derivatives of derivatives - those things that "nobody really understands" - you end up with feedback loops whose parameters are themselves subject to chaotic oscillations, which means they can't possibly succeed in regulating anything. The reason nobody really understands these things is that they do turn entire markets into fucking enormous random number generators - casinos for the exceedingly wealthy to play in - and bugger them completely for the rest of us.

The very rich understand this full well.

The rest of us just find it difficult to credit that these people, knowing this, are still willing to continue screwing us for all they can get. Naked greed, expressed with chutzpah on the scale these people display it, just strikes most people as deeply, fundamentally, somehow implausible.

It's just unfortunate that it isn't.
posted by flabdablet at 5:00 AM on July 6, 2010 [8 favorites]


The article references Peter Wahl

I followed that link, too. Longer and more academic-looking, but about equally ridiculous. He's pretending to be an economist much like Harri is pretending to be a good journalist. Together, they strongly remind me of the deniers of global warming, who also have lots of Policy Institutes on their side, and tonnes of superficial pretense at serious argument to "prove" their particular pet idea that climate change is just a scam.

Ghosh looks a bit more respectable. I mean, at least she doesn't seem to say anything too obviously, trivially wrong. She's wrong in more sophisticated ways, pretty much along the lines of Michael Masters, "limited to anecdotes and temporal correlation" as put by that OECD paper linked by Kadin2048 above. I would add prejudice, and "common sense", and argument by repetition of "clearly..." which still do not add up to particularly compelling logic. I'll go ahead and assume that in the area of agricultural policy prescription for government, or whatever her area of expertise really is, her ideas are more sensible.
posted by sfenders at 5:08 AM on July 6, 2010


Does anyone have any major examples of food going bad or hedge funds accidentally taking delivery of several tons of wheat?

Because otherwise, this is just about speculators noticing an inevitable mismatch between supply and demand and raising the price early, with the effect that producers raise production in time to avert an actual shortfall and an actual famine. In that scenario, the speculators are the good guys, especially because they lost a lot of money preventing a global catastrophe.

A lot of what I've seen here doesn't count as evidence, especially now that I'm beginning to think that contango means something different in food than in oil. For instance, the World Hunger Notes article in the FPP deals with a large enough period (2006-2009) that it conflates the food price rise with the global recession, while it's conveniently too short to capture the massive decrease in poverty and malnutrition over the decade, mostly led by China.
posted by anotherpanacea at 5:12 AM on July 6, 2010


How the Food and Financial Crises Are Interconnected -- Eric Toussaint
In 2007-2008, the standard of living of more than half of the world population dropped dramatically when the price of food soared. There were massive demonstrations in at least fifteen countries in the first half of 2008. Tens of millions of people more than before faced hunger, and hundreds of millions had to reduce their food consumption (and consequently, their access to other essential goods and services[3]).

All of this was the result of decisions made by a handful of companies in the agro-industry and the financial sector (the institutional investors who contribute to doping the prices of agricultural products) with the backup of the US administration and the European Commission[4]. In fact, the percentage of exports in the world production of food remains small.
Only a small part of the rice, wheat or corn produced in the world is exported, while by far the greater amount is consumed in the country of production. However, the price on the export market determines the price on the local market. The export market price is fixed in the United States, mainly in three stock exchanges (Chicago, Minneapolis and Kansas City). Consequently, the price of rice, wheat or corn in Timbuctu, Mexico, Nairobi, and Islamabad is directly affected by the evolution of the prices of these cereals on the United States stock markets.
posted by Abiezer at 5:49 AM on July 6, 2010 [2 favorites]


Speculation in Food Commodity Markets (pdf) by Thomas Lines author of Making Poverty, a History
posted by adamvasco at 5:51 AM on July 6, 2010 [1 favorite]


The price paid for X quantity of product at time T will end up having more to do with what the futures traders have been up to than what the supply situation is.

That would be true if all the futures contracts were representative of real goods being sold. But most futures contracts are just settled out, and the goods only go to those who actually need them. Basically, only the people with the lowest-priced future contracts will actually buy the stuff. Futures markets are also confusing because they are in essence 12 different marketplaces happening all at once. (Assuming a monthly settlement.) As you get closer to the settlement date, the prices trend toward the real supply-demand natural price. It doesn't really matter what the prices are in the interim, the consumers and producers are only depending on the starting price and the ending price.

It is useful to note the difference between hording and cutting production. You can only horde so much stuff- most commodities just aren't easily stored. But you can cut production- that's a fundamental of the free market*- that you shouldn't produce stuff you can't sell. But if you horde or cut production in order to raise prices, someone else probably won't and you lose.

