March 25, 2015

The Artificially Inflated Price of Food and Gas Can Be Blamed on the Commodities Futures Modernization Act of 2000

The law was that when you bought futures, you had to take delivery. However, in 1991, Goldman Sachs' commodities subsidiary, J. Aron, asked for a waiver, and they got it. And over the years the Commodity Futures Trading Commission [CFTC] handed out 14 other similar exemptions. Then everyone got to do this under the Commodities Futures Modernization Act of 2000, which was signed into law by President Bill Clinton on December 21, 2000. Because of this act, speculators can buy and sell food and crude oil on paper without having to actually take possession of it, thus artificially inflating the price.
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According to a 2009 article about the exemption for Goldman Sachs:

There was a 1936 government regulation which had successfully stopped this type of shenanigan. In effect it did not allow large speculators to lean on any commodity market and crowd out real producers and consumers. Until 1991. That’s when Goldman Sachs’ commodities subsidiary, J. Aron, requested an exemption based on the flimsiest justification. Amazingly enough it got it. And over the years the CFTC handed out 14 other similar exemptions. Goldman and its ilk were busy with a few other schemes and it wasn’t for a while that they started to really take advantage of the loophole they had gained. What followed was nothing short of astonishing. For example: Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent.
Brooksley Born, the head of the Commodity Futures Trading Commission [CFTC] under Clinton, warned about how the the Commodity Futures Modernization Act of 2000 could potentially cause the type of meltdown we had in 2008. She was opposed by Greenspan, Rubin and Summers, who eventually convinced Congress to not heed her warnings about the danger of unregulated derivative markets. The episode of the PBS series FRONTLINE titled "The Warning" is an excellent account of this period.

Click on the ("more") link on the web page to read the rest of the story before watching: 
http://www.pbs.org/wgbh/pages/frontline/warning/view/#morelink

"It'll happen again if we don't take the appropriate steps," Born warns. "There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience."

Private investment firms are betting on hunger, and their reasoning, unfortunately, is sound.

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