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How Goldman Sachs gambled on starving the world's poor - and won

 
Sol Hyperion
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07/02/2010 07:56 AM
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How Goldman Sachs gambled on starving the world's poor - and won
How Goldman Sachs gambled on starving the world's poor - and won


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 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, just so they could make a fatter profit.

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 percent, maize by 90 percent, and rice by 320 percent. 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 over 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, called 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 like they were hit by a tsunami. "It was very painful," a woman my age called Abeba Getaneh, told me. "My children stopped growing. 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. We were told the swelling Chinese and Indian middle classes were pushing it up, but as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand from those countries for them actually fell by 3 percent over this period.

There are some smaller explanations that account for some of the price rise, but not all. 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. It's true that oil prices increased, driving up the cost of growing and distributing food - but the evidence increasingly shows that wasn't the biggest factor.

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.

For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. 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. 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.

So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to financial speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutschebank, who sell it on for £30,000 to Merryl Lynch - and on, and on, provided they think the price can be jacked up, until it seems to bear almost no relationship to Farmer Giles' crop at all.

If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance, 'Whoops! Why Everybody Owes Everyone and No One Can Pay', explains: "Finance, like other forms of human behaviour, underwent a change in the twentieth century, a shift equivalent to the emergence of modernism in the arts - a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn't be explained in workaday English."

Poetry found its break broke with straightforward representation of reality when T.S. Eliot wrote 'The Wasteland.' 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."

So what has this got to do with the bread on Abiba's plate? How could this parallel universe of speculation affect her? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was itself deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in contracts that were speculating on theoretical food that would be grown in the future - and the speculators drove the price through the roof.

Here's how it happened. In 2006, financial speculators like Goldman's pulled out of the collapsing US real estate market, and they were looking for somewhere else to make their stash of cash swell. They started to buy massive amounts of derivatives based on food: they reckoned that food prices would stay steady or rise while the rest of the economy tanked. Suddenly, the world's frightened investors stampeded onto this ground and decided to buy, buy, buy.

So while the supply and demand of food stayed pretty much the same, the supply and demand for contracts based on food massively rose - which meant the all-rolled-into-one price for food on people's plates massively rose. The starvation began.

The food price was now being set by speculation, rather than by real food. The hedge fund manager Michael Masters estimated that even on the regulated exchanges in the US - which take up a small part of the business - 64 percent of all wheat contracts were held by speculators with no interest whatever in real wheat. They owned it solely to inflate the price and sell it on. Even George Soros said this was "just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices." The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.

When I asked them to comment on the charge of causing mass hunger, 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.

How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period - but only a fraction as much as the ones affected by speculation. Her research shows this speculation was "the main cause" of the rise.

So it has come to this. The world's wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won. This is what happens when you follow the claim that unregulated markets know best to the end of the line. The finance sector's Wasteland moment created a real wasteland. What does it say about our political and economic system that we can so casually inflict such misery, and barely even notice?

If we don't re-regulate, it is only a matter of time before this all happens again. How long would it last then? How many people would it kill next time? The moves to restore the pre-1990s rules on commodities trading have been stunningly sluggish. In the US, the House has passed some regulation, but there are fears the Senate - drenched in speculator-donations - may dilute it into meaninglessness. The EU is lagging far behind even this, while in Britain, where most of this "trade" takes place, advocacy groups are worried David Cameron's government will block reform entirely to please his own friends and donors in the City.

Only one force can stop another speculation-starvation-bubble from swelling, probably soon. The decent people in developed countries need to shout louder than the lobbyists from Goldman Sachs. In the UK, the World Development Movement is launching a week of action this summer as crucial decisions on this are taken: text WDM to 82055 for your marching orders. In the US, click here to find out what you can do. The last time I spoke to her, Abiba said: "We can't go through that another time. Please - do anything you can to make sure they never, never do that to us again."
Anonymous Coward
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07/02/2010 07:59 AM
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Re: How Goldman Sachs gambled on starving the world's poor - and won
Reading the Economic Hitman books was VERY eye-opening as to HOW these banks enslave impoverished companies.
Anonymous Coward
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07/02/2010 01:40 PM
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Re: How Goldman Sachs gambled on starving the world's poor - and won
I was going to post this article, but I searched and found the OP's earlier post. So I'll bump this now, and pray that people are paying attention.

