I’m sure I don’t have to argue to anyone here that economic policy decisions affect our lives, and that bad ones can have lasting repercussions. Everyone who’s looking for a job, trying to sell a house, or looking at their 401K and vowing to start investing in Beanie Babies instead knows that. However, I think that in the wake of recent political uprisings in which citizens have demanded better from their governments, we in the hegemonic economic powers, specifically the United States, should look at how policy here impacts the quality of life for people all over the world.
Deregulation of financial systems of course played a role in the collapse of the housing market, but it also continues to play a role in the rise of world food prices, and economic crises in many developing countries. The short version of this grisly tale of greed and poor decision making is that, similar to what happened in the mortgage market, deregulation of the commodities market created something referred to as the “swap-trade loophole,” which enabled speculators to turn over immature commodities futures very quickly, passing them through many hands, none of which ever actually had the product in hand, and artificially inflating the price of goods like food grain. This problem intensified when the bottom fell out of the housing market, and many more speculators moved into the commodities market.
The financial crisis corrected the artificially high market prices, however real prices to consumers in the developing world remain extremely high. Demand and supply doesn’t explain this, as many nations–notably India–actually increased production during this time period, and have plentiful unused stores of food grain. Unfortunately, they were unable to sell them to consumers, many of whom are facing astronomic levels of unemployment, for a reasonable price. Governments of these nations are often already financially constrained due to debt restructuring or development investments, and are unable to subsidize food prices effectively.
I don’t currently have figures about this on Egypt or Tunisia, but it isn’t too much of a stretch to imagine the contribution rising food prices and high unemployment can make to civil unrest. This is just one example of how the mechanizations of U.S. financial markets can have an immense impact on the day to day lives of people in other areas of the world. We are in an unprecedented era of global financial interdependence with linkages at every level of economic activity. While “the market will right itself” may work in the abstract, and may serve to correct the mistakes made by investors over time, there are many people in the world who don’t have time to waste on the ups and downs of the free market.
Previously: Persephoneconomics: Know Thy Enemy