Gambling with HungerPosted: February 4, 2011
During the wind down of the financial crisis several years ago, a few people that read my more wonky threads asked me where I thought the next speculative bubble would develop. I answered food more from intuition than any hard core evidence that I had at the time. Now there is plenty of hard core evidence that validates my intuition.
Farm land and Ag. prices have been fairly stable since the 80s and represented some of the few markets that proved relatively resistant to the Global Financial Crisis. However, there was a period of time–2007 through 2008– when some speculative practices influenced food markets. That is why I thought it was likely to recur. Food is, of course, a necessity so that always gives a market a degree of persistence during downturns. It does not make it safe from speculation. The deal is that speculators made a lot of money from their counterbets to the mortgage bubbles and that money had to go some where. I thought it likely they would head for the commodities markets since they did that before with oil, cooper, and food. Since these investors are by nature speculators, they have similar investment behaviors and profiles. The movement of a large number of large dollar investors from one specific clientele into any market is going to have an impact. Speculators moved to commodities and they moved on food. You could see the momentum build and you could trace momentum riders as they entered the market.
Before I get started on the main thrust of this post, I’d like to mention that I know a lot about Shari’a compliant finance and banking because my major professor is one of its leading authorities. Because this discussion is going to include countries where Islam is a major religion, I would like to say a few things about how Shari’a is applied to stock markets, banks, and ‘financial engineering’ in countries where populations may be pushing for these kinds of laws. I’d also like to say that Islamic economists share my concerns even though those concerns are rooted in different philosophies.
It is important to point out that Islamic banks and investment funds were found to be resistant to the global recession compared to their conventional counterparts. This is because gambling and speculation is outlawed in Islamic texts and therefor not allowed in Shari’a compliant institutions. The current U.S. and European corporate form is problematic under Shari’a. The Qu’ran is very specific about the nature of doing business. Most of this is based on the old testament prohibition against usury but the haddith and Q’uran go further. However, the shared old testament roots makes a lot of Islamic financial institutions similar to the ones you find in New York with special banks run by the Orthodox Jewish communities there. We already have religious financial institutions that follow Old Testament prescriptions. I’ve had Jewish students from Orthodox congregations provide me similar information that’s rooted in the Talmud. (Yes, I’m an atheist which makes me extra suspicious of any religious text.)
The Qur’an also promotes shared partnership/ownership and responsibility within a business as a moral imperative between all owners of that business. It does not promote any governmental ownership. It is considered immoral to operate a business with a never-ending, always changing ownership pool like that present in the business form of a public corporation. Preferred stock is strictly prohibited. All owners must have a shared responsibility for the business. That includes the concept of ‘negative’ profits and any negative results. If the business does something immoral or wrong, all of the owners and decisions makers owe the societal retribution and share in the shame and negative profits. No one owner can walk away from illegal activities.
Contracts that are compliant to the Shari’a are written clearly and monitored against gharar (disception) so that gambling and speculation cannot occur and so that any thing bad the business does comes back on all the owners/investors in a business. They all hang or thrive together over long periods of time. That is because a business and trade are supposed to bring good results for the entire community. It’s like the idea of karma. If you do good, every thing thrives. If you do harm, the poison spreads and you are held to account. The contracts are enforceable in courts. In this case, an Islamic jurist and an angry sky god will hold you to account. You’ve undoubtedly read exactly how old testament angry that punishment can be be in the version of Shari’a practiced by the extreme Shia Islam of Iran. Fortunately, most adherents to Islam–like the majority of adherents to Christianity and Judaism–do not adhere to literal interpretations of Old Testament prohibitions and punishments. They hold to the underlying moral view and practices.
Shari’a compliance means no corporate form like we use here with its limited liability financiers and assumed perpetuity. This is probably why you’ve got so many people calling Islam ‘anti-capitalist’ now. It’s not anti-capitalist at all. In fact, it exhorts people to share and run businesses as a moral activity. It’s the speculation and the ability to walk away from liability that is prohibited. It is not about government takeover of private property. It is about holding private property owners to account for the damage they may do to society and preventing that when possible. Of course, the plutocracy hates this.