Goldman Sachs is out to destroy this planet.

Got rope?

PS: this piece on Goldman Sachs really does deserve a pin.
Cypher

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07/02/2010 01:45 PM
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Re: How Goldman Sachs gambled on starving the world's poor - and won
all about GS and Crime Inc here:

Thread: Whistle blower will testify BP deliberately sinks oil with Corexit as cover up! (Page 3)
Anonymous Coward
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07/02/2010 01:59 PM
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Re: How Goldman Sachs gambled on starving the world's poor - and won


Good information...but it's only part of what's going on. Here's an example:

[link to www.businessweek.com]

Goldman Sachs Pressed By Born for Derivatives DataJuly 01, 2010, 5:03 PM EDT

July 1 (Bloomberg) -- Goldman Sachs Group Inc. refused a request from the Financial Crisis Inquiry Commission to reveal how much it makes trading derivatives, saying the bank doesn’t separate the figure from other businesses.

“Some other firms have provided us with that data when we’ve asked for it and Goldman Sachs hasn’t,” Commissioner Brooksley Born said today in Washington on the second day of a hearing investigating the role of derivatives in the 2008 credit crisis, which sparked the worst recession since the 1930s. “It makes one wonder why Goldman has the incentive or impetus to not release this information.”

...Goldman Sachs, the most profitable Wall Street firm in history, is being questioned about credit-default swap trades with American International Group Inc., the insurer bailed out by the U.S. government after AIG was unable to meet collateral demands from trading partners on the contracts. The swaps, used by Goldman Sachs and other banks to hedge against declines in the value of mortgage-linked debt, caused losses at AIG as housing prices collapsed.

‘It’s Integrated’

...Goldman Sachs was subpoenaed by the commission last month after the New York-based firm sent more than a billion pages of documents to the panel, a shipment so sizable that panel members called it an attempt to hinder their probe.

“We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish,” Chairman Phil Angelides, who previously served as California’s treasurer, said June 7. “This has been a very deliberate effort over time to run out the clock.”


Born’s Warning

Born had warned in 1998, as chairman of the Commodity Futures Trading Commission, that the unregulated over-the- counter derivatives market posed a danger to the global financial system. She moved to address changes in how swaps based on interest rates, commodities or currencies were traded and was stopped by then-Federal Reserve Chairman Alan Greenspan, SEC Chairman Arthur Levitt and Treasury Secretary Robert Rubin, who all argued the market could regulate itself.

Born said last year that the banks that caused the crisis were trying to stop the congressional overhaul of the market. ...
(see article)
Cypher

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07/02/2010 02:47 PM
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Re: How Goldman Sachs gambled on starving the world's poor - and won


Crime Inc

[link to www.thecypresstimes.com]

Nalco/Crime Inc. Connection

[link to www.blogster.com]

Vatican behind it all?

[link to clareswinney.wordpress.com]

Mr. Sutherland, the man standing with one foot in GS, and the other on the burning Halliburton-BP oil rig, is the Consultor of the Extraordinary Section of the Administration of the Patrimony of the Apostolic See. In other words, Sutherland is the chief financial adviser to the Pope.

<snip>

Now, ironically, Sutherland’s mission impossible is to migrate marine flora and fauna, fisherman, and coastal residents out of harms way in this spreading international emergency.

Last Edited by RTS on 07/02/2010 02:48 PM
Cypher

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07/02/2010 03:12 PM
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Re: How Goldman Sachs gambled on starving the world's poor - and won
btw..the following thread is directed towards GS and those who support them..

it sort of ties everything together imo..

Thread: Crazy? Once I was crazy. They locked me in a room to die. Die? I don't want to die. All the mice will get me. Mice? I hate mice. They drive me cr
Cypher

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07/02/2010 04:15 PM
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Re: How Goldman Sachs gambled on starving the world's poor - and won
excuse me OP but I am always suspicious when OPs don't bump their own thread.

any thoughts?

Last Edited by RTS on 07/02/2010 04:15 PM
Anonymous Coward
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07/02/2010 06:56 PM
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Re: How Goldman Sachs gambled on starving the world's poor - and won
excuse me OP but I am always suspicious when OPs don't bump their own thread.

any thoughts?
 Quoting: Cypher


I don't tend to bump mine that often. It depends.

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