Many years ago when I set up a small research institute with a focus on development aid in crises – we chanced upon some rather peculiar (or they seemed that at the time) features of famine. To cut short a very long (and very interesting) time of research and testing here are the main conclusions:
Famine is almost never due to absolute shortage of food but due to the increasing price of food. This is what happens; grain in the local market is threatened by something like a flood in a nearby valley causing destruction of a given crop or disruption in communications with local markets, or an outbreak of fighting in the region. Marketeers get nervous and immediately begin to hoard grain and as a result the price goes up. People, desparate to buy ever more expensive grain – especially if it is at the end of the season – begin to sell off smaller assets such as sheep and goats to raise money to buy grain. As the market gets flooded with sheep and goats their price goes down so people begin to sell off larger assets such as plough oxen. Meanwhile the price of grain continues to rise so that the gap between sales of assets and price of grain gets ever larger. Eventually people sell off things such as roof rafters and if this doesn’t buy them the food they need to survive (which it almost never does) then they begin to move in large numbers towards towns, feeding centres and relief agency shelters.
Most pundits, until fairly recently, judged this mass movement of people to be the first sign or indicator of famine and thus a time to start acting. However when people start moving is actually the terminal sign of extreme food shortage and already weakened people die in large numbers when they congregate in camps where contagious disease is rampant. Remember too that setting up a food distribution system is a logistical nightmare and it can take up to six months to ship, dock and distribute food in large quantities.
This reseach showing that famine has long antecedents suggests a mechanism to intervene at an earlier stage to prevent famine by calming the market and stabilising grain prices. Even a relatively small injection of grain into the market at an early stage can prevent the calamity of hoarding and consequent price hikes.
What I wonder are the parallels with today’s financial markets? As I understand it, there is money about but it is not flowing in the traditional ways. Banks are not lending but hoarding money – so smaller financial institutions which don’t have the liquidity to survive in the short term will go under. If however there was an agreement that loans between banks would be guaranteed would this release the hoarded money and allow markets/banks to trade at reasonable interest rates?
The way that food markets in Africa, Asia and Latin America behave in crises might have some relevance?
I find your post of some reassurance in that at least somebody with a university degree has actually used it for bona fide research in his or her employment.
For a very long time now any degree has simply become a key that opens the HR door of a corporation for a prospective job. Thereafter no research takes place in or around the employment and the worker is often ill equipped to deal with a job that really should have been filled by someone with a vocational qualification not to degree level.
Indeed, often no vocational qualification is needed at all other than good written and numeracy skills along with lots of common sense. Why must everything have a degree? Perhaps it is an employer’s only assurance that an individual will have these basic skills and even these are now in decline. So what is going on?
If ever you have been invited behind the scenes of a financial institution such as a bank or building society you cannot fail to notice how young most employees are? One consequence of this is that there is nobody to bring wisdom or an older morality to their inexperience when pursuing revenue for their masters.
It is essentially the culture of finance that has allowed the present situation to develop.
This is a very interesting post, it’s definitely going in my favourites list! It’s one of those things that can be used as a reference when debating, and I thank you for it, baroness.
It’s interesting how markets reflect reality, it also reminds me of how unfair distortion of markets can have a very negative effect on the local realities they reflect.
Sorry to digress a little, but has anyone here heard of the problems with Ghana’s loans from the IMF? Forcing that country to remove import duties/subsidies on rice caused an influx of subsidised rice, from the US. Collapsing local markets, plunging the country into further poverty and debt.
This seems to be an example of the theory you’re expounding baroness.
Yes, this is a good analogy. Then I suppose we see a domino effect, as the smaller banks are unable to repay their debt, this causes the larger ones to collapse?
So the solution would be to guarantee transfers between banks. Then the government would step-in and pay any outstanding debt in the event of a bank collapsing. This would stop the domino effect. Am I correct?
Also, if you don’t mind a bit of bad language (at the very end), here’s my favourite explanation of the sub-prime crisis.
Although I’m not an economist, or a banker, I worry that, along with the worry ‘normal’ people are experiencing, we’re going to lose any entrepreneurial spirit the banks may have had. During this bad patch, and for a long time afterward, banks are going to be less likely to lend to business start-ups.
That is something guaranteeing transfers is not going to do: encourage banks to take the right kind of risks.
Perhaps we could use a tiered banking system, where banks that deal in stuff that matters (mortgages, savings) are highly regulated; purely investment banks are allowed to do whatever they like; and banks dealing in loans to startup businesses, R&D endeavours, tech companies are actively encouraged to take risks. Also creation and failure should be built-in to the highest risk banking tier.
Am not sure of the extent to which the current system already fits this description, and I’ve wandered off-topic. However, this blog post got me thinking! 🙂
The question of confidence in paper money itself is an interesting one too, now that we have a cashless society. The complete loss of confidence in an agricultural economy manifest by sale of everything
would surely be similar to carrying paper money round in suitcases
as per the 1929 inflation, and not be able to buy anything with it.
The public statements of treasury secretaries are critical to the continuing good function of falling markets, and who is to say that
a falling market is not good?
Who is to say that in a famine situation described, a move to the towns is not a good thing either?
One is the flight of Labor, the other the flight of Capital.
To take Gareth Howell’s point first – no you’re right a move to towns of course can guarantee some access to food. I think the point I was making was twofold: first given the early warning indicators it is both possible and desirable for intervention at an early stage to prevent hoarding and severe food shortage. Second, the consistent experience is that once people move into new microbiological environments, they (already weakened) tend to die in large numbers from contagious disease.
In small scale and vulnerable societies people can and do suffer absolute poverty – that is they have nothing to barter or exchange and no debts to call in.
Here is one example which I found in a rural town in south west China: a man, his wife and two small children moved from the far north in search of a job and food. His job was collecting plastic bags for resale and his wife collected wild vegetable and cooked them for sale in the market. The daughter fell into a vat of hot oil and was horrifically burned. Her injuries were such that as her body grew she was becoming increasingly distorted. The mother meanwhile had a complete breakdown and would not leave their reed shack by the side of the sewage river that ran through the town.
This kind of poverty is almost beyond our understanding and it is extremely rare under normal conditions. People who live in developing countries and who have no welfare state to fall back on make very intelligent decisions in order to protect themselves and their familes from absolute poverty. A mixture of diverse sources of income, social relations of debt and credit, investment in durable assets are all survival strategies.
Liam that is rather a novel idea – different banks for different tasks – to some extent this already happens but the ‘crisis’ could well result in greater specialisation.
The loan guarantees upon which we both agree are a good thing are already beginning to happen. What we don’t know if it will do the trick of helping markets to return to some semblance of normal trading.