(I'm not talking about the randian free market religion, just a marketplace where nobody is artificially controlling prices or barriers to entry.)
posted by gjc at 5:53 AM on July 6, 2010


Adamvasco i dont understand why despite overwhelming evidence that Goldmans role in the commodity bubble, you ignore speculation as to why Goldman is the target of such blame.
Perhaps it is just a populist urge to find a scapegoat and simplify a complex set of problems by fixing blame on a single entity. However given the history of antisemtitism and blaming the Jews for every financial calamity, one can't help but wonder if this is just the start of a troubling trend. The fact that the author has some stature makes the scapegoating more dangerous. Rather than being a underground chatter from the marginalized few on Stormfront and other hate sites, it becomes a legitimate point of view published in major newspapers. This is the traditional mechanism by which these anti-Semitic forces gain power and influence in the national conversation. Those who care deeply about preserving diversity and tolerance should be concerned anytime an entity is singled out as the focus of popular rage.
posted by humanfont at 6:31 AM on July 6, 2010


Holding people accountable for their actions is not anti-semitism, and criticising particular Jewish people for reasons unrelated to the fact of their Judaism is not anti-semitic either.
posted by Pope Guilty at 6:47 AM on July 6, 2010 [7 favorites]


I'm surprised this sorta previously didn't come up before.

thanks, flabdablet.
posted by warbaby at 7:10 AM on July 6, 2010


Picking one member of the crowd and holding them accountable is not justice. The only place it can end is in terror and populist violence.
posted by humanfont at 8:19 AM on July 6, 2010


However given the history of antisemtitism and blaming the Jews for every financial calamity, one can't help but wonder if this is just the start of a troubling trend.

Historically, I think it's true that targeting speculators and short sellers was associated with antisemitism. But that doesn't mean it will be today. Even then, the mistake was a pretty basic one: "Bankers caused the Crash. Some Jews are Bankers. Jews caused the Crash." The role of Jews in banking is significantly different than it was in 1929, so I think it's significantly less likely that Jews are being identified with bankers or vice versa.

The real target of our concern is not the movement from "Some Jews" to "All Jews," it's the initial claim that *X* caused the crisis, as if there was some singular actor who was able to accomplish the destruction of the financial system all by themselves.

"X caused the crisis" belies the actual interconnections entailed in something this global. It's a Lex Luthor mentality. There can't be scapegoats unless there are supervillains: demonizing requires that our prospective demons have supernatural powers. The truth of multi-level systemic failure and shared public and private responsibility is much harder to swallow.
posted by anotherpanacea at 8:37 AM on July 6, 2010 [1 favorite]


"X caused the crisis" belies the actual interconnections entailed in something this global. It's a Lex Luthor mentality. There can't be scapegoats unless there are supervillains: demonizing requires that our prospective demons have supernatural powers. The truth of multi-level systemic failure and shared public and private responsibility is much harder to swallow

This is my point. We have jumped to "x" caused the crisis by making Goldman into a super villain responsible for the starvation of millions. Perhaps we've moved on as a society from Nixon's jew hunts in the US federal government in the 1970s under Fred Malek. Perhaps it will be different this time. Of course saying it is different this time is exactly what caused the financial calamity in the first place.

Also no one has answered the question, why is Goldman Sachs the scapegoat? It is reasonable to ask why this scapegoat is selected from the many that could be selected. Is there something different about them from other targets? Is it their name? Is it their apparent continued success in the face of failure by so many others? Why are they spoken about in dark conspiratorial tones? Why is the imagery used lifted from propaganda posters of Nazi Germany? Are we just to accept that this is a mere coincidence? Or are we to infer that an underlying agenda is in play, consciously or not and that we should confront it now.
posted by humanfont at 9:08 AM on July 6, 2010


However given the history of antisemtitism and blaming the Jews for every financial calamity, one can't help but wonder if this is just the start of a troubling trend.

This statement is just not true. I'm sorry. I've studied early to mid 19th century American cultural history pretty extensively, with an eye towards how newspapers looked at immigrant groups and race, in a time of repeated financial disaster. While these papers were virulently anti-Semitic, Jews were not, to my recollection, blamed for the various crashes in one single paper, that anger was reserved for the con man, who was generally considered to be a middle-class, unsavory WASP fast-talker. Oh, and the poor. And god. But not Jews. This is not an isolated incident, either, the history of anti-Semitism, at least in America, doesn't really conform to this particular theory of yours very well. It's not that cut and dry. Find a new trend.
posted by Subcommandante Cheese at 9:20 AM on July 6, 2010 [1 favorite]


I would agree that Hari does not successfully explain exactly how derivatives trading caused huge food price rises, famine, riots and death in 2006-2008. Yet the arguments produced by the people queueing up to explain why there is unequivocally no such link seem just as handwavy.

