Published on Friday, February 4, 2011 by CommonDreams.org
Food, Egypt and Wall Street
The dramatic rise in food prices is fueling a great deal of discontent in Tunisia, Egypt and elsewhere. It is a deep under current propelling many of the poor, facing prospects of starvation to resort to the streets and to violence. According to the United Nation's Food Agency (Food and Agriculture Organization -- FAO) world food prices are up for the 7th month in a row and are likely to remain close to the record high reached in December 2010. There's no end in sight to this destabilizing battle with food price inflation in places like Egypt, where more than half of an average income goes for food. According to the U.S. State Department, more than 60 food riots occurred worldwide over the past two years.
In March 2008, a dramatic spike in food prices led thousands of people on the brink of starvation in Egypt to violently riot -- sending a seismic shock wave through the Mubarak regime. After the Egyptian military was able to distribute enough wheat to dispel the rioting, efforts to stockpile wheat by the Mubarak government have failed, as food prices continue to hover at record highs.
Many reasons are given in the media for this problem ranging from soaring demand, cuts in food subsidies, droughts, and government mandates to use more grain-based bio-fuel. But, another significant factor is at play: unfettered speculation by investment banks. As noted in USA today, in 2008, "the bulls may not be running on Wall Street, but they're charging in the commodities pits." http://www.usatoday.com/money/
At issue are the still deregulated commodity markets ushered in by the Clinton Administration and the U.S. Congress with the passage of the Commodity Futures Modernization Act of 2000. Before this law, the Commodity Futures Trading Commission (CFTC) served as a cop on the beat, enforcing rules that prevent distortion of manipulation of prices beyond normal supply and demand. But Wall Street Banks and companies such as ENRON, and British Petroleum were determined to make a lot more money from speculation by exempting energy-derivative contracts and related swaps from government oversight. And so, the 2000 law allows entities that have no stake in whether adequate amounts of food and fuel are available for ordinary people and commodity-dependent businesses, to make huge sums of money by gambling with other people's money.
Soon after passage of the 2000 law "dark" unregulated futures trading markets emerged, most notably the Intercontinental Exchange (ICE) in London -- created by Wall Street and European investment banks and several oil companies. A key practice involves "over the counter index trading" in which hundreds of billions of dollars of pension, sovereign wealth other institutional funds are used to flood "dark" commodity markets to buy and hold futures contracts without an expiration date or oversight. When it's time to make money on a losing bet, these funds are withdrawn causing commodity price crashes and economic instability. These transactions do not involve customary "bona fide" commodity traders, such as an airline company hedging on the price of jet fuel by purchasing futures contracts. As noted by Michael McMasters, a prominent hedge trader before a U.S. Senate panel in 2008, this amounts to "a form of electronic hoarding and greatly increases the inflationary effect of the market. It literally means starvation for millions of the world's poor." http://hsgac.senate.gov/
Some world leaders are willing to speak out against the pernicious role of "dark" commodity markets. Recently, French President Sarkozy warned of further unrest and even war at the Davos forum, unless commodity speculation is reined in -- something that is being fought bitterly by Wall Street and Congressional Republicans. The Dodd/Frank Financial Reform Law places some restrictions on this practice by the Commodity Futures Trading Commission (CFTC). In particular, the CFTC is beginning the process of weeding out "non bona fide" investment bank speculators. True to form, House Republicans are demanding that the CFTC slam on the brakes and are planning hearings and legislation to hamstring these efforts.
The spontaneous mass uprising of ordinary people in the Middle East against their authoritarian regimes has many root causes. One that should receive much greater attention is the unfettered speculation over food supplies by powerful private financial institutions that could care less about world-wide starvation and its impacts.
In March 2008, a dramatic spike in food prices led thousands of people on the brink of starvation in Egypt to violently riot -- sending a seismic shock wave through the Mubarak regime. After the Egyptian military was able to distribute enough wheat to dispel the rioting, efforts to stockpile wheat by the Mubarak government have failed, as food prices continue to hover at record highs.
Many reasons are given in the media for this problem ranging from soaring demand, cuts in food subsidies, droughts, and government mandates to use more grain-based bio-fuel. But, another significant factor is at play: unfettered speculation by investment banks. As noted in USA today, in 2008, "the bulls may not be running on Wall Street, but they're charging in the commodities pits." http://www.usatoday.com/money/
At issue are the still deregulated commodity markets ushered in by the Clinton Administration and the U.S. Congress with the passage of the Commodity Futures Modernization Act of 2000. Before this law, the Commodity Futures Trading Commission (CFTC) served as a cop on the beat, enforcing rules that prevent distortion of manipulation of prices beyond normal supply and demand. But Wall Street Banks and companies such as ENRON, and British Petroleum were determined to make a lot more money from speculation by exempting energy-derivative contracts and related swaps from government oversight. And so, the 2000 law allows entities that have no stake in whether adequate amounts of food and fuel are available for ordinary people and commodity-dependent businesses, to make huge sums of money by gambling with other people's money.
Soon after passage of the 2000 law "dark" unregulated futures trading markets emerged, most notably the Intercontinental Exchange (ICE) in London -- created by Wall Street and European investment banks and several oil companies. A key practice involves "over the counter index trading" in which hundreds of billions of dollars of pension, sovereign wealth other institutional funds are used to flood "dark" commodity markets to buy and hold futures contracts without an expiration date or oversight. When it's time to make money on a losing bet, these funds are withdrawn causing commodity price crashes and economic instability. These transactions do not involve customary "bona fide" commodity traders, such as an airline company hedging on the price of jet fuel by purchasing futures contracts. As noted by Michael McMasters, a prominent hedge trader before a U.S. Senate panel in 2008, this amounts to "a form of electronic hoarding and greatly increases the inflationary effect of the market. It literally means starvation for millions of the world's poor." http://hsgac.senate.gov/
Some world leaders are willing to speak out against the pernicious role of "dark" commodity markets. Recently, French President Sarkozy warned of further unrest and even war at the Davos forum, unless commodity speculation is reined in -- something that is being fought bitterly by Wall Street and Congressional Republicans. The Dodd/Frank Financial Reform Law places some restrictions on this practice by the Commodity Futures Trading Commission (CFTC). In particular, the CFTC is beginning the process of weeding out "non bona fide" investment bank speculators. True to form, House Republicans are demanding that the CFTC slam on the brakes and are planning hearings and legislation to hamstring these efforts.
The spontaneous mass uprising of ordinary people in the Middle East against their authoritarian regimes has many root causes. One that should receive much greater attention is the unfettered speculation over food supplies by powerful private financial institutions that could care less about world-wide starvation and its impacts.
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