Larry Summers and the Hunger Games

Who remembers the food shock of 2005-2008? Just another global policy disaster from then Treasury Secretary Summers.

With acknowledgements to moneytrumpet.co.uk

Thanks to the revelation of a series of badly judged, slovenly and vulgar emails; and to evidence of trips to sex offender Jeffrey Epstein’s island in the ‘Lolita Express”, the reputation of ’the single most important neoliberal economist of the last forty years’ - Harvard Professor Larry Summers - is being well and truly trashed - worldwide.

Many are pointing to his hubris, his abrasive manner and his policy failures. However no one has so far highlighted a policy error to which I have devoted a whole chapter in my forthcoming book, The Global Casino. (You can place an advance order here, which helps me enormously - thank you!). Namely, his role in exacerbating the cost-of-living crisis and causing a sharp increase in global hunger - a direct consequence of the de-regulation of global commodity markets in 2000.

But to step back a minute.

I had an in-person encounter with Larry Summers in 1999. I was on a visit to his office where he presided as 71st Secretary of the US Treasury The purpose of the visit was to argue that the Jubilee 2000 worldwide campaign welcomed President Clinton’s pledge to cancel all $5.7 billion of debt that 36 desperately poor countries owed the U.S. government. However we wanted assurances that debt relief would be made transparent to citizens of poor countries, so that money saved would be diverted to education, health and welfare.

During the meeting Summers’ head made a big impression on me. Like his ego it is unusually large - bear-sized. A tiny elastoplast had been applied to his forehead. I focused on it obsessively as I faced him - my way of grounding myself in the presence of the fabled intellectual bully. He was already notorious for having signed up to a memo that called for toxic waste to be dumped on poor countries, and for sharing the economist William D. Nordhaus’s climate scepticism in 1994 (as I explained in a previous post). I was also fully aware that together with Robert Rubin he had fuelled the deregulation that was literally blowing up the boom, and would ultimately blow up US economy - even as we met that day.

There was general agreement with our proposal for greater transparency. “Sunlight” Summers opined “is said to be the best disinfectant.” It could be used to check the power of unaccountable elites.

Today ‘sunlight’ illuminates the minds and characters of Larry Summers, Jeff Epstein and other members of the world’s ‘paedophile elites’ as they are called. Light and public opprobrium has exposed this powerful economist’s deeply flawed judgements and arrogance.

This matters because Summers has through several decades exercised damaging, unaccountable power over the global economy - and over a cowed economics profession. His mostly male peers in the profession are in awe of his arrogance, status and influence - despite the catastrophic impact his theories and policies have had on the global economy. An obsequious New York Times Michael Hirsch, once described him as “a living repository of economic wisdom.”

Another told the FT that the Epstein emails were typical of his hubris.

Nobody writes things like that in an email unless they think they’re untouchable…Which he has been — for a long time.

While male economists and officials have lived in fear and veneration of Summers, he has not enjoyed the same respect from high-powered women.

The Commodity Futures Modernisation Act of 2000 and the Cost-of-Living-Crisis.

While the Clinton administration’s decision to weaken and repeal the 1933 Banking Act (Glass–Steagall) is well known, far less known are the changes made to the 1936 Commodity Exchange Act. Those changes were embodied in the Commodities Futures Modernization Act of 2000 (CFMA). This ‘modernisation’ of law related to commodity trading would fuel speculation, precipitate food crises, as well as economic and political crises, in both 2005–8 and again in 2022–4.

Before the Clinton Act was passed in 2000, Harvard Professor Lynne Stout had warned of the dangers posed by proposals for a sudden and wholesale removal of centuries-old legal constraints on speculative trading in derivatives. In a paper published in 1995 titled ‘Betting the Bank: How Derivatives Trading Under Conditions of Uncertainty Can Increase Risks and Erode Returns in Financial Markets’, Professor Stout warned of the threat posed by derivatives to society as a whole:

Her warnings were ignored. As were the warnings issued by Ms Brooksley Born, then chair of the Commodity Futures Trading Commission (CFTC), the federal agency that oversees the US futures and commodity options markets.

In October 1998, Ms Born warned in congressional testimony that the dangerous boom in OTC derivatives trading could ‘threaten our regulated markets or, indeed, our economy without any federal agency knowing about it’.

