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UK stock market regulation crucial to food prices, say economists

By Jess Halliday in London , 27-Oct-2010

Regulating food speculation in the City of London is the lynchpin to preventing volatility over food prices, say economists, as parallel measures on both sides of the Atlantic will block traders conducting secretive deals wherever they can.

In 2007 and 2008, global food prices spiked as a result of several factors, including poor harvests of staples, increased use of food crops for biofuels and, crucially, over-the-counter trading in the futures market. While they subsequently returned to reasonable levels and dipped out of the headlines, in developing countries prices have not fallen significantly, and the effects on people who spend most of their income on food have been grave.

The US is working out the detail of the Dodd-Franck Wall Street Reform that was signed by President Obama in July, and the EU together with several member states have signalled parallel moves. But two economists speaking at a World Development Movement meeting in London yesterday warned that secretive over-the-counter trading could move to London unless parallel controls are put in place.

Robert Pollin, professor of economics at the University of Massachusetts-Amherst and founding co-director of its Political Economy Research Institute, explained that Wall Street on food speculation introduced in the 1930s were dismantled in the late 1999s and early 2000s.

This, he said, opened up a “casino stock market” which increased over-the-counter trading – “a fancy way of saying ‘do whatever they hell you want’”.

Many aspects of the Dodd-Frank measure have taken the weaker stance of the House of Representatives over that of the Senate, but it does include the requirement that trading take place on an exchange, which gives “some semblance of record keeping and public scrutiny”.

While the broad parameters of the law are laid down, the details are now being fought out – “madly, I assure you,” Pollin said. “This issue is so important to Wall St, to have unregulated casinos. They like that. There are trillions of dollars at stake. They like that a lot.”

One of the major arguments of Wall Street is that if the US regulations are too tough, all the trading will shift to London as soon as the act is implemented – and Wall street will be left in ruins.

“The point is that must we not let that happen. You must establish standards in the UK of same order that we have in Wall Street,” he said.

Moreover in Europe, consultation on a review of MIFID (‘markets in financial instruments directive’ are on-going, and there is concern from WDM that the UK vote may hold back major change.

Jayati Ghosh of Jawaharlal Nehru University said it is “absolutely essential” to curb speculation in the UK. She agreed with Pollin about the importance of Europe, saying: “If it’s not done in Europe, especially London, all that trade will be concentrated in London.”

She pointed out that instability is not in the interests of farmers, food processors, producers or consumers – yet the issue has not been focus of public attention in this country. Called for public pressure for controls on the UK government, she said: “If this kind of demand is made, it will be very hard to deny it.”

More information on the WDM campaign to curb speculation on food is available at www.wdm.org.uk

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