The Huge Threat to Capitalism That Republicans Are Ignoring

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.

But if "capitalism" starts to be associated in the public mind with Wall Street profiting by deliberately slowing down industrial productivity (or with Mitt Romney making millions by buying companies and gaming the tax implications of shuttering them), Americans are not going to support capitalism. They're going to regard it as a rigged system that only profits wealthy insiders. 

In the short term, Republicans and Democrats alike benefit by allying themselves with the wealthy insiders. Like the GOP, President Obama has benefited from Wall Street money. But in the longer term, enough stories like this New York Times scoop will destroy Republicans, because rhetorically, they're the ones insisting that the market is beneficial and more or less fair, even as a transparently corrupt financial sector consumes a larger percentage of the overall economy.

I'm emphatically for free markets. I have the highlighted copy of The Constitution of Liberty to prove it. But the party of free markets has a self-interested obligation to attack crony capitalism. The party has been failing for years. Democrats have too, but they have less to lose. 

"Many of us already view the financial industry as little more than a gigantic shakedown of the American public," Drum writes. "But even so, there are still days when we can be dumbfounded by the sheer scale and gall of their machinations." It isn't enough for the right to point to faulty government regulations and bailouts that have abetted financial-industry shakedowns.

Republicans need to wean themselves from certain donors and make fixing American capitalism a priority, and to go on the offensive against Democrats for their part in Wall Street dysfunction, if they're going to persuade voters that the party of free market capitalism is worth supporting.

A good place to start: rules of the road that make increasing productivity more profitable than decreasing it.

I prefer a theoretical Republican solution to a theoretical Democratic solution, but if Democrats have an actual desire to regulate Wall Street, and Republicans have nothing, that's no choice at all. The GOP has to start attacking Wall Street misbehavior even when it doesn't take the most obvious form: a direct, explicit bailout check from taxpayers to the most well-connected banks.

Earlier this year, George Will wrote, "By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail. Aux barricades!"

Co-sign.