23 Jul 2010
Watch part two of this interview here.
While Goldman Sachs agreed to pay $550 million to resolve a civil fraud lawsuit filed by the US Securities Exchange Commission, Goldman has not been held accountable for many of its other questionable investment practices.
A new article in Harper’s Magazine examines the role Goldman played in the food crisis of 2008 when the ranks of the world’s hungry increased by 250 million.
Amy Goodman and Juan Gonzales of Democracy Now speak with Frederick Kaufman, a contributing editor to Harper Magazine.
According to Kaufman, the new US Financial Reform Bill is a sham because it does not cover, in any way, shape or form, what Goldman Sachs, Bear Stearns, AIG, Lehman, Deutsche, and JPMorgan Chase were able to do in the commodities market, which reached its peak from 2005 to 2008, in what is now known as the food bubble.
What happened is unconscionable. Their speculation and restructuring of commodity markets pushed 250 million new people into food insecurity and starvation, and brought the world total up to over a billion people.
In 1991, Goldman Sachs came up with a new idea and product, which completely restructured the commodities market and threw it out of equilibrium.
How did they create this disequilibrium?
Goldman, it must be understood, and a lot of investment banks, are not interested in the particular structure of any market. What they’re after are very large pools of cash for themselves. So, Goldman, in 1991, came up with the idea of the commodity index fund, which was a way for them to accumulate huge piles of cash for themselves.
Instead of buying and selling like bona fide hedgers and speculators in these markets, Goldman just started buying. It’s called "going long." They started going long on the wheat futures market.
Usually prices go up because supply is low. In this case, Goldman and the other banks introduced a completely unnatural and artificial demand to buy wheat. This accumulation created an odd phenomenon in the market, called a "demand shock,” which then set the price of wheat up.
Hard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel.
The irony here is that 2008 was the greatest wheat-producing year in world history. The world produced more wheat in 2008 than ever before. But, 250 million people around the world were pushed into starvation because Goldman Sachs and the other banks interfered in the wheat market -- and got away with it.
For a full transcript of this interview, visit the Democracy Now website.
Speculators Versus Producers
According to my understanding, GS was able to make huge trades as an investment bank by buying out a few agricultural producers. Legislation had been existent since the Great Depression outlawing trading in futures commodities markets by financial speculators. The futures markets were started to protect the producers from fluctuations in prices. Obviously, someone with a lot of money could manipulate prices by buying up futures contracts, and then holding the market to ransom. The controls remained in place for 50 years. By buying out a few producers, GS effectively was able to claim it too was a producer. It didn't do this only with the food markets, but with the oil markets too. From 1991, the Commodity Futures Trading Commission started issuing 'exemptions' to producer-speculators. The result? Between 2003 and 2008, speculative money in commodities grew from $13bn to $317bn. The "artificial demand" the above article speaks about is the result of speculators buying and selling a commodity while it was still in the ground on average 27 times. Artificial 'middlemen' were created - often the same company buying and selling to themselves. Goldman was by far the biggest and most aggressive player in the food and oil markets. And they got legislation changed to allow pension funds and other large institutional investors to invest in futures - although the market was the most volatile, unpredictable and unreliable of markets. From 2006 to 2008 when the oil bubble broke, speculators were ripping the world economy off to the tune of a trillion dollars a year, given an oil price of $70. Taking that the oil price peaked at $144, the actual price tag is higher than a trillion a year. The oil price tanked during the 2008 presidential elections. What sparked the sudden drop? A GS press release confidently predicting $250 a barrel by the end of the year. That got US voters demanding to know why. In an election year, such a price given its effect on inflation in the midst of the breaking credit crunch - sparked by the sub-prime housing crisis nuturd by GS - carried with it too much political flak and so the price fell. But why would GS make such an outrageous prediction, knowing surely that it would attract criticism and throw the floodlight of public concern on futures trading? It's called 'pump and dump' - pump up the price, lure the suckers in, sell when prices peak and then short the market and watch the suckers panic. Then you go in and buy low and start it all over again.
Despite all Obama's promises, his recently unveiled 'reforms' of the banking sector will become operational finally only in 12 years because of long-term "contractual obligations' the banks have. And the problems in the futures markets? Heheh ... they're still there.