Some people seem far more concerned to explain at length why derivatives trading as currently regulated is A-OK than than they are about why the events in the markets of 2006-2008 occured. Those events - it bears repeating - led to relatively widespread famine, riots and death.

Meanwhile, some rich people are still rich and some poor people are now dead.

Clearly the markets are large and highly complex systems with all manner of poorly understood and chaotic behaviours. Since events there can have serious life and death consequences for people entirely unconnected with them, the markets must be properly regulated. There is a balance to be struck between protecting the institutions and between protecting the people whose lives they affect. Recent events show that balance to be way out of whack.

The key question is whether or not you would rather protect the freedom of financial institutions to make money by whatever means they fancy - modulo the occasional government bailout when they screw up - or whether you would rather protect human beings from homelessness, joblessness, famine, riots and death.

The arguments of those who still wish to err on the side of protecting the financial institutions are ringing pretty hollow right now.

Though not as hollow as the blatant attempt to derail this discussion into one on antisemitism. That's just embarrassing.
posted by motty at 9:27 AM on July 6, 2010 [1 favorite]


why is Goldman Sachs the scapegoat? It is reasonable to ask why this scapegoat is selected from the many that could be selected. Is there something different about them from other targets?

People are particularly distrustful of Goldman Sachs because they had a particularly unsavory relationship with AIG that caused AIG's collapse.

Is it their name?

No. This is absurd.

Is it their apparent continued success in the face of failure by so many others?

Well, yes: they benefited more than any other company from the bailouts, but they're still lobbying against finance reform.

Why are they spoken about in dark conspiratorial tones?

Because they appear to have succeeded in regulatory capture of the Federal Reserve and the SEC?

Why is the imagery used lifted from propaganda posters of Nazi Germany?

It's not. This is absurd. You sound like Glenn Beck.

Are we just to accept that this is a mere coincidence?

Fallacy of many questions, much? You're just ranting now, not giving reasons or arguments.

The key question is whether or not you would rather protect the freedom of financial institutions to make money by whatever means they fancy - modulo the occasional government bailout when they screw up - or whether you would rather protect human beings from homelessness, joblessness, famine, riots and death.

More ranting: why are there only two options? And it looks like you, too, have assumed without evidence that because there are winners and losers, the winners must have made the losers lose. Why can't it just be that we live in a tragically finite world and we're doing our best? Faced with the prospect of increasing demand, flat supply, and falling stockpiles, prices had to rise to stimulate production.

Why is it okay when governments force prices to rise by destroying stocks and paying farmers not to farm, but not when speculators force prices to rise by making risky bets?
posted by anotherpanacea at 9:44 AM on July 6, 2010 [7 favorites]


Goldman and Sachs did something deplorable?!?!? Really? I can't believe it. Quickly everyone write your outrage down and more on to the next topic!
posted by Mastercheddaar at 9:58 AM on July 6, 2010


This is where an excess of moral outrage on the internet leads, right?

http://www.metafilter.com/90161/Human-flesh-search-engines-in-China
posted by bastionofsanity at 10:35 AM on July 6, 2010


After accusing me of ranting anotherpanacea asks why are there only two options?

I'll repeat my argument, since it seems pretty clear and non-ranty to me: I am not saying there are only two options. I am saying that there is a balance to be struck between protecting financial institutions and protecting the lives of people adversely affected by the actions of those institutions.

This is hardly a revolutionary position.
posted by motty at 11:03 AM on July 6, 2010 [1 favorite]


motty: I am not saying there are only two options.

Sure you are! Don't you remember? It was two hours ago:

The key question is whether or not you would rather protect the freedom of financial institutions to make money by whatever means they fancy....

No one here is arguing for unregulated speculation, but there is all manner of speculation and all manner of regulation. Of course, despite your accusations of hand-waving, it looks like the particular speculation described in this FPP did not cause "homelessness, joblessness, famine, riots and death." In this instance, financial institutions protected human beings by getting food producers the prices they needed to meet shortfalls before they became famines. So it's kind of an odd question to describe as the "key question."

The true "key question" is whether the credit crisis could have been averted, since it was the credit crisis and subsequent global recession that caused and is causing "homelessness, joblessness, famine, riots and death." If you get the diagnosis wrong, you're going to get the prescriptions wrong, too.