In a television interview that aired in 2009, well after the law had changed, Ms Born explained that the Clinton Commodity Modernisation Act of 2000

took away all jurisdiction of over-the-counter derivatives from the CFTC. It also took away any potential jurisdiction on… the part of the Securities Exchange Commission, and in fact, forbid state regulators from interfering with the over-the-counter derivatives markets. In other words, it exempted it from all government oversight, all oversight on behalf of the public interest.

I cannot emphasise enough how damaging the removal of jurisdiction or regulation over this form of gambling with derivatives - let’s call them ‘poker chips’ - can be in a world awash with trillions of dollars of ‘easy money’, always in search of a ‘quick buck’. The consequences of that speculation is that financial elites get rich quick, while society as a whole pays the price.

Ms Born was viciously attacked by Larry Summers for her resistance. In a PBS Frontline documentary a colleague of Brooksley Born shared this:

I walk into Brooksley’s office one day; the blood has drained from her face,” says Michael Greenberger, a former top official at the CFTC who worked closely with Born. “She’s hanging up the telephone; she says to me: ‘That was [former Assistant Treasury Secretary] Larry Summers. He says, “You’re going to cause the worst financial crisis since the end of World War II.”... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.’

Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born’s attempts to protect Americans by retaining oversight and future regulation of the commodity market’s ‘poker chips’.

All this is explained in greater detail in The Global Casino.

The Consequences: The Hunger Games of 2005-8 & 2022-2024

Remember the Hunger Games of 2005–8? Probably not. In the run-up to the Global Financial Crisis, there was the global food price crisis, caused largely by the Commodity Futures Modernisation Act of 2000. It was a crisis for hungry people living in the poorest countries of the world - a crisis eclipsed later by financial deregulation that harmed people in the richest countries.

Over three years, global food prices rose by a whopping 83 per cent as speculation in financial markets accelerated. Between January 2005 and June 2008, maize prices almost tripled, wheat prices increased 127 per cent and rice prices increased 170 per cent. Higher prices pushed an additional 40 million people into hunger in 2008, raising the overall number of under-nourished people in the world to 963 million, compared to 923 million in 2007.

According to the economist Anuradha Mittal, the greater demand created by investors’ activities in commodity futures markets (where hedging and speculation are both allowed) put tremendous upward price pressure on food and energy commodities. The higher prices applied to essential foodstuffs, including corn, rice and soya. Wheat, a commodity increasingly subject to speculative trade in commodity futures exchanges, was subject to extreme price volatility. Prices rose by 46 per cent between January and February 2008 but fell by as much by May that year. These prices were correlated with the greater participation of hedge funds, index funds and sovereign wealth funds in agricultural commodity markets – especially after 2006.

What is striking about the 2005–8 food shock is this fact: more food had been produced by 2008 than at any point in human history. At the same time, demand for food was falling as the global economy weakened and then collapsed from August 2007 onwards.

The economic law of supply and demand, so often called upon as explanation of prices and the cause of such crises, did not apply here. Instead, the price volatility that led to hunger and food riots was caused by the greater participation of financial speculators in food derivatives markets: by throwing vast sums of money at finite assets (grains and agricultural goods). That in turn was a direct result of the Clinton administration’s 2000 change to the Roosevelt administration’s 1936 Commodity Exchange Act, changes - changes proposed and led by Larry Summers, and which removed quantitative restrictions on speculative positions in agricultural futures contracts.

Professor Larry Summers (at the time President Clinton’s Treasury secretary) and Chairman Alan Greenspan, encouraged by Wall Street lobbying, had persuaded President Clinton and lawmakers that further financialisation of the commodities market might make the market more ‘efficient’ by promoting ‘innovation, competition, efficiency, liquidity, and transparency in over-the-counter derivatives markets, by providing legal certainty for OTC derivatives and removing impediments to innovation (specifically to the development of electronic trading systems)’.

After the 2000 Commodity Modernisation Act was passed, speculative trading in commodities vital to the welfare of human society became subject to a volatile arms race that amplified or inflated and deflated prices as markets swung wildly up or down - accelerated by a herd mentality and by ever-escalating competition between speculators.

Larry Summers policy advice back in 2000 laid the ground for the hungry years of 2005–8 and the cost-of-living crisis of 2022–4.

Today we are still enduring the economic, social and political consequences of those crises - and of the changes made to the regulation of financial speculators in 2000.

And Larry Summers is still a tenured professor of economics at Harvard University.

If the King of England can strip his ‘blue-blooded’ brother of a royal title because of the Epstein scandal, then Harvard University can strip Larry Summers of his tenured professorship.