Banks screwing with price discovery mechanisms: water’s next

Frederick Kaufman in the current edition of Nature:

Making money come out of the tap means that fresh water must be given a price anywhere it is traded — a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere. A water calamity in China or India — and the food inflation, political instability and humanitarian crisis that will surely follow — will reverberate in price spikes from London to Sydney. This is how bankers will profit.

Economists have begun to model a global water-based futures market featuring financial puts, calls, shorts, longs, exchange-traded funds, indices of indices, options piled on top of options, and all sorts of opportunity for over-the-counter swaps. Flood-insurance companies will certainly want to buy stakes that could mitigate their financial risk. In fact, every corporation that conducts its business in a flood plain, anywhere, would probably participate. Farmers will want to hedge their bets that it will or will not rain, as will frackers and fishermen. As for the speculators, we know who they will be.


The reverberations of a global water futures market can hardly be imagined. This much is clear: a water betting game will leave crops thirsting and push the global price of food far beyond the peaks of the past five years.

The good news is that, unlike the failed attempts to regulate the derivatives markets in food, something can still be done in the case of water. There are plenty of examples of valuing water outside the realm of pure commodification. One of the best examples has been developed in the Ruhr basin in Germany. This riverine resource is managed not by the invisible hand of the market, but by a policy-creating body called the Ruhr Association. Cities, counties, industries and enterprises in the region are represented by associates and delegates. A total of 543 stakeholders negotiate water-abstraction fees and pollution charges. The politics may be messy, but it works. Unfortunately, that is the way with democracy.

There is no easy panacea for the world’s water needs, least of all the global derivatives business, which has proved that it is not to be trusted with mortgage-backed securities, much less our most precious resource. There is no need to initiate a futures market in water only to create yet more financial madness that seems to resist all attempts at regulation. This time around, let the business stop before it starts.

Worth reading the whole thing. He’s pretty scathing about Payments for Ecosystem Services (PES) and work on The Economics of Ecosystems and Biodiversity (TEEB).