For my part, I would have liked to see some variation of the size cap and breakup of systemically overlarge institutions advocated by Johnson and Kwak in 13 Bankers. Does that make me a "protector of financial institutions" or a "protector of human beings"?
posted by anotherpanacea at 11:32 AM on July 6, 2010


Subcomandante Cheese your scholarly study of 19th and 20th century news and media seems to have totally ignored Father Coughlin and the Deerborne Independent. Week after week Father C. got on one of the most listened to radio programs in the country and blamed lewdly bankers for the depression and the war. Your argument from scholarship is countered by readily accessible historical record.
posted by humanfont at 11:52 AM on July 6, 2010


Why is Goldman Sachs the scapegoat? It's not. It's the original perpetrator. From the Harpers / Re-Imagining Economics Link ^
The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment.
Agriculture, rooted as it is in the rhythms of reaping and sowing, had not traditionally engaged the attention of Wall Street bankers, whose riches did not come from the sale of real things like wheat or bread but from the manipulation of ethereal concepts like risk and collateralized debt. But in 1991 nearly everything else that could be recast as a financial abstraction had already been considered. Food was pretty much all that was left. And so with accustomed care and precision, Goldman’s analysts went about transforming food into a concept. They selected eighteen commodifiable ingredients and contrived a financial elixir that included cattle, coffee, cocoa, corn, hogs, and a variety or two of wheat. They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known thenceforward as the Goldman Sachs Commodity Index. Then they began to offer shares.

posted by adamvasco at 12:07 PM on July 6, 2010 [1 favorite]


Subcomandante Cheese your scholarly study of 19th and 20th century news and media seems to have totally ignored Father Coughlin and the Deerborne Independent. Week after week Father C. got on one of the most listened to radio programs in the country and blamed lewdly bankers for the depression and the war. Your argument from scholarship is countered by readily accessible historical record.

No, I'm well aware of Father Coughlin, however, saying that Father Coughlin blamed the Great Depression on what he called "a conspiracy of Jewish Bankers," and many of his followers believed him is a very different statement than the one you made, which was, "...the history of antisemtitism and blaming the Jews for every financial calamity."

Moreover, sure, I'll bring in the Dearborne Independent. You brought it up, after all. The Dearborne independent existed, for all intensive purposes, from 1919 until 1927, when it was shut down--before the Great Depression started--in fact, this was being published in a time of relative prosperity. It's anti-Semitic screeds had nothing to do with blaming Jews for recent financial calamities, rather, arguing, as many anti-Semitic pieces did, that Jews were causing a degeneration in moral and cultural values--coincidentally, this is the same stuff being published in the 1830s and 40s, during the first waves of Jewish immigration to New York.

So what's your argument here? Is it that there's any basis in history for your claim that accusations against Goldman fit neatly into your ideas of historical trends, or is it just that anti-Semitism exists, therefore, you are right? Because this comment seems to be mistaking one for the other.
posted by Subcommandante Cheese at 12:22 PM on July 6, 2010 [1 favorite]


In this instance, financial institutions protected human beings by getting food producers the prices they needed to meet shortfalls before they became famines.

Except in this instance there was no shortage of food causing higher prices. There was plenty of food to go around except that it was overpriced due to hoarding and speculation on yet higher future prices. That fact that there was eventually a market crash indicates that the pricing signals were wrong. This was a market failure that caused much suffering and death.
posted by JackFlash at 12:29 PM on July 6, 2010 [1 favorite]


They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known thenceforward as the Goldman Sachs Commodity Index

You do realize that there are at least a dozen commodities indexes out there out there including one put together by AIG. On top of this, GSCI is an index, you might as well blame the Consumer Price Index, or Dow Jones Industrial average for starvation and collapse. There are also many exchange traded funds created by a variety of investments banks that allow investment in commodities. This I go back to my assertion, why single out Goldman. The charge that they alone caused the death by starvation of millions of the worlds poor is an outrageous claim. It fails to look at the root cause the market failure and in place substitutes a scapegoat. Your refusal to even consider the potential agendas of those who would issues such charges calls into question your own motivations.
posted by humanfont at 12:35 PM on July 6, 2010


You really, really want to find some antisemitism.

Put down the hammer.
posted by Pope Guilty at 12:38 PM on July 6, 2010


Except in this instance there was no shortage of food causing higher prices.

Yes there was. Global consumption had been higher than global production for years, in large part because so much of the world had simultaneously left crippling poverty, but also because we in the US decided to start converting food into ethanol in large quantities. Only higher prices could bring production back into line with consumption. We were eating more than we produced, and only the presence of stockpiles prevented that from being an immediate crisis. As the stockpiles were depleted, higher production required higher prices.

The speculators delivered the message while there was still time to do something about it.
posted by anotherpanacea at 12:52 PM on July 6, 2010


Except in this instance there was no shortage of food causing higher prices.

Yes there was.


Wheat is not used for biofuels. There was no shortage of wheat yet wheat was one of the worst commodity bubbles.

