By Paul Solman
People walk in front of Goldman Sachs, whose subsidiaries store aluminum in Michigan, enriching Goldman’s trading assets. Photo courtesy of Mario Tama/Getty Images.
Here’s the lead paragraph of a front-page expose of the rigged aluminum market in Sunday’s New York Times, “A Shuffle of Aluminum, but to Banks, Pure Gold”:
“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…
“Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process ‘a merry-go-round of metal.’”
The article goes on to suggest how powerfully commodities speculators can influence price, something I’ve controversially argued on this page for years regarding oil prices, summarized in January of 2009: “Why Has the Price of Oil Decreased So Significantly?”
The details are not entirely clear, as Slate’s Matt Yglesias suggests Sunday, but the bottom line seems both damning and scuzzy.
The larger moral of the story, though, assuming it’s correct, is what makes the story significant: the implausibility of industry self-regulation.
Adam Smith is often thought of — incorrectly — as a free-market fundamentalist. That’s why his cameo was festooned on ties worn by “supply-side” economics enthusiasts to Ronald Reagan’s inauguration in 1981. And I am a great Smith admirer, having taught a class on him for years. But that’s because he is the epitome of a thinker who understands both sides of our economic makeup: the impulse to predate in the pursuit of self-interest and the impulse to cooperate, which Smith attributed to the human faculty of sympathy.
I quoted Smith at length in these pages on Thursday, extolling the “invisible hand” that turns emulation and envy into ever greater productivity. But one must never forget that he wrote his famous pro-market “Wealth of Nations” as, in his words, “a very violent attack…upon the whole commercial system of Great Britain,” what today we would call “crony capitalism.”
His view of the merchant class, then or ever? “People of the same trade seldom meet together,” he wrote, “even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
And that brings us back to the reported commodities merry-go-round perpetrated by Goldman Sachs, whose dubious routes to profit we have examined in recent years. If it’s not illegal, how can they be expected to do otherwise? They can’t. They are in the business of making profits, of pushing the envelope. They will push as hard as we let them.
For the past few years, economist William Black has been making the case that the crash of 2008 was an inevitable result of crony capitalist deregulation.
He first explained to me on the NewsHour how it led to fraud in an interview a few years ago and has more recently made the case here and here.
The case for government regulation, then, seems dispositive. Unfortunately, however, in this country, it seems the financial industry at least is always a step ahead of those seeking to restrain it. Back in the late 1980s, I interviewed an investment banker about a story I was thinking of doing for the then-MacNeil/Lehrer NewsHour. The subject was a tricky new maneuver in which shares of stock would be converted into other securities, including debt, which would then be tax deductible. I saw the financial logic — lower taxes — but wondered aloud if this was good for the country.
“Hey look,” he said, “if you’ve got a problem with that, just end the tax deduction for interest.”
“That’s real easy to do,” I scoffed.
“It would be if you gave the job to me and six of my smartest guys,” he said. “We’ll write the law in a few months.”
But then came the following exchange, which I’ve never forgotten. “When you go back into private practice,” I asked him, “could you then get around the law you wrote?”
His answer was short and chilling: “I should certainly hope so.”
In other words, the dirty little secret of our current version of finance capitalism is that although regulation is an absolute necessity — in markets as in all human endeavors — it’s also an eternal Wile E. Coyote-Roadrunner game in which Wile E. and the Acme Corporation keep concocting devices which not only fail to nab the elusive Roadrunner, but often blow up in Wile E.’s face.
What’s the alternative? Mega-money manager Steve Waters suggested one to me on the NewsHour in a story about executive pay and AIG bonuses back in 2009: pay the top regulators substantial salaries to make it a fair fight.
“Regulation is not a glamorous career, doesn’t pay well,” he noted. “The smart folks will go to Wall Street and figure out how to beat the SEC as opposed to go to the SEC and figure out how to control Wall Street, right? Ultimately, what we lost (leading up to the crash) was the integrity of the markets. And to restore that integrity…you ought to be willing to pay.”
But is it possible to pay regulators top dollar in America, given the dependency of our politicians on campaign contributions, which can now be both unrestrained and secret? Quite possibly not.
This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.