The Daily Beast Podcast - How a Wall Street ‘Villian’ Set the Stage for Endless Global Chaos

Episode Date: February 6, 2022

Writer and filmmaker Rupert Russell and author of PRICE WARS explains how a move by longtime former Federal Reserve chairman Alan Greenspan to deregulate the commodity markets in 1998 has caused decades of market trouble and sparked a “butterfly effect” of problems around the world. Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hello and welcome to another bonus episode of The New Abnormal, and we thank you so much for being here. Today we're going to talk to Rupert Russell about his new book, Price Wars. And he's going to tell us about some of the underlying things that move our economy. Welcome to the new abnormal, Rupert Russell. Thanks so much for having me. Talk to me about the book. Give me like a 500-foot view. Sure thing.

So the book is called Price Wars, and the thesis is the, The chaos that struck virtually all of the world, actually, since 2008, has been the result of a series of price shocks. So that could be the rise, a sudden rise in the price of food globally. It could be a sustained price in the rise of oil. Or it could be the collapse of a price. So it could be the collapse of the oil prices or also the collapse of coffee prices. Each of these prices has huge impacts globally, right? We all need to eat.

Some of the most military aggressive states in the world, as we're seeing right now, like Russia are essentially oil economies. And all of these conflicts, wherever they come from, also produce huge waves of migration. So chaos in one part of the world usually doesn't stay there. We usually get these migratory moves. And so what ends up happening is you have a kind of engine of chaos that can begin in the markets. It can start with a speculative play on food or oil. That then can create a riot, a revolution that then becomes a civil war, for example. that then produces refugees, and then that then ends up causing chaos back in the West financial centers, where it all started. So you end up with these sort of butterfly effects bouncing between the commodity markets and the real world.

And the book tells that story of how we've essentially been bouncing between these two kinds of chaos since 2008. So you're talking about commodities traders, but I want to pull back for a minute because you're also really talking. talking about quantitative hedge funds. They play a small role in the story, and they actually come in really towards the end of the end of the decade. What's interesting when I started looking into finance was that these speculative strategies often get a lot of hype in the media, right? So we like to see headlines about the new kind of algorithmic trading that this or that hedge fund may be developing. But when I talked to sort of economists such as the Nobel

prize winner Robert Schiller, he kind of convinced me that a lot of this is sort of hype. It's really hedge funds kind of selling journalists and selling their clients on some new strategy. And really, most of these speculators are essentially doing the same thing, regardless of what label they put on it. They're following trends and they're following the narrative. And often these AI trades, in fact, just read the narrative from the news directly. In a global competition between hedge funds, who would be the people who would suffer in that? That's a really good question. You know, from their point of view, it's essentially themselves, right?

So like a lot of really wealthy people, they kind of all see themselves are these enormous victims of circumstances. It's very sad. But of course, what the book really kind of hones in on is the people across the world, right? So I went to Ukraine, I went to Iraq, I went to Venezuela, Kenya, Somalia, many of these places that have been impacted as kind of collateral damage. The image that I kind of came up with in the book was that you've got these hedge funds in the city of London

or Wall Street kind of firing shots at each other. You can imagine it kind of going across the narrow streets of low Manhattan. And the force of the detonations aren't actually felt there. They're felt in the rest of the world. They're felt in Caracas or Ukraine or Iraq or basically anybody who's living on less than, than a dollar a day. And so I went to those places to kind of look up, to sort of draw a portrait of

chaos across the world and what it means to live in a disorderly world. So your central thesis is that the commodities traders are the ones who are bringing up the prices? Yeah, that's right. So the way in which you can think about this to be a little bit technical for a second is what mathematicians or economists are called positive feedback, right? So the opposite would be negative feedback. So when you have negative feedback in a system, it kind of calms everything down when things are getting out of control. So often you see a lot of these analogies with ecology, right? There are certain kind of predators which may kind of bring down an animal population if it's kind of getting out of control. And so you kind of need to keep the predators around to make sure, I don't know, say there aren't too many rabbits like taking over Australia or something.