You are talking about how the futures markets are supposed to work and they normally do. Futures prices can provide an advance signal for future shortages. But what happened was not a normal signal. It was not based on fundamentals but instead a speculative bubble that provided the wrong signal and caused great harm to innocent people.
posted by JackFlash at 1:27 PM on July 6, 2010


Only higher prices could bring production back into line with consumption.
Growth in agricultural output has outstripped growth in population over recent decades; where that excess of food goes can entirely be determined by regulatory intervention if food security is prioritised over profit. Yet global institutions such as the World Bank encouraged 'liberalisation':
U.S. Agriculture Secretary John Block put it at the start of the Uruguay Round of trade negotiations in 1986, “the idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on U.S. agricultural products, which are available, in most cases at lower cost.”
From here, where you can read further about the causes and consequences of this shift, or if you prefer it in video form he's saying the same here.
posted by Abiezer at 1:57 PM on July 6, 2010


There was no shortage of wheat yet wheat was one of the worst commodity bubbles.

Again, that's just not true: in 2008 the stockpile of wheat were at their lowest in the post-World War II period.
posted by anotherpanacea at 2:04 PM on July 6, 2010


That was the year Goldman Sachs decided our daily bread might make an excellent investment.

If someone wants to actually just propose that those commodity index funds ought to be done away with, or at least regulated more tightly in one way or another, *without* just assuming they're going to destroy the world, that'd be great. Can't say I disagree in principle. I don't know if they actually do any harm: When you look at the thus-far presented evidence it doesn't seem to stand up very well. On the other hand I don't see how they do much good to anyone, either. One could make a roughly similar argument against stock market index funds, but that's another story.

No matter what lofty highs long wheat futures might attain, the managers would transfer their long positions into the next long futures contract, due to expire a few months later, and repeat the roll when that contract, in turn, was about to expire—thus accumulating an everlasting, ever-growing long position, unremittingly regenerated.

At least that Harpers thing does identify the actual target rather than just blaming "speculators". The detail it leaves out, of which many readers are probably unaware, is that this roll to the next contract, which happens typically every month, still involves selling the same futures contract they previously bought, before buying the next one. The forces that encourage the future and spot prices to converge should still work as they always did. For a given futures contract, if you assume that the fund buying is going to drive up the price, you have the same reason to assume that the fund selling is going to drive down the price of that contract when they sell before expiry. The buying and selling these guys do is predictable by design, so you might expect that both effects on futures prices would quickly go away, cancelling each other out due to arbitrage. In markets I've looked at it appears they do actually, near as can be easily seen.

Easy thought to imagine that it could be a problem if these crazy long-only fund buyers grow so large and numerous that they just overwhelm the rest of the market to the point where there just aren't enough proper traders and speculators to take their money. The real question is whether or not they already did so, or have the potential to do so in the foreseeable future, and it's not so easy to tell. If that really is (a large part of) what happened, the result doesn't look much like what you'd have expected when you get down to the details (as in that OECD summary).

No surprise that so many people, some experienced traders included, are quick to blame the index funds. It's like the standard newspaper headline "market moves higher on Obama's optimistic speech" or whatever. Sort of plausible, hard to prove the contrary, but in most instances taking it for granted that whatever tidbit of news everyone points to is what really what caused the move in prices is not going to get you very far.
posted by sfenders at 2:08 PM on July 6, 2010


The markets are large and highly complex systems with all manner of poorly understood and chaotic behaviours.
Since market events can have serious life and death consequences for people entirely unconnected with them, the markets must be properly regulated.


These two statements embody the difficulty of any regulatory regime. There is an urge to "properly regulate" things that are "poorly understood". And not only are they poorly understood in absolute terms, they are also poorly understood through plain ignorance.

The key question is whether or not you would rather protect the freedom of financial institutions to make money by whatever means they fancy - modulo the occasional government bailout when they screw up - or whether you would rather protect human beings from homelessness, joblessness, famine, riots and death.

The missing third axis: protecting the ability of markets to assign prices efficiently. Having efficient prices is a social good.
posted by storybored at 2:25 PM on July 6, 2010 [1 favorite]


There was no shortage of wheat yet wheat was one of the worst commodity bubbles.

Again, that's just not true: in 2008 the stockpile of wheat were at their lowest in the post-World War II period.


A stockpile is not a shortage. The U.S. still had over a quarter billion bushels in storage. Yet wheat prices jumped by a record 136%, far, far out of proportion to the real situation. This over-reaction of the speculators was due in part to investors in a panic moving out of mortgage securities and equities and into commodities. The subsequent collapse is an indication that the price signaling was wrong.

Speculators can often be spectacularly wrong, causing immense damage. For example in 2007 speculators were signaling a shortage of housing where a shortage did not exist. Likewise in 2008 speculators were signaling a shortage of food where a food shortage did not exist.
posted by JackFlash at 2:49 PM on July 6, 2010


It just occurred to me that there's an obvious hole in the "Goldman Sachs caused the food bubble" argument. Here it is:

Today, the Goldman Commodity Index (the assumed root of evil) still exists.

