How Goldman Sachs created the food crisis

[nichomachus]

Goldman Sachs creative derivatives, coupled with rampant deregulation, has created a food crisis. The traders are getting rich and we're paying the price -- again.

http://www.foreignpolicy.com/articles/2011/04/27/how_goldman_sachs_created_the_food_crisis?page=0%2C0

On the other side is the speculator. The speculator neither produces nor consumes corn or soy or wheat, and wouldn't have a place to put the 20 tons of cereal he might buy at any given moment if ever it were delivered. Speculators make money through traditional market behavior, the arbitrage of buying low and selling high. And the physical stakeholders in grain futures have as a general rule welcomed traditional speculators to their market, for their endless stream of buy and sell orders gives the market its liquidity and provides bona fide hedgers a way to manage risk by allowing them to sell and buy just as they pleased.

But Goldman's index perverted the symmetry of this system. The structure of the GSCI paid no heed to the centuries-old buy-sell/sell-buy patterns. This newfangled derivative product was "long only," which meant the product was constructed to buy commodities, and only buy. At the bottom of this "long-only" strategy lay an intent to transform an investment in commodities (previously the purview of specialists) into something that looked a great deal like an investment in a stock -- the kind of asset class wherein anyone could park their money and let it accrue for decades (along the lines of General Electric or Apple). Once the commodity market had been made to look more like the stock market, bankers could expect new influxes of ready cash. But the long-only strategy possessed a flaw, at least for those of us who eat. The GSCI did not include a mechanism to sell or "short" a commodity.

This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying -- no matter what the price. Every time the due date of a long-only commodity index futures contract neared, bankers were required to "roll" their multi-billion dollar backlog of buy orders over into the next futures contract, two or three months down the line. And since the deflationary impact of shorting a position simply wasn't part of the GSCI, professional grain traders could make a killing by anticipating the market fluctuations these "rolls" would inevitably cause. "I make a living off the dumb money," commodity trader Emil van Essen told Businessweek last year. Commodity traders employed by the banks that had created the commodity index funds in the first place rode the tides of profit.

[Andy823]

1. I will say it again

Congress needs to put a stop to this kind of madness! Energy and food should not be used by anyone to become rich! Stop speculators from manipulating prices just so they can make huge profits while the rest of the country, and world, end up paying more and more for things they need to survive! Wall street CAN NOT regulate itself, it doesn't work. We need tougher regulations to stop the insanity before it's to late. Will congress, especially the GOP, every wake up to what the people "REALLY" want?

[banned from Kos]

2. Dodd-Frank puts restrictions on margins and position limits.

That severely limits all traders ability to game the market.

Support Obama so that all of Dodd-Frank gets implemented (it is about 20% now).

[PETRUS]

3. The article explains why such regulations won't work.

And Dodd-Frank is not a particularly good piece of legislation anyway.

The roots of our problems run very, very deep. Occasional trimming of some ugly foliage is not a solution.

[banned from Kos]

4. No, Dodd-Frank is very strong. Wall St hates it, don't they?

See how easy that is? I quickly contradicted your contradiction. The fact is that many commodity prices are falling. So if margin limits and position limits are not enough, what is?

You can't ban speculators. They perform a vital function. And there won't be any new legislation for at least four years.

Learn to like Dodd-Frank - its our horse. Oh, and the Volcker rule is much stronger than Glass-Steagall as I have explained before.

[PETRUS]

5. You didn't contradict me, you just disagreed. nt

It's overly complicated and doesn't get to the roots of the problem (as I hinted in my previous response).