Deutsche Bank, long coddled by the German government, is mired in a swamp of costly “matters,” such as the Libor rate-rigging scandal or the carbon-trading tax-fraud scandal that broke with a televised raid by 500 police officers on its headquarters. It’s writing down assets and setting up reserves to settle these allegations.
Co-CEO Jürgen Fitschen insinuated more gloom was to come. The bank, he said, would “be confronted with more developments in these and other matters”. And now, one of these other matters seeped to the surface: the bank had known for years about the impact of commodities speculation on food prices and the havoc it wreaked on people in poor countries. And it had lied to the German Parliament about it.
On June 27, 2012, David Folkerts-Landau, head of Deutsche Bank’s DB Research, educated a parliamentary commission about the dire consequences of food price inflation—and what didn’t cause it.
“In developing countries where often up to 90% of the income must be spent on food,” he said, “price increases of wheat, corn, and soybeans in the years 2007-2008 and 2010-2011 had devastating consequences.” Volatility made it worse. “Even spikes of only a few months are a serious threat to food security.”
While the volume of options and derivatives in agricultural markets had been ballooning in recent years, “primarily in search of higher yields,” he said, there was “hardly any sound empirical evidence” for the assertion that any of it “led to price increases or higher volatility.”
He cited the big players. The US Commodity and Futures Trading Commission (CFTC) had received “no reliable economic analysis” that showed that excessive speculation influenced the markets. US Department of Agriculture came to the same conclusion in 2009. And the Bank for International Settlements (BIS) pointed out as early as 2007 that there was “no convincing causal relationship” between speculation and price increases. That the BIS would say that makes sense: it groups together 58 central banks, including the most prodigious money printers. On its board: Fed Chairman Ben Bernanke, NY Fed President William Dudley, ECB President Mario Draghi, etc. etc.
Thus inspired, Folkerts-Landau concluded that “commodity prices are primarily determined by fundamental demand and supply factors,” not speculation.
Alas, foodwatch, an independent non-profit, has obtained four studies by DB Research and two studies by German insurance and finance conglomerate Allianz that showed that both companies had known for years that commodity speculation—one of their major business activities—drove up food prices.
In September, 2009, a DB Research study pointed out: “Speculation has also contributed to price increases.”
A year later, DB Research found that speculation could be “distorting the normal functioning of the market,” which “can have grave consequences for farmers and consumers and is in principle unacceptable.” It argued that it was important for the proper “functioning of the food chain” that commodity derivatives serve their original purpose of price discovery and hedging against volatility. And it suggested that more regulation of derivatives would “be helpful in avoiding excesses.”
In January, 2011, DB Research—shocked that high food prices had at least in part triggered social unrest in a number of countries in Latin America, Asia, and Africa—admitted that “in some instances speculation might have added to the price movement.”
Two months later, DB Research acknowledged that in developing countries where “consumers spend over 50% of their income on food,” price increases can be devastating and “hollow out the right to food.” While there was no consensus on the role of derivatives, the study nevertheless fingered speculation: “When speculation drives prices to a level that is no longer consistent with fundamental data, this can have serious consequences for farmers and consumers.”
Hence another scandal: large banks have known for years that commodities speculation and related products that they sold to their clients caused immense damage to people in developing countries and hurt people even in rich countries. foodwatch points out that even short price spikes can cause permanent damage to already mal-nourished children—and can lead to death. Yet banks “deceive the public, even lie to Parliament, to continue without scruples to profit at the expense of those who are starving.”
But the banks are just a link in the chain. Central banks have cranked up their printing presses and flooded the world with speculative capital, causing asset bubbles left and right. Their stated policy goal is to cause inflation, but when food-price spikes wreak havoc around the world, it’s of course someone else’s fault.
Deutsche Bank is flailing to get this under control. There have already been noisy demands that it remove those financial products from the markets that bet on price changes of agricultural commodities. But the bank is the bedrock of the German economy, and Germany must soldier on. All hopes rest on it: its vibrant economy teeming with globalized, ultra-competitive, export-focused companies is supposed to drag France and other Eurozone countries out of their economic morass.