Goldman Sachs (the presumed perp) is still around.

There's still hundreds of billions of dollars invested in commodity index futures.

So why isn't there a price bubble in food commodities right now?
posted by storybored at 2:49 PM on July 6, 2010


Humanfont -
I grew up in a country a long long way away, in which Jewish people were as much of everyday life there as, say, Ethiopians here. Ie, not a big presence. Consequently, while I had a (very) basic understanding of Jewish history, my contact with Jewish culture basically went no further than what happened to be shown in American movies that I happened to see. Much like Ethiopians, it just wasn't a people that was high on my radar.

But a few things happened to put it on the radar in strange ways. For a straightforward example, when discussing (online) some of the reprehensible things Paul Wolfowitz had done (regarding implications those things might have for some promotion/position of the time), I was accused of anti-semitism. This was a surprise - I didn't even know the guy was Jewish, and I was only talking about deeds that he had, in fact, actually done. When things like that happen too frequently, other things happen.

How could I not know he's Jewish with a name like that? Well obviously, without growing up around Jewish culture, how would I learn which names are Jewish? If I was Jewish, no doubt I'd be pretty good at spotting people who shared my background. (Apparently I might also take this ability for granted, and assume everyone else has this ability too.)

The upshot of that, and many similar occurrences, has deeply taught an ugly association that passively, if not actively, aids anti-semitism: that cries of anti-semitism are a normal, illegitimate response to legitimate concerns. You don't want this.

I am aware that anti-semitism is a problem that has to be jumped on early and jumped on hard, so I don't know what the ideal solution is, but as I see it, I don't have a horse in the race, I don't have skin in the game, however I can tell you that you do your (fair) cause enormous long-term harm by being over-quick to draw that interpretation of motives. And the claims here about Goldman Sachs being singled out because of anti-semitism, is working against your cause - our cause (my allegiance is humanity).

Watching this thing unfold, there is no mystery to me why Goldman Sachs is such a dominant Bad Guy name to the guy on the street. A lot of it is justified, a lot of it is circumstance, and it would not make a difference what the names of the company of the executives were, GS is being judged for its deeds and its role, it is perfectly positioned to attract the attention it has, and viewed from mainstreet, what it has done and its attitude to what it has done, is incendiary. Yeah, I'm sure there is no shortage of racists out there ranting about Jew bankers (as they always do), but they're not what's driving this, and they're almost certainly not what is driving this thread.
There is no racist conspiracy behind the bad press. Claiming otherwise while minimizing the importance of how GS's deeds are perceived by the people hurt by them and companies like them, teaches your allies to ignore you. That's a real bad lesson to be teaching.

I say that as a friend. I know your concerns have harsh grounding, but don't let that distort your perceptions. It is in everyone's best interests to avoid belittling the non-racist criticism of GS.

Also (and I'm not just extrapolating from myself) I think the Jewishness of a person or company is probably much less apparent to most people than it is to you - and likely also a subject of much greater indifference.
posted by -harlequin- at 3:04 PM on July 6, 2010


Subcomondante -- I will admit that I have not studied every correlation of economic panics in world history antisemitism, but it is clear that there have time and again been this urge to blame groups esp. the Jews for economic calamity. The panic of 1873 resulted in numerous pogroms in Russia and Central Europe and a rise of antisemitism in Germany, Austria and France. The populist party in the United States that arose in the wake of this panic has many well documented examples of antisemitic tracts blaming Jewish bankers. The most notable of which is probably Mary Elizabeth Lease's quotation, "What you need to do is kill fewer hogs and more Jews."

Right up to the 1970s when in the midst of another economic crisis Richard Nixon and the Rev. Billy Graham had this conversation:
BG: This stranglehold [of jews in the media] has got to be broken or the country's going down the drain.
RN: You believe that?
BG: Yes, sir.
RN: Oh, boy. So do I. I can't ever say that, but I believe it.


I'm sure you will now go back to the word "every", fine I will change my argument to many modern panics have seen an associated rise in antisemitism. This correlation still invites further investigation into the motivations and reasoning behind the selection of Goldman Sachs as the target of so much popular anger. It also prudent to conclude that the scapegoating of Goldman will feed antisemitism and is thus an instrument of antisemitism. You are free to criticize Goldman's Behavior but it must be done so in the context of a broader context that includes the complexities of responsibility. Otherwise you might as well be blaming out of control federal spending on welfare queens.
posted by humanfont at 3:19 PM on July 6, 2010


I'm sure you will now go back to the word "every", fine I will change my argument to many modern panics have seen an associated rise in antisemitism.

Good for you, your claims are now not untrue, solely vague. Also, patronizing much?

