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On Tuesday night a historic agreement was reached in Brussels which will curb the ability of banks and hedge funds to speculate on food prices. It’s a success in the battle to reclaim our society from finance. But once again, the British government stood firmly on the side of the banks.
The snappily titled Markets in Financial Instruments Directive II (‘MiFID’) attempts to clamp down on the sort of ‘dark trading’ in financial instruments that represented the high point of ‘out of control’ finance. So-called ‘high frequency trading’, using computer algorithms to make decisions on data measured in the microsecond, has been given a regulatory framework. Investors get better protection against being conned by toxic products of big finance.
But the real victory for campaigners is the new restriction on trading in food (and other) commodities. ‘Food speculation’ has been the focus of campaigns in Britain and elsewhere, and has caught the public interest during a period when the global and domestic effects of food price volatility have been all too apparent. The new European rules will reduce speculation on food prices by introducing ‘position limits’, curbing the ability of large financial institutions to control the market.
This is important because the market in food contracts is awash with speculative capital – to the point that speculation is a major cause of volatile food prices globally.
In other words, banks and hedge funds, which have no role in the production, manufacture or distribution of food, are driving up food prices, feeding into the sort of food crisis the world saw in 2008. One fund manager told the US Senate in 2008 “Most of the [food contract] business is now speculation – I would say 70-80%."
Goldman Sachs, Barclays, Deutsche Bank, JP Morgan and Morgan Stanley together made an estimated £2.2 billion from speculating on food between 2010 and 2012. And at the end of last year, the World Development Movement estimated that UK pension funds bet around £1.5 billion on food prices, meaning that around £180 belonging to the average UK pension saver is being used to speculate on global food prices.
Not a penny of the billions of pounds pouring into food commodity markets goes towards improving food production, so this money is not ‘investment’. Speculation is better described as financial gambling. At the excessive levels it has reached, it has no function but to make banks and hedge funds a quick and easy profit.
Sudden spikes in the price of basic foods affect people everywhere. But while households in ‘developed’ countries tend to spend between 10 and 15 per cent of their incomes on food, many households in ‘developing’ countries spend between 50 and 90 per cent. When the price of a staple food doubles, the consequences are disastrous.
Anything which curbs this trade is to be welcomed. The new regulation is not a revolution, and it contains serious loopholes. But it is a step in the right direction that, like the US’ Frank-Dodd Act (2010), begins to unwind the unquestioned deregulation of finance since the mid-1980s, driven by banks like Goldman Sachs.
A core reason the European regulation is not tougher is the position of the British government. The government has opposed regulation from the beginning, believing that the speculators are better left to their own discretion and good sense. The Treasury opposed position limits throughout the three and a half years which this regulation has been held up in discussion – years in which speculation has continued to fuel high food prices and contribute to the global hunger crisis
Last week the World Development Movement disclosed information on a series of meetings from 2010 onwards held by then Financial Secretary to the Treasury Mark Hoban, urging finance companies to lobby against the proposed regulation. Hoban and other Treasury ministers encouraged the City to coordinate lobbying efforts with the Treasury, and travelled around Europe to persuade other governments to join with them.
One result of this lobbying is that the limits on food speculation will be set nationally rather than at an EU level, something which risks a ‘race to the bottom’ as countries could compete to set weaker limits.
Before the new regulation comes into force, it must be incorporated into law in each of the 28 EU member states. As has happened in the US, which was first to legislate to curb speculation, there will no doubt be further lobbying from the finance sector and its friends in government. Campaigners are urging the European regulator ESMA to make sure the new rules are implemented effectively.
So we’ve moved in the right direction, but the battle to reclaim our society from finance continues. Once again, Cameron has shown the British public where he stands on this issue.
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