Will a Bailout for Wall Street Spell Hunger for the World?

Rising food prices are proving deadly for the world’s poor. Driven by a combination of speculation, high oil prices, agrofuels consumption, a weak dollar, climatic events, and historically low grain reserves, the number of people in the world who cannot afford to feed themselves is expected to climb to one billion people this year. One in every six people on earth will go hungry. Combined with an economic crisis that is becoming increasingly global, the food price crisis spells disaster. This crisis is not limited to the developing world. In the U.S. food stamp enrollment is at an all time high and the nation’s food banks are dangerously empty as more and more people turn to them for help.

So what will the proposed $700 billion dollar bail out do for an increasingly hungry nation (and planet)?

Without any sliver of a doubt, the $700 billion dollar plan will saddle taxpayers with a massive debt. This debt is so large that it is unlikely to ever be paid off unless inflation reduces the value of the dollar, and thus the debt itself.(1) Building on the largest national debt in the history of the nation, a debt so enormous calls into question the very creditworthiness of the U.S. Treasury. The debt, combined with that uncertainty will likely drive down the value of the dollar.(2)

Unfortunately for the rest of the world, a weak dollar means high commodities prices. When the value of the dollar decreases, it takes more dollars to buy the same quantity of a given commodity, so in the long run a falling dollar will send commodities prices even higher. This is exactly what has happened in the past seven years of the dollar’s decline. Food prices have increased 127% since the dollar began to loose value in 2001.(3) The conservative CATO Institute estimates that as much as 55% of the increase in rice prices this year were caused by a falling dollar alone.(4)

If the bailout goes through as planned and taxpayers are saddled with Wall Street’s crushing debt, the world will be paying for their greed with empty bellies. There is no consensus among economists that the bail out will fix the financial crisis. If the bail out fails, then the working poor will be hit twice: once with rising costs for basic needs like food and transportation, and again with job losses, disappearing retirement savings, evaporated pensions, and less economic opportunity.

The Big Picture: World Markets, Speculation, a Food System in Crisis

The falling dollar doesn’t tell the full story of the power of U.S. markets on food prices. The U.S. market, more than any other, has tremendous influence over global food prices. After nearly 30 years of free trade policies, many nations that began as food self-sufficient, like Haiti, are now nearly entirely dependent on exports. In the 1970’s the Global South had a food trade surplus of $1 billion a year. By 2001, it had shrunk to a deficit of around $11 billion.(5) Nations that were once food self-sufficient now have to source their food on volatile commodities markets, much of which comes from cheap subsidized grain produced in the United States.

Food prices are set largely by commodities futures. There are several types of players on commodities markets, from the traditional “hedgers,” farmers and food companies that use futures to hedge against the uncertainties inherent in agriculture, to speculators, who bet on the short term up and down swings of the markets, and index investors, who seek long-term investments by hoarding futures contracts for extended periods and betting on the continued rise of commodity prices.

In the past ten years of deregulation, futures markets have actually created market volatility. Unregulated trading in the U.S. was authorized by the Commodity Futures Modernization Act of 2000, which removed position limits and disclosure requirements, essentially opening the door to unlimited speculation. Since the passage of the act, the total holdings of commodity index investors on regulated U.S. exchanges have increased 25 times, from $13 billion in 2003 to $317 billion as of July 2008; in the same time frame, commodity prices have tripled.(6) As of April 2008, index investors owned approximately 35% of all regulated corn futures contracts in the U.S., 42% of all soybean contracts, and 64% of all wheat contracts, compared to minimal holdings in 2001.(7)

Speculation in commodities like oil and food went up drastically as the sub-prime mortgage mess sent investors scrambling for safe havens. No one knows for certain what percentage of food price inflation was directly caused by speculation. We do know however that for many, price swings in the U.S. market more than actual shortage, means hungry kids in the rest of the world.

Regardless of Bailout, Root Causes of Food and Financial Crises Remain

Granting $700 billion dollars to banks will do nothing to address the root causes of either the food or financial crises. It may or may not stabilize credit markets in the short-run, no one knows. In the long run, the bail out will do nothing to limit the role of index investors in commodities, nothing to reduce consolidation in food or finance corporations, nothing to stabilize the price of basic goods, like food and fuel, that are sinking working families. A bailout is simply what it sounds like: an emergency measure with no attempt at reform.

Decades of free market fundamentalism has left food systems around the world in tatters and our financial systems poised on the edge of disaster. Instead of throwing money at a system in crisis, we need to use the crisis as an opportunity to fundamentally restructure both food and finance. We need to re-regulate the financial services industry, re-establish national grain reserves, and use anti-trust legislation to break up the oligopolistic food and finance corporations that have our systems in a stranglehold. Instead of considering a $700 billion dollar gift to financiers, Congress should be giving a critical look at the failures of the extreme laissez-faire policies that brought us to this precipice.

Notes:

1. Stablum, Anna. Gold up ahead of U.S. Bailout Vote. Reuters, UK Guardian. October 1, 2008. accessed Oct. 1 2008 at http://www.guardian.co.uk/business/feedarticle/7842031

2. Trumbull, Mark. Bailout Could Boost Inflation, Sink Dollar. The Christian Science Monitor. Sept. 23, 2008. accessed Oct. 1, 2008 at http://www.csmonitor.com/2008/0923/p25s10-usec.html

3. Hanke, Steven H. “The Greenback and Commodity Prices.” CATO Institute, September 11, 2008. accessed on 1 October 2008 at http://www.cato.org/pub_display.php?pub_id=9639

4. Ibid.

5. FAO. 2004. The State of Agricultural Commodities Markets. Accessed Oct. 1 2008. http://www.fao.org/docrep/007/y5419e/y5419e00.htm

6. Masters, M.W., A. K. White (2008). Accidental Hunt Brothers: 14.

7. Collins, B. 2008. Hot Commodities, Stuffed Markets, and Empty Bellies. Dollars & Sense: 10.