Goldman Sachs created the food crisis — “Foreign Policy” tells how they did it

From Frederick Kaufman in Foreign Policy:

Photo of wheat field via Financial Post.

Don’t blame American appetites, rising oil prices, or genetically modified crops for rising food prices. Wall Street’s at fault for the spiraling cost of food.

“Demand and supply certainly matter. But there’s another reason why food across the world has become so expensive: Wall Street greed.

It took the brilliant minds of Goldman Sachs to realize the simple truth that nothing is more valuable than our daily bread. And where there’s value, there’s money to be made. In 1991, Goldman bankers, led by their prescient president Gary Cohn, came up with a new kind of investment product, a derivative that tracked 24 raw materials, from precious metals and energy to coffee, cocoa, cattle, corn, hogs, soy, and wheat. They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known henceforth as the Goldman Sachs Commodity Index (GSCI).

For just under a decade, the GSCI remained a relatively static investment vehicle, as bankers remained more interested in risk and collateralized debt than in anything that could be literally sowed or reaped. Then, in 1999, the Commodities Futures Trading Commission deregulated futures markets. All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food.

Change was coming to the great grain exchanges of Chicago, Minneapolis, and Kansas City — which for 150 years had helped to moderate the peaks and valleys of global food prices. Farming may seem bucolic, but it is an inherently volatile industry, subject to the vicissitudes of weather, disease, and disaster. The grain futures trading system pioneered after the American Civil War by the founders of Archer Daniels Midland, General Mills, and Pillsbury helped to establish America as a financial juggernaut to rival and eventually surpass Europe. The grain markets also insulated American farmers and millers from the inherent risks of their profession.

The basic idea was the “forward contract,” an agreement between sellers and buyers of wheat for a reasonable bushel price — even before that bushel had been grown. Not only did a grain “future” help to keep the price of a loaf of bread at the bakery — or later, the supermarket — stable, but the market allowed farmers to hedge against lean times, and to invest in their farms and businesses. The result: Over the course of the 20th century, the real price of wheat decreased (despite a hiccup or two, particularly during the 1970s inflationary spiral), spurring the development of American agribusiness. After World War II, the United States was routinely producing a grain surplus, which became an essential element of its Cold War political, economic, and humanitarian strategies — not to mention the fact that American grain fed millions of hungry people across the world….”

Read it all on Foreign Policy.

Related:

Photo via Boing Boing. Click image for that link.

Boing Boing titled their excerpt of the article below:

“Goldman Sachs bankers ready themselves to kill peasants in the inevitable uprising

Bloomberg columnist Alice Schroeder reports that Goldman Sachs vampires are loading up on handguns to defend themselves against popular uprising:”

From Alice Schroeder, an opinion piece via Bloomberg.com: “

Arming Goldman Sachs With Pistols: Alice Schroeder

“(Corrects second paragraph of story published Dec. 1 to say the New York Police Department believes some bankers may have received handgun permits.)

“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

I called Goldman Sachs spokesman Lucas van Praag to ask whether it’s true that Goldman partners feel they need handguns to protect themselves from the angry proletariat. He didn’t call me back. The New York Police Department has told me that “as a preliminary matter, it appears that some of the records you requested may be in the possession of this department” after I asked for information on approved handgun permits for bankers. The NYPD also said it will be a while before it can name names.

While we wait, Goldman has wrapped itself in the flag of Warren Buffett, with whom it will jointly donate $500 million, part of an effort to burnish its image — and gain new Goldman clients. Goldman Sachs Chief Executive Officer Lloyd Blankfein also reversed himself after having previously called Goldman’s greed “God’s work” and apologized earlier this month for having participated in things that were “clearly wrong.”

Has it really come to this? Imagine what emotions must be billowing through the halls of Goldman Sachs to provoke the firm into an apology. Talk that Goldman bankers might have armed themselves in self-defense would sound ludicrous, were it not so apt a metaphor for the way that the most successful people on Wall Street have become a target for public rage.

Pistol Ready

The fact that there are plenty of photos like this out there -- of banker types waving guns tells you that yes, even stock photo agencies realize bankers arming themselves against fears of a peasant uprising is likely going to become a popular theme.

Common sense tells you a handgun is probably not even all that useful. Suppose an intruder sneaks past the doorman or jumps the security fence at night. By the time you pull the pistol out of your wife’s jewelry safe, find the ammunition, and load your weapon, Fifi the Pomeranian has already been taken hostage and the gun won’t do you any good. As for carrying a loaded pistol when you venture outside, dream on. Concealed gun permits are almost impossible for ordinary citizens to obtain in New York or nearby states.

In other words, a little humility and contrition are probably the better route.

Until a couple of weeks ago, that was obvious to everyone but Goldman, a firm famous for both prescience and arrogance. In a display of both, Blankfein began to raise his personal- security threat level early in the financial crisis. He keeps a summer home near the Hamptons, where unrestricted public access would put him at risk if the angry mobs rose up and marched to the East End of Long Island.

To the Barricades

He tried to buy a house elsewhere without attracting attention as the financial crisis unfolded in 2007, a move that was foiled by the New York Post. Then, Blankfein got permission from the local authorities to install a security gate at his house two months before Bear Stearns Cos. collapsed.

This is the kind of foresight that Goldman Sachs is justly famous for. Blankfein somehow anticipated the persecution complex his fellow bankers would soon suffer. Surely, though, this man who can afford to surround himself with a private army of security guards isn’t sleeping with the key to a gun safe under his pillow. The thought is just too bizarre to be true.

So maybe other senior people at Goldman Sachs have gone out and bought guns, and they know something. But what?…”

Read it all on Bloomberg.com

I remember once reading a story from hoary antiquity of some Greek dude — can’t remember though whether it was Pliny the Elder or Socrates — who bought up all the grape harvest, or was it the olive harvest, and was in a position to hold the country ransom. Not that he did so, but he was just making a point about a vulnerability in the system. Perhaps there are some readers out there who know this story and can fill in the details. When I try to research it via the great Google all I learn is that “Pliny the Elder” is now the name of a new micro-brewery beer!

As another aside, during the recent G20 in Toronto there were stories circulating in the media and on Facebook about how bankers were being advised not to dress in their usual uniform of suit and briefcase, and to instead disguise themselves as tourists. Which raises the question as to why they would be feeling paranoid; were they complicit in something bad that “the people” or the protesters would be angry about?