A curious little item in Time Magazine this issue:
If you are in any doubt about how little has changed on Wall Street since 2008, check out yesterday’s front page New York Times story about how banks like Goldman Sachs and Morgan Stanley profited wildly by hoarding and slowing the supply of various commodity metals like aluminum, driving up prices on the global market in the process. It was a truly ingenious profit-making scheme, involving sophisticated arbitrage of complex global regulations, all of which resulted in lots of money for banks, and higher prices for companies and consumers.
This story put me in mind once again of the fact that many of the best minds on Wall Street still spend the majority of their time figuring out new and smarter ways to game the system, rather than how to grease the wheels of the real economy. Just look at the record profits posted by a number of the world’s largest banks last week. The six largest are on track to post a 20% earnings increase in the second quarter of this year. But the vast majority of that money came not from lending, but from trading. While the money spigots to the small and new businesses that create most of the jobs in this country are still tight — like last year, small business lending was down again this year, according to the Small Business Administration — trading profits are way up.
Clearly, finance is still disconnected from the real economy, which is one reason that the regulation battle rages on. A new proposal issued jointly a few days back by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency would require some of the country’s largest banks to hold double the amount of reserve capital that they currently do. This has prompted all the usual complaints from the industry about too much regulation. Former Minnesota governor Tim Pawlenty, now the head of bank advocacy group the Financial Services Roundtable, said the new rules would make “it harder for banks to lend and keep the economic recovery going.”
Think about that anecdote again: a cartel of banksters collude (possibly conspire) to artificially jack up commodity prices, not on gold or diamonds, but on everyday items like aluminum, thus gouging an enormous profit from society.
OK, some basic economic theory here first: the theory is that market competition and free enterprise will expose inefficiencies in prices, thus creating opportunities for a company to step in and profit.
Theoretically, this occurs when a competitor steps in and, seeing how he can work more efficiently, sells his product for a lower price or with better features of some sort. That’s the basis of capitalism, as Adam Smith envisioned it. Smith must be rolling in his grave to think that industries are no longer run by entrepreneurs but by financiers, people who have zero concept of production, distribution or service.
They only know profit. The sole measure of their value to society is in a dollar figure. If anyone wonders whether that viewpoint erodes a society, one has only to look around oneself: clearly, it does.
Business schools pay lip service to reversing this trend by including courses on ethics and management strategies that don’t involve raping a community or its resources, but let’s be honest: the world is run by vulgarians, who mock ethical people.
Until, of course, they run afoul of the law as they inevitably do. Unfortunately, they’ve left a whole cadre of apostles behind who are more than happy to pick up the slack, buy off more of the government and media, and measure their lives in money.
New regulations, and a return of Glass-Steagal, will help, to be sure, and I fully support those, but here’s the thing: corporations now have enough money and enough entrenched power that they can afford to spend hundreds of millions of dollars to get around those legally. We have to find a way to defuse the mindset that they should. We can put up obstacles, but at the end of the day, persuading them not to try is our best inoculation against future economy catastrophies.
And make no mistake: we have many many more in the near future.