This correlation still invites further investigation into the motivations and reasoning behind the selection of Goldman Sachs as the target of so much popular anger. It also prudent to conclude that the scapegoating of Goldman will feed antisemitism and is thus an instrument of antisemitism. You are free to criticize Goldman's Behavior but it must be done so in the context of a broader context that includes the complexities of responsibility. Otherwise you might as well be blaming out of control federal spending on welfare queens.

You know, here's where I'll start with this--the language of 'welfare queens' was a well-orchestrated media circus with a pretty definite, easily ascertained intent. Racially coded language was used by the right to help push an agenda that crippled the government's programs aimed at poorer Americans. I'd be really hesitant to ascribe the same thing to the GS outrage. Which is to say, arguing that anti-Semitic language is being used consciously by people arguing for regulation on Wall Street is inane and ridiculous without any actual evidence. Of course, that's not really your argument, because excepting the name Goldman, there's not too much anti-Semitic language going around in this article, or others--excepting Yahoo message boards. Simply stating that anti-Semitism becomes more evident during economic hard times doesn't make your argument for you.
posted by Subcommandante Cheese at 4:26 PM on July 6, 2010 [1 favorite]


As you get closer to the settlement date, the prices trend toward the real supply-demand natural price. It doesn't really matter what the prices are in the interim, the consumers and producers are only depending on the starting price and the ending price.

Yeah, but the point is that consumers and producers end up not buying and selling stuff to each other, but to a chain of middlemen. If the volume of trade in derivatives is large compared to the volume of trade in actual commodities, and the price signals end up lost in the shuffle - which means the only way that demand can actually end up affecting supply is slowly.
posted by flabdablet at 8:15 PM on July 6, 2010


Racially coded language and stereotypes are being used to push an agenda here as well. Just as the populist rage required an African American woman receiving an impossible amount of government benefits, we have a bank with a jewish being castigated for starving the poor. Even though in the first case the majority of welfare recipients were rural and suburban white women and in the later the majority of traders and market players were outside Goldman. Reagan pushed a southern strategy build on the politics of race. Pundits like Taibbi who apparently said that the US is governed by a cabal of zoinists+aipac+neocons. Or Hari with his own documented strong Palestinian advocacy. Yet we are to accept that their carefully selected scapegoat isn't part of a larger pattern. Just as we were to accept that Reagan really wasn't a racist.
posted by humanfont at 8:46 PM on July 6, 2010


Or Hari with his own documented strong Palestinian advocacy.

Why am I not surprised that this is where it went? Well, it's also where it ends. If this is your "proof" that someone is anti-Semitic, then I'm done, I'm long beyond the point where I see any purpose in talking to people who think this way.
posted by Subcommandante Cheese at 9:34 PM on July 6, 2010


So I'm one of those people now am I? Go retreat back into your prejudiced world.

There are certainly legimate critics of Israel. Yet there are also those who's criticism is drive by racist worldviews. We must determine if Johann Hari falls into the group of legitimate critics or not. Evidence
of not includes describing Israel as a stench of "shit", arguing that Israel was founded on a genocide of the Palestinians. Now we combine these statements with his actions here and I think a case can be made.
posted by humanfont at 11:02 PM on July 6, 2010


humanfont you are being disingenuous..
I think this is the article you wanted to backup your last statement. "Across the occupied West Bank, raw untreated sewage is pumped every day out of the Jewish settlements, along large metal pipes, straight onto Palestinian land. From there, it can enter the groundwater and the reservoirs, and become a poison.". It is the smell of shit - rather like your specious arguments.
The g word is only used in describing what the Jews were fleeing from.
zoinists+aipac+neocons" : to be, or argue against any of these groups is not to be anti semitic. Are you one of these "bots" I've heard about that inserts itself into conversations to wave a flag and show us the light?.
posted by adamvasco at 12:00 AM on July 7, 2010


A stockpile is not a shortage. The U.S. still had over a quarter billion bushels in storage. Yet wheat prices jumped by a record 136%, far, far out of proportion to the real situation.

I think you're missing the point: the stockpile was never going to be restored until prices rose or demand fell. (Demand for food falls when people die or poor people go hungry, so I'm a supply-sider on that front.) If consumption outstrips production year after year, eventually, you run out. It's just like with Peak Oil: there can be plenty of oil in the ground, but if demand outstrips supply, somebody gets bid out of the market and goes without. The difference is that if you wait until the food stockpiles are empty, you get real famines.

Unless you run a farm, your claim that an 136% percent increase in price is out of proportion to the situation is utter bullshit. This is why we don't make important decisions about food supplies on the internet: there's too much incentive to make claims without basis. Again, if 136% is what it costs to increase production, then the best thing is for the price to rise 136%, or even 150%, rather than undershooting production goals. Governments can still help pay that increased cost using progressive taxes and food subsidies, and they should.