I want to explain what this means because it’s not a Marxist form or a planned market form like you saw in the Soviet Union. This is not a ‘communist under the bed’ situation. Derivatives and financial engineering are being vigorously discussed by Islamic economists and financiers right now. They are separating out the forbidden, speculative activities. This means that many hedge funds would not be able to get into projects where the owners follow Shari’a because speculation is strictly prohibited. All investments must be matched to “real” assets. Assets cannot be created out of thin air. So, in this situation, forward contracts or futures contracts are allowed. Some of the synthetic deals that characterized the pre-crisis time cannot be used by firms providing investment fund opportunities to people concerned their monies be placed in Shari’a compliant ways. Additionally, the Q’uran has a strict prohibition on hording money. The rich must keep their funds active in the economy to please God. Another edict is that all activities must put aside a portion for charitable activities that support widows and orphans. I hope this gives you enough understand to place this next discussion in context and why some people may find this appealing.
So, maybe you can understand why gambling with food assets is a big concern on many levels for developing nations. First, you have an incredible amount of hungry people. There are tales of hungry people in Africa watching boats be loaded with food they grew being shipped to rich, developed countries. Then, you have a number of regions where gambling is basically seen as doing harm to people and is prohibited by God. I would like to remind you that most fundamentalist Christians and Orthodox Jewish Congregations believe this too. It’s clearly part of the old testament prohibitions. So, modern finance is running headlong into development economics as well as people with literal old testament-based religions. Again, Orthodox Jewish congregants have a separate banking system in New York that would be considered Shari’a compliant. I cannot emphasize this enough.
So with this in mind, there is increasing evidence that ‘Rampant Speculation Inflated Food Price Bubble”. You can see what excessive speculation is now doing to food markets.
Billions of dollars are being made by investors in a speculative “food bubble” that’s created record food prices, starving millions and destabilising countries, experts now conclude.
Wall Street investment firms and banks, along with their kin in London and Europe, were responsible for the technology dot-com bubble, the stock market bubble, and the recent U.S. and UK housing bubbles. They extracted enormous profits and their bonuses before the inevitable collapse of each.
Now they’ve turned to basic commodities. The result? At a time when there has been no significant change in the global food supply or in food demand, the average cost of buying food shot up 32 percent from June to December 2010, according to the U.N. Food and Agriculture Organisation (FAO).
Nothing but price speculation can explain wheat prices jumping 70 percent from June to December last year when global wheat stocks were stable, experts say.
“There is no food shortage in the world. Food is simply priced out of the reach of the world’s poorest people,” said Robert Fox of Oxfam Canada in reference to the estimated one billion people who go hungry.
“Hunger is not a food production problem. It is an income problem,” Fox told IPS.
The conditions that created the 2007-08 price hike and food riots have not changed, he said. It is no surprise to see record-high food prices and riots again in Egypt, Algeria, Jordan and elsewhere.
In 2010, wheat futures rose 47 percent, U.S. corn was up more than 50 percent, and soybeans rose 34 percent.
On Wednesday, U.S.-based Cargill, the world’s largest agricultural commodities trader, announced a tripling of profits. The firm generated 1.49 billion dollars in three months between September and November 2010.
Meanwhile, U.S. Treasury Bills pay a return of less than one percent.
“We have set up a global food system that supports speculation. And with [such] markets, we can’t get speculators out of the food business,” said Lester Brown, an agricultural policy expert and founder of the Washington- based Earth Policy Institute.
“Farmland is better gold than gold for speculators,” Brown told IPS.
Growing concern over access to food is also creating a new geopolitics around food security, with many countries buying up farmland and banning the export of food, he said.
World leaders have utterly failed to address the simple fact that while there is enough food, a billion people, living in every country in the world, simply can’t afford to buy it, said Anuradha Mittal of the Oakland Institute, a U.S.-based policy think tank on social, economic and environmental issues.
