@ Peter: It was Pollin that was arguing that CFTC changes coming out of the Dodd-Frank Bill held potential to stop some of this. I agree, he is overly optimistic.
JAY: Jayati, some people argue, including people like Paul Krugman, who actually--who usually isn't someone to critique--to be shy about critiquing speculation, he's saying that if there isn't physical hoarding of food, you can't have this kind of gambling affect the price of food, that if you buy a future on, you know, corn or whatever and you think a year from now the price will be higher, that the spot markets, the actual day-to-day market, catches up to that, and that there's no point--you can't actually manipulate the price unless somehow you're physically putting corn somewhere. What do you make of that argument?
GHOSH: Well, you know, that used to be true, that used to be the case, that in fact to speculate in grain, you had to hold grain. And that was why, essentially, the speculators in grain were those who were commodity dealers. That was the old story. What happened in the last decade is that you have this kind of transition whereby you have a futures commodity in which financial agents who have no interest in holding the actual physical commodity are able to play this market. And that's because they are essentially rolling over contracts and [inaudible] contract, that is a crucial [inaudible] market [inaudible]
JAY: I mean, one would think, Bob, that if you know there's a future market, and the futures six months from now are higher than what the market is right now, you would--I mean, it goes to--the logic would say you'd try to hold on to what you've got for six months and sell it when it's higher. Is that the logic of this?
POLLIN: Well, except that, as Jayati said, the people that have come to dominate the market are people who are not really calculating on the basis of when any physical commodity is coming due. They are basically moving the market in order to move the market. And if they're big enough, if they're so much bigger than all the other traders, they have the capacity to move the market to the degrees that we have seen that are just unprecedented. And so when they move the futures market, that pushes the spot market up--the futures market is driving the spot market prices. And that's why you have, you know, the new form, much greater form of speculation becoming the predominant force in the futures market, which is then pulling the spot market along with it.
JAY: Well, what do you make of Krugman's argument that says you can't do that with food, that you actually have to hoard it or you can't move the price?
POLLIN: I think it's wrong.
GHOSH: Well, that's simply not true, and we have evidence of that in 2008. In fact, what happened in 2008 is a classic example, where the food price went up by--almost doubled in the period between January and June, and then fell back to almost the previous level in the next six months, and yet there was hardly any major movement in terms of actual turnover of the physical commodity.
JAY: Okay. So let's move to the next phase, then. So if speculation, and especially this kind of modern derivatives speculation, is moving the price of food, Bob, what's the beginning of a public policy to deal with it?
POLLIN: Well, you know, a lot of the action takes place, in terms of trading, here in the United States. So the real action in terms of dealing with it has to do with regulations here in the United States. Though the impact is global, and in fact the most severe impacts are not in the United States, the policy implementation needs to start here. And, in fact, we have had some success--and you and I talked about it a few months ago--we have had some success in moving the policy debate in the United States, because around the debate on financial regulations in general, the issue of the speculation in commodities market became an increasingly important issue, and in large part because of people who were concerned about the control of food prices globally and also oil prices. And so today you have this debate going on because the Congress and the Obama administration put in place this new financial regulatory regime, the Dodd-Frank law, which actually has some pretty strong features in terms of regulation. But the issue that's taking place right now is implementation of the Dodd-Frank law at the level of regulations, the regulatory agency. And the particular regulatory agency is called the Commodities Futures Trading Association. They are the ones that are going to regulate and put in place the specific laws. The laws that were passed are too vague. And so what the fight over now is what specific things are going to be put in place that will actually have teeth to actually inhibit the kinds of excessive speculation that is driving up food prices and making people go hungry. That's the issue.