How Goldman gambled on starvation
Speculators set up a casino where the chips were the stomachs of millions. What does it say about our system that we can so casually inflict so much pain?
Friday, 2 July 2010
By now, you probably think your opinion of Goldman Sachs and its swarm of Wall Street allies has rock-bottomed at raw loathing. You're wrong. There's more. It turns out that the most destructive of all their recent acts has barely been discussed at all. Here's the rest. This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world.
It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."
Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember the food crisis as if they had been struck by a tsunami. "My children stopped growing," a woman my age called Abiba Getaneh, told me. "I felt like battery acid had been poured into my stomach as I starved. I took my two daughters out of school and got into debt. If it had gone on much longer, I think my baby would have died."
Most of the explanations we were given at the time have turned out to be false. 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: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they aren't enough on their own to explain such a violent shift.
To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world's stomachs ache. more
Bread and Derivatives
by Wallace C. Turbeville
Goldman’s control of market structure might just starve us, strand us, and leave us in the dark. Literally.
In 2008, before the financial system almost melted down and threatened an economic collapse of biblical proportions, some very odd events occurred in the market for commodities derivatives. It is now clear that financial institutions and investors already understood that the mortgage market was teetering and that severe problems for the financial firms were on the horizon. Stress was building, but how did this relate to the commodities markets? We still do not know for certain, but we do know that it coincided with peak investment levels of $317 billion in several investment vehicles known as commodity index funds.
In 1991, Goldman Sachs invented the commodity index fund. While several other firms have replicated the fund, Goldman has maintained a 60-75% market share.
A key factor in the success of commodity index funds was an exemption granted by the CFTC from limits on speculative positions. It allowed the fund holdings to grow enormously. Whatever the rationale was at that time, the conditions have changed and history suggests that the decision was unwise.
Goldman would take in funds from clients and invest the proceeds in futures contracts, a portfolio of energy, agricultural, minerals and financial contracts. It would be a sponsor and manager of the structure, not a principal. Futures contracts fluctuate based on the price of a commodity at a specified date in the future. For example, a barrel of oil to be delivered in August might be worth $70 to both a buyer and a seller as of today. The futures contract between a notional buyer and seller is essentially a financial instrument which continuously tracks that price each day until August arrives and the final price is known. It is not about actual oil, but rather the price of actual oil on a future date. A futures contract is the functional equivalent of a swap and is a derivative of the cash market for the given commodity. more