And positive feedback is the exact opposite of that. So positive feedback essentially adds in volatility or adds in chaos into a system. And the easiest way to think about it is simply amplification, right? So what the markets, what the speculators are doing is they're simply amplifying something that may have already happened. So often these big speculative moves, these big price swings that I look at in the book, are often, they have some grounding in reality for sure, right? So, for example, when the food prices spiked in 2010, which triggered the Arab Spring,

there were wildfires in Russia, right? That was in the news. Russia is a massive commodity exporter, not just of oil and natural gas, but also wheat. And so you can imagine traders looking around going, right, we anticipate a decline in global supply of wheat. So it makes sense that we're going to price that in and we're going to increase the future price of wheat. And so you begin to see a rise in prices. Now, the reality was that in fact, there wasn't a global shortage of wheat because the Americans had a bumper crop that year. In fact, 2010 produced more food than ever before in history. And yet the global food prices doubled in just the space of a few short months. And when they doubled, riots broke out in Tunisia, Egypt, Jordan, Yemen, Syria,

and that kind of sparked an avalanche that kind of created civil wars, the riots. And the of ISIS, the global refugee crisis, and then, of course, the rise of right-wing populism in Europe and then the United States. And so really the way that I think about speculation, really since about 2004, is a kind of engine of chaos, right? They're amplifying chaos in the real world. They're pricing it into the markets, and then those markets then kind of export it back again, creating new, new waves of chaos. So it's almost like a continuum, and there's no way to get out of the cycle? Yeah, I think that's, I think that's right. I kept on thinking that my story was ending. So I kind of wrote about the history between about 2008 and 2018, and I thought, okay,

I've written about this commodity boom and bust, and I've looked at all these different case studies, various wars, crises. I've looked at the impact of climate change. And then, of course, there's the U.S. border crisis in 2019. And it's a surge of Central American. migrants come into the US border. And of course, it's very politicized inside the US. But if you were actually asking why they were coming in the first place, when I looked into it, it was essentially tied to the collapse of coffee prices in 2018. And essentially a lot of farmers live right on the edge. So in mathematics, they often call this the edge of chaos. And so people, if you live right on the edge and then there's a shock, it can be a big shock. It can be a small shock. But regardless,

you can't afford essentially to feed your family because these farmers had no other income source. And so that's why you saw this wave of migration northwards through Mexico to the US and precipitating a political crisis inside the United States. We're seeing it again right now as Russia puts their troops on the border of Ukraine. This is pushing up oil prices. And we know that when oil prices go go up, we see a rise in conflict globally as well. well. I just want to go back for a second. The border crisis in the United States is caused by the coffee prices thing is caused by climate. Well, climate change is a long-term trend. So Guatemala in particular,

which is where I went, has been on kind of a climate risk index for decades, essentially. And so, yes, climate change has been year on year increasing the cost of production, right? Because farmers have to by fertilizers for their crops. There's this disease called Royal in Spanish or Rust, they say, is the English translation. And it's associated with the change of rainfall and pressure, which climate change is bringing. They have to buy these expensive fertilizers, that increases their cost of production. And that, if you like, pushes them closer to the edge of chaos, right? It just means that it could be just a small change in the price of coffee can essentially

bankrupt them, especially because they have to. to borrow a lot of money against their land to pay for these fertilizers. So they're also indebted and they're paying really high interest rates, essentially 120% a year interest, to get the money, to pay for the fertilizers, to get their coffee. And so when there was a collapse in coffee prices, again, driven largely by respective hedge funds, as reported by the Financial Times and others, that has really pushed these hundreds of thousands of people over the edge. Can you identify some of the bad guys here? On the hedge fund side, it's so diffuse.

And of course, the trades are not necessarily public. There are ways in which, you know, the Chicago Mercer and Total Exchange or the Commodity Futures Trading Commission, they do aggregate a lot of this data. So we definitely know it's coming from hedge funds because of the trading designation these trades have. On the whole, it's a market-wide phenomenon. The big villains in my book actually ended up being more on the political side.

In particular, Alan Greenspan ended up being a major villain of the book, which was completely unexpected when I sat down to kind of research it. He was not even on my horizon, but he was sort of a key figure in deregulating the markets. So the whole reason why this story is happening that I've been talking about is because the commodity markets were, deregulated in 2000. Prior to that, there were regulations put in by Roosevelt, and what they had done is they limited the amount of speculation. So essentially what they said was the vast majority of the people trading in these markets around 80 percent had to be physical traders, right? You had to be a farmer, growing food, or say you were a bakery or a hotel and you were buying that

food. So these are people really involved with the kind of physical nuts and bolts of commodity trading. And then they said, okay, well, we're going to have 20% of the market are going to be speculators. And speculators are important because they provide what economists call liquidity. That just essentially means that when a farmer wants to come and get some money or sorry, to rather to guarantee a price for his harvest or her harvest down the road, there's always somebody they can sell it to, right? Without speculators, there just simply might not be enough bakeries or hotels looking to buy at that moment. And so they always had a kind of important function in the markets going back to the middle of the 19th century. But what happened in 2000, it was of Greenspan

and another favorite figure. Larry Summers kind of sat down and wrote this report, which ended up becoming the legislation. And essentially what they did is they removed all of those barriers. And very, very quickly, within about four to five years, speculators came to dominate these markets, right? So where before they were, say, 20% of the market, now they became 80 to 90% of the market. These commodity markets are actually very small

compared to the size of the financial markets. So it doesn't take a lot of financial capital to kind of completely dwarf them. And so what ends up happening is the market ends up being transformed from something which is really driven by people with local knowledge of crops or of consumers, to people who have absolutely no idea what these commodities really even are, right? These are people who don't even know what the price of milk at their local bodega is in Wall Street. They're instead operating through a very different set of rules and a different set of expectations, an entirely different game, in fact, to how ordinary people are doing.