The current situation isn't good, but the problem isn't that prices rose, the problem is that there's no safety net for the global poor. I'm honky dory with state subsidies and transfer payments to help the malnourished... but you still need to increase production, and price increases are still the best way to do that. (Of course, you could also coerce farmers... but that doesn't work quite as well.) Price is the best signal we have: blaming speculators is like blaming short-sellers for the stock market crash. It's not the short seller's fault that these stocks weren't worth what bullish investors paid for them, and it's not the speculator's fault that food was worth more than it's price. You're blaming the messenger.

For example in 2007 speculators were signaling a shortage of housing where a shortage did not exist. Likewise in 2008 speculators were signaling a shortage of food where a food shortage did not exist.

In both cases, an underlying shortage drove a speculative bubble. At the start of the millenium, there was a housing shortfall and a food shortfall. At least in the latter case, the bubble was short lived and seems to have done little permanent damage. We weren't so lucky with the housing bubble, in large part because of the investment banks' regulatory capture. Still, bubbles are a natural feature of all economies: at least we didn't have to overthrow the government to correct the mis-allocation.
posted by anotherpanacea at 9:09 AM on July 7, 2010


but you still need to increase production, and price increases are still the best way to do that.
From the World Development Movement FAQ on the crisis [PDF]:
Aren't high prices good for poor farmers in developing countries as they'll get better prices for their produce?
No, high food prices affect poor farmers as well as the urban poor. A high percentage of rural households are net buyers of staple foods. In Kenya and Mozambique, around 60 per cent of rural householders are net buyers of maize. Very few poor farmers produce a significant surplus to sell. In Zambia, 80 per cent of farm households grow maize, but fewer than 30 per cent sell any. The few households which make up the bulk of maize sellers have significantly higher incomes.
Any farmers who do have a surplus to sell may see little benefit of higher prices. The FAO says that consumers in urban areas are more likely to see the effects of higher prices than producers in rural areas. Moreover, large producers which are part of large (sometimes multinational) companies are most able to benefit from high prices. Africa has gone from being a net exporter of food in 1970 to a massive net importer. Around 55 per cent of developing countries are net food importers and almost all countries in Africa are now net importers of cereals. This means they are hugely reliant on the world food prices of their staple foods and higher prices have a direct impact on their ability to feed themselves.
Again, as I noted above, overall global food production has far outstripped population growth in recent decades. The problem isn't stimulating greater food production, it's ensuring that all have access to sufficient food.

At least in the latter case, the bubble was short lived and seems to have done little permanent damage... Still, bubbles are a natural feature of all economies
No permanent damage other than the millions of dead and those children who will grow up affected by the malnutrition they experienced in their vital formative years.
Bubbles aren't some force of nature; they're the product of human activity - financial speculation - and even absent an ending of the capitalist economy of which they are an inevitable feature, their baleful impact on human well-being can be ameliorated by regulating speculative behaviours in essential commodities such as food.
posted by Abiezer at 4:11 AM on July 9, 2010 [1 favorite]


No permanent damage other than the millions of dead and those children who will grow up affected by the malnutrition they experienced in their vital formative years.

Nothing you've linked gives evidence that the real losses occurred in 2007 and not 2009. The data simply isn't exacting enough for that. Indeed, your food production charts only go to the year 2000, which was when the troubling trends in food production started. Certainly the dissemination of techniques for the industrialization of agriculture between '61 and '00 is a mega-trend that deserves great credit. Yay, Norman Borlaug.

You claim inflation is the problem, I claim economic stagnation is the problem, so let's compromise: stagflation is the problem. It's the global recession that's eroding the gains made by the global poor over the last few decades.

Bubbles... baleful impact on human well-being can be ameliorated by regulating speculative behaviours in essential commodities such as food.

It's just not clear that this is true. One thing we know about bubbles in general is that they're difficult to distinguish from market fundamentals until after the fact. If they weren't, nobody would buy into them. That said, I fully support import substitution for food security, so again, we needn't disagree on the fundamentals.
posted by anotherpanacea at 6:23 AM on July 9, 2010


Speculators' new craze for chocolate leaves a bitter taste
European cocoa traders threaten to quit the London market over 'manipulation'.
posted by adamvasco at 8:20 AM on July 11, 2010


Tangentially: Darwin's Nightmare is a documentary film about humans and fish.
posted by yoHighness at 12:00 PM on July 12, 2010


Interview with the author of the Harper's piece.
posted by homunculus at 8:44 AM on July 16, 2010


Can You Hear Goldman Laughing? After a big wind-up, the SEC is essentially allowing Goldman Sachs to redeem itself for the price of a few days' revenue.
posted by homunculus at 12:32 PM on July 17, 2010


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