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The Financial Crisis and the Food Crisis: Two Sides of the Same Coin

by Food First Analyst Annie Shattuck

Note: A modified version of this analysis appears on the New York Times Economix Blog here as comment 1

http://economix.blogs.nytimes.com/2008/09/24/empowering-paulson/#comments

Between the sub-prime housing mess, volatile oil prices, food price inflation, and a massive trade deficit, the American economy is in the worst shape we've seen since the Great Depression.[i] Now the government is proposing a $700 billion dollar bail-out to Wall Street, equivalent to $1500 from every person in America. Government intervention is certainly warranted, but we need an intervention that addresses the root causes of all these crises; from food to housing to speculation. Both the food crisis and the financial crisis are rooted in similar polices that have fed on each other for years. Both crises find their origins in the failings of free market fundamentalism.

In the late 1970's Washington and the international finance institutions under its tutelage, began a sharp departure from the interventionist policies that had brought the US out of the Great Depression. Free market reforms worldwide, championed by the U.S. and enforced under loan conditions of the International Monetary Fund, eroded support for local agriculture through the elimination of grain reserves, government supports, extension, and credit services. Tariffs on agricultural imports were loosened throughout the 1980's and 1990's, a result of which was massive consolidation in the agriculture industry. In 1988 the top ten seed companies controlled 30% of the global market.[ii] Now that same share is controlled by just the top three.[iii] The top three agricultural exporters in the world, Cargill, Bunge and ADM, now control 90% of the world's grain supply.[iv]

In the same period, deregulation in the financial services industry allowed banks to cross over their investments: small banks that traditionally held mortgages were allowed to invest in other areas of the economy (Think the Savings and Loan crisis of the 80's). Large banks quickly swallowed up small banks. Between 1980 and 1998 alone there were over 8,000 bank mergers in the US, accounting for over $2.4 trillion in assets.[v] As banking became more centralized, loans to small businesses, including farms, became harder to come by,[vi] which in combination with falling prices and expensive chemical and seed packages, left many farmers to get big or get out. Commodities traders increasingly invested in other financial services, large traders crossed over into futures markets, and some banks began to trade in financial instruments, including commodities, in order to protect their loans.[vii] Some financial services companies, like Goldman Sachs, even became importers of physical goods,[viii] while traditional agribusinesses, like Cargill, now have investment banking arms that deal in everything from real estate, corporate securities and IT technology.[ix]

Deregulation and consolidation both make markets extremely vulnerable to shock. When the sub-prime mortgage crisis hit in 2007, investors began to scramble for safe places to put their investments. At least some of the rampant food price inflation that began at the beginning of this year was caused by exactly that scramble—a combination of investing in agricultural commodities and oil, which drove up the price of food and farm inputs.[x] Looking for safer investments, traders that may or may not be in business related to food at all, put their money into commodities futures. This kind of speculative trading that is so exacerbating the food crisis was not possible on this scale until financial services deregulation in the 1980's.[xi]

This system of deregulation has caught our economy and our food system in a negative feedback loop. Less regulation breeds more consolidation and subsequently, less stability in both agricultural and financial markets. The irony is that now because markets and investments are so intertwined, we stand to face a breakdown in the world's food and financial systems at the same time.

Food riots, foreclosures, lost pensions, destabilized governments, the threat of “financial Armageddon” and an increasingly hungry planet are all evidence of the same failed policies. A $700 billion dollar bail out to Wall Street may or may not stabilize markets in the short run, but will do nothing to address the root causes of the current crisis, nor will it stave off the next one. A real solution must include measures to stabilize both food and financial markets. We need strong oversight on large traders and financial services, and increased support to local economies, small farmers, small, local banks, and small borrowers. Most of all, we need a dramatic departure from the free-market fundamentalism that brought us here in the first place.

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[i] Reuters. “Obama, McCain Battle Over U.S. Financial Crisis” 23 September 2008.

[ii] RAFI Rural Advancement Foundation International. 1998. “Seed Industry Consolidation: Who Owns

Whom?” Communique. July/August 1998.

[iii] ETC Group 2007. “The World's Top Ten Seed Companies 2006” October 2007.

http://www.etcgroup.org/en/materials/publications.html?pub_id=615

[iv] O'Driscoll, Peter. “Part of the Problem: Trade, Transnational Corporations and Hunger.” Center Focus. Center of Concern, Washington D.C. Issue #166, March 2005.

[v] Rhoades, Stephen A. “Bank Mergers and Banking Structure in the United States, 1980-98.” Staff Study 174. Board of Governors of the Federal Reserve System. August 2000.

[vi] De Windt, Claudia S., Isis Marquez, Rodrigo Martinez, Oscar Ceville, and Xiaohang Liu. “Liberalization of Financial Services Under NAFTA and its Effect on the Environmental Performance of the Agicultural Sector in Mexico.” presentation Fourth North American Symposium on Trade and the Environment. Organization of American States. Phoenix, Arizona, USA. April 2008.

[vii] Talbot, John M. Grounds for Agreement: The Political Economy of the Coffee Commodity Chain. Roman and Littlefield. Lanham, Maryland. 2004.

[viii] Ibid.

[ix] Cargill Corporation website http://www.cargill.com/products/risk/ps_investment.htm

[x] Gordon, Gretchen. 2008. Food Crisis in the Age of Unregulated Global Markets. Institute for Food and Development Policy. Oakland, CA. April 18 2008.

[xi] Moberg, David. “Let Them Eat Free Markets: How deregulation fuels the global food crisis” In These Times. July 23 2008. http://www.inthesetimes.com/article/3801/