“Why were a billion hungry with a record wheat harvest in 2008?” Mittal told IPS.
And how is it there are one billion people who are overweight, with 300 million of those considered medically obese?
With these figures in mind, please read the TruthOut article: The Egyptian Tinderbox: How Banks and Investors Are Starving the Third World.
Underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices and unemployment. The Associated Press reports that roughly 40 percent of Egyptians struggle along at the World Bank-set poverty level of under $2 per day. Analysts estimate that food price inflation in Egypt is currently at an unsustainable 17 percent yearly. In poorer countries, as much as 60 to 80 percent of people’s incomes go for food, compared to just 10 to 20 percent in industrial countries. An increase of a dollar or so in the cost of a gallon of milk or a loaf of bread for Americans can mean starvation for people in Egypt and other poor countries.
This is a dangerous situation. Markets are generally the best way to allocate scare resources. We have seen over and over again the failures of planned economies. However, we are increasingly entering territory where deregulation, speculation, and momentum created by huge multinational firms gaming markets have created intolerable public health and governance issues. This removes scarce resources from real asset markets.
If you read Adam Smith, J.M. Keynes, Marx or the Q’uran, the Talmud, and the Old Testament of the Christian Bible or you just think about the Hindu/Buddhist idea of karma, you can find one sure theme. This idea is that damage will be done to entire economies when countries overly engage in purely speculative activities (e.g. gambling). It is a harmful activity in the moral sense in nearly every religious text. In the economic sense, it is considered by all schools of thought to be something that interferes with the basic economic function of the best allocation of scare resources. It causes price distortions which mess with price. An ‘honest’ price is the essential free market allocator. Now, consider that we’ve gone through one bubble based on shelter and have moved on to the next which is food and farmland. This entire game is played on the most vulnerable parts of a society because food and shelter make up the the major budget items among every one’s poor, working class, and middle class society. It is why most of us feel ‘inflation’ even though it is not present at the ‘aggregate’ level of the economy. This ‘steals’ purchasing power, value, and products from people on very basic necessities of life.
Modern governments exist to protect the many from the abuses of the powerful few. This is clearly an example. Many governments are letting institutions gamble with huge amounts of money and that is hurting the basic pricing mechanism of many markets. It’s distorted housing prices and food prices. A recent article in Harper’s Magazine elucidated the role Goldman Sachs played in the food crisis of 2008. The number of hungry swelled by 250 million then. The article is titled “The Food Bubble: How Wall Street Starved Millions and Got Away With It” and came out in summer of 2010. It’s an excellent read. Democracy Now has an taped interview with its author that you can watch here. GS paid $550 million to resolve a SEC lawsuit that showed they gamed trading laws. Exactly how greedy do you have to be to game the market for food? The article is good because it goes into detail on how companies do this.
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.
Activities like this should be illegal and markets should be carefully guarded against them through regulation. I’d rather see us move to this with clear headed secular laws. It’s not difficult to see, however, why some religious people in developing nations want it stopped. It’s also hypocritical to label their efforts ‘anti-capitalistic’ while allowing similar institutions to exist in one of our own US states. Much better that secular governments establish secular controls before more hungry and starving people–who will do desperate things to feed their families–take to the streets.
I would also like to point to examples where the Village is distinctly unhelpful. It does no good for talking heads like Elliot Spitzer and Sean Hannity to simply bash fundamentalist religion figures–in this case Anjem Choudry–on national TV for ratings and avoid rational discussion of the true issues. Even Choudry’s Christian equivalents–like Pat Robertson–can have valid concerns even while they are frequently expressed in hateful and strict religionist terms that make our skin crawl. Press Spokesmodels should be driving a conversation on the concerns, not creating fear and anger. The impact of speculation on food crises should be taken seriously. This is a place where we can find common ground among many peoples. It saddens me to see it being inflated with other things.