If either you or I get in a high-stakes poker game and we lose our shirts, an absolute certain bet is that the government will not bail us out.
If either a money center bank or a Wall Street investment bank loses its shirt in the same game, however, an equally certain bet is that the government will appear with the taxpayers’ checkbook to cover the bank’s loss.
The Bush administration’s recent $30 billion “rescue” of investment banker Bear Stearns, known as the “cowboy of Wall Street” because of stupid, and stupidly engineered, bets in the American home mortgage market, is not without precedent.
Bailout
Every five years or so, incredibly stupid bankers phone your Federal Reserve to plead for a bailout and, remarkably, get it.
Recent — and evidently forgotten — examples abound. In May 1984, the Fed pumped $4.5 billion into Continental Illinois after the nation’s seventh-largest bank bet big and badly on loans in the American oil patch.
Deemed “too big to fail,” the government operated the bank for a decade before selling it to an immediately richer, fatter Bank of America. Less than five years later, the same lending lesson had to be relearned as your government began to write checks to cover the savings and loan crises.
That mess, created when stupid bankers made stupid loans to stupid people (sound familiar?), cost you $125 billion.
In late 1998, the Fed, this time under Bill Clinton, organized a private, $3.6 billion bailout of Long-Term Capital Management, an incredibly brash, incredibly stupid “hedge fund” that imploded when it, too, was deemed “too big to fail.” (Earlier, in late 1994, Clinton authorized a $50 billion loan to Mexico, our newly minted partner in the North American Free Trade Agreement, to cover a run on its currency after a galacticly stupid move by the Mexican president to devalue the peso.)
What’s all this have to do with farming and food?
Fallout
First, American agriculture, despite its current tall-clover times, will not escape the fallout of today’s mortgage mess. Recent day-to-day, limit-up, limit-down moves in futures markets are a clear clue that most traders haven’t one clue of the true value of hard commodities.
That uncertainty, combined with today’s unheard of corn, soybean and wheat prices, is now pushing commercial grain buyers — the big trans-nationals as well as local cooperatives — to abandon 2009 hedge-to-arrive sales contracts.
The risks, as well as the cost of borrowed capital to underwrite those risks, they complain, are simply too expensive. That market breakdown leaves farmers who have yet to presell 2008 grain open to incredible price risk.
Meanwhile, the Federal Reserve continues to run its printing presses to deliver newly minted cash to air-sucking bank clients — and, since the Bear Stearns bailout, to air-sucking investment banks, too.
That flood of money will have two, take-it-to-the-bank consequences.
Inflation
First, when too much money chases too few goods, inflation is sure to follow. That means today’s doubled and tripled fuel, fertilizer and seed prices will continue their steep rise regardless what grain prices do.
Grain growers, like today’s hog farmers, soon could face a cost-price squeeze that will make the 1970s look like the good old days.
Second, those good old days ended very badly for farmers. When the Fed finally came to its senses courtesy of steely-eyed Paul Volker, even the most well-heeled farmer bled red.
If you think it can’t happen again, here are some words of advice: Continental Illinois, Long-Term Capital, Bear Stearns. All were lessons soon forgotten.
Which reminds me of poker’s rarely-remembered, cardinal rule: If you’re in a poker game for 20 minutes and haven’t yet figured out who’s the patsy, you’re the patsy.
