Johann Hari on commodity speculation: not even wrong

The Independent’s Johann Hari has written a piece on commodity speculation that’s lighting up the Twittersphere. Shame it’s so far beyond “wrong” that it’s into the territory of “making stuff up”.

Johann Hari: How Goldman gambled on starvation

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.

Hari goes on to explain that in 2006, the prices of agricultural commodities skyrocketed, then just as quickly plunged back to earth in mid-2008. (The same thing happened in oil, and metals, and nearly every other commodity class, but that doesn’t rate a mention, presumably because the Indy’s editorial slant is that high oil prices are a good thing.)

He paints a heart-wrenching picture – and it is a heart-wrenching picture of a genuine crisis – of Ethiopians and Somalians being driven mad with hunger, and – this is where he goes off the rails – then proceeds to point the finger at the evil evil traders.

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. […] When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.

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.

“Through the 1990s”? He’s talking about commodity futures. Commodity futures as we know them were invented in the 1700s. They’ve been actively traded – in Hari’s words, “bought and sold among traders who had nothing to do with agriculture” – in Chicago since the 1840s. (Here’s a list from 1955 of the charter members of the Futures Industry Association, who would be surprised to hear that what they were doing didn’t exist until the 1990s.)

The markets that Hari’s claiming were created in the 1990s have existed for centuries, and they’ve had plenty of booms and busts in that time. He’s making things up. But he continues…

[…]after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price through the roof.

…and the farmers producing the crops were absolutely rapt, but Hari doesn’t mention that.

Here’s how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world’s frightened investors stampeded on to this ground.

Every single time Hari mentions financial markets players, he invokes Goldman Sachs. “Goldman and its swarm of Wall Street allies”, “Goldman Sachs and others”, “financial speculators like Goldmans”, “the lobbyists from Goldman Sachs”. His campaign (and he is working for a campaign, as he points out later) needs a devil, and Goldman is a convenient one.

But it wasn’t just Goldmans who were buying commodities in the ’06-’08 bubble. It was everyone. Hedge funds. Bank prop desks. Retail investors (who piled into newly-invented commodity ETFs, among other things, with alarming ferocity). Even pension funds were buying into the hype, as Bloomberg’s Caroline Baum pointed out in early 2008. The money quote from Baum’s article:

[…]index positions accounted for 41.3 percent of the total market capitalization of the covered markets as of May 2. These funds “are the largest participants in the markets covered in this report, dwarfing positions held by both non-index hedgers and traditional speculators,” [analyst Jim] Bianco says.

Goldman is firmly in the “traditional speculator” category, and they were being drowned out by long-only index investors. And that destroys Hari’s anti-Goldman premise.

But he comes so close – achingly close! – to making an actual argument that Goldman had a detrimental influence on the commodity markets:

Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that “serious analyses … have concluded index funds did not cause a bubble in commodity futures prices”, offering as evidence a statement by the OECD.

Hari doesn’t provide any context, doesn’t even explain what an “index” is, or why Goldman might want to say it sold them. But Goldman sponsors – or used to sponsor, because as they mentioned, they sold the business to Standard and Poors in 2007 – the Goldman Sachs Commodity Index, which was a popular benchmark index for big institutional investors who didn’t want to miss out on commodities’ bubblicious returns.

But if you’re going to use the existence of the GSCI index to sheet home blame to Goldmans for the commodity bubble, then you should also blame Karl Case and Robert Shiller for the housing crash. You should blame Nasdaq for the tech stock bubble. And you should blame Dow Jones for the Crash of 1929. It’s not the index sponsors’ fault that people speculate on their indices.

At the end of his article, Hari rises to his triumphant conclusion: that you should give him money!

If we don’t re-regulate, it is only a matter of time before this all happens again. How many people would it kill next time? […] Only one force can stop another speculation-starvation-bubble. The decent people in developed countries need to shout louder than the lobbyists from Goldman Sachs. The World Development Movement is launching a week of pressure this summer as crucial decisions on this are taken: text WDM to 82055 to find out what you can do.

The NGO that Hari’s endorsing is the World Development Movement, who are crusading to “stop commodity speculation”. Their FAQ sets a new bar for fence-sitting: in the space of two pages (pages 2 and 3, if you’re curious) they manage to argue that high prices are bad, argue that low prices are bad, and argue that volatile prices are bad. They aren’t clear on what they want to happen to prices, but they know that they want the banksters out of food markets.

But if the banksters left the food markets, that would make WDM’s nightmare market – high prices, low prices, volatile prices – come to pass.

There is one major agricultural commodity that doesn’t have a futures market in the United States – the humble onion. Introduced in 1956 after a market-manipulation scandal, The Onion Futures Act applies WDM’s perfect world to the onion market, and the result has been chaos:

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics’ belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April.

The volatility has been so extreme that the son of one of the original onion growers who lobbied Congress for the trading ban now thinks the onion market would operate more smoothly if a futures contract were in place.

WDM wants to bring back a market where wheat and corn and rice experience 500% spikes and 96% crashes. That would destroy the farmers, then destroy the consumers.

Johann Hari won’t feed a single hungry person with his sanctimonious bandwagon-jumping.

And WDM will never feed a single hungry person either. They say as much on their “About Us” page: “We do not give aid, and we do not run projects.”

All they do is talk: “We lobby decision-makers, organise public campaigning and produce robust research to win change for the world’s poorest people. We investigate, expose and challenge government policies and corporate actions[…]”. No action – only “lobbying” and “organising” and “producing research” and “investigating” groups they don’t like.

Malnutrition and food insecurity in the developing world is a real problem – a deadly problem – but mindless bankster-bashing and “a variety of campaigning tactics” won’t feed the poor and hungry in Ethiopia or Bangladesh. They need food aid. They need better fertilisers. They need reliable water supplies. They need higher-yield crops. They need a new Norman Borlaug.

They don’t need WDM.

And they don’t need Johann Hari.

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One Response to Johann Hari on commodity speculation: not even wrong

  1. Max says:

    1. The commodities future trade changed in the 1990s following a move for deregulation that had limited speculators since the 1930s.
    2. Goldman and other banks are responsible for creating/benefiting from the mechanism (the commodity index) that allowed/encouraged speculators to enter the commodities market and create a bubble.
    3. For a more technical article than Hari’s look up the Accidental Hunt Brother paper that was presented before congress.

    Good luck

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