it. And the person who really changed those rules and not just changed them, but really advocated for them and fought off other bureaucrats and other politicians was Alan Greenspan. Why? It's a good question. So Alan Greenspan got into a fight in 1998 with the chair of the Commodity Futures Trading Commission, a woman named Brooksley Bourne. Brooksley-Born was publishing a white paper, which essentially asked all kinds of different stakeholders, including finance, by the way, what they thought of these new financial products, which few people outside Wall Street even heard of,

called derivatives. These so-called derivatives had already detonated. So in Orange County, there was an explosion that nearly bankrupted Orange County. Procter & Gamble, I think, lost hundreds of millions in these derivative trades. they didn't understand or were perhaps missold. And so, Brooksley-Born was looking at these new products.

And as the chair of the CFTC, it basically fell underneath purview because they were sort of futures and options and fell underneath the sort of Roosevelt era legislation that I just mentioned. Yes. So she was saying to Wall Street and other stakeholders, hey, there were these new products out there. They're worth trillions of dollars. Maybe we should look into regulating them.

And kind of Larry Summers got this infamous phone call. So Larry Summers made an infamous phone call to Brooksley Bourne, where he said, I've got 13 bankers in my office. And if you go ahead with this report, they say the entire US financial system is going to collapse. Now, Bourne went ahead and she released the report. There was no financial. But Alan Green Spanan and his ally, Larry Summers,

who was then undersecretary and then Treasury Secretary, under Clinton, essentially organized an ambush in Congress at these congressional hearings where sort of Greenspan really gangs up on her, and it was this kind of regulator versus regulator, battle of the bureaucrats fight that happened. And Greenspan comes out of this victorious. Now, the reason why this was so important to Greenspan was that they wanted these new financial derivatives to be unregulated. They said, look, these are private contracts between financial speculators or other financial institutions such as banks. And these guys really know what they're doing, right? These are kind of between professionals. They understand all of this stuff. There's no real

role for the government in this. And a lot of these derivatives were really based around other financial products. So they were sort of bets on currencies, maybe US treasuries. And of course, we all know now mortgage-backed security. And Greenspan kind of famously says, look, these derivatives are so great because they disperse risk. They're essentially insurance products. And the financial system is going to become so much safer because of their existence. We don't need Glass-Steagall.

We don't need to keep the banks and the investment banks separated. This is a kind of new financial world, the new kind of utopia around the corner. And he wins that argument in the Clinton administration and in Congress. they passed the legislation. And regular commodities like food, oil, you know, gold, coffee, where I think actually just really an afterthought, they just thought, well, we're deregulating everything else. Why not just sort of chuck this stuff in as well? Of course, there were financial players such as AIG and Goldman Sachs who were selling derivatives, especially commodity index funds that allowed pension funds and university endowments to essentially bet on the price

of commodities by sort of just buying one of these derivative. products. So there was definitely financial interest pushing it as well. But it was, I think, part of this much larger ideological move on Greenspan's part aligned with these financial interests, right, Wall Street wanting to sell these derivative products. And so it was a kind of a combination of those two factors that led to the rise of derivatives and the rise of speculation. And the 2008 crash is the sort of derivative explosion that we're most familiar with, right? We've kind of seen the film, the big shore, we lived through, many of us lived through the crisis, some lost a lot of money, they may have lost their homes through that. But what my book

essentially looks at is saying that was just part one of this story, right? Housing was just the first derivative explosion. There were explosions in food, oil and coffee and others that happened later. But the difference was that these explosions really happened in the developing world. They happened in South America, the Middle East, parts of Eastern Europe, even Africa. those explosions did reverberate back into the West through refugees, but through other channels as well, like house prices. And that's really what the story is. It's a story of the explosive world,

the Greenspan and Wall Street built at the end of the 1990. Oh, man, this is really depressing. Thank you so much for joining us. I hope you'll come back. Thank you so much for having me. On that note, we'll wrap this episode of the new abnormal from The Daily Beast. In future episodes, we'll be talking to smart folks from The Daily Beast and beyond from media, culture, politics and science. We'll help us understand what's happening to our country and the world.

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