Over the weekend, the New York Times published a jaw-dropping story about how Wall Street investment banks are slyly manipulating commodities markets to make billions at the expense of consumers.
Is that description too abstract? Here's the lead example:
Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers' aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country. Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process "a merry-go-round of metal."
Only a tenth of a cent or so of an aluminum can's purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year -- and add the tons of aluminum used in things like cars, electronics and house siding -- and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.
Kevin Drum writes:
Did you follow that?
Some genius at Goldman apparently had a brainstorm after reading the detailed rules that determine the spot price of aluminum. They figured that if storage times could be artificially lengthened, prices would go up and Goldman could make a killing. So they bought an aluminum storage business with the explicit goal of making customers wait a longer time for their aluminum. And they made a killing. The Times hastens to add that Goldman has done nothing illegal. Of course not. Why bother when "special exemptions" granted by the Federal Reserve and "relaxed regulations" approved by Congress allow you to make billions legally?
Preventing this sort of thing ought to be a high priority for anyone who wants to see free-market capitalism succeed in America. So long as our economic system resembles what Adam Smith described -- the profit motive benefiting everyone, as if by an invisible hand -- much of the American public can be counted on to support politicians who campaign as unapologetic capitalists, even if people are rewarded unequally, based on the value their labor is producing.