Since I finished my TAI ebook Broken: American Political Dysfunction and What To Do About It back in March, I have continued to collect data points relevant to the subject. (One of these, a real doozey that some of you may recall, concerns a May 26 post that mentions a certain Congressman Jim Hines from Connecticut.) In four months I have amassed several dozen, but yesterday’s press was particularly bountiful in this regard. The Sunday papers carried two terrific stories that, assuming they’re mainly accurate (a big assumption, often enough, I realize…..), make for pithy illustration of some of the book’s key points.On page 1 of the business section of the Washington Post there appeared Steven Mufson’s “How the IRS Handed Paper Giants $2 billion.” This illustrates several themes in Broken: how the IRS is outgunned by corporate predators; why tax credits are a main way to hide corporate welfare; and how much corporate and financial lobbying bypasses Congress and goes directly at regulatory agencies. Read it; you’ll see.But the big press score from yesterday is the lead article in the New York Times—that’s right, a rare plutocracy j’accuse above the fold on the right in the Gray Lady herself. I refer to David Kochieniewski’s “A Shuffle of Aluminum, But to Banks, Pure Gold.” The article describes how Goldman Sachs and other large financial institutions have taken advantage of loosened regulatory rules, courtesy of the Federal Reserve and Congress, to invest in lucrative infrastructure functions. They use even such common functions as metals and other commodities warehousing to make billions of dollars via artificial makework that raises prices for everyone. Read the article: the details are riveting. Kochieniewski deserves a Pulitzer and the guys at Goldman who thought this up and who approved it deserve to be tar and feathered and run into the East River on a rail.This story also illustrates key themes in Broken. The first is how our big banksters make money off all sorts of cons, besides encouraging consumption-based debt, in ways that create systemic misalignments between the financial interests of the major banks and the economic interests of everyone else. It’s hard to think of a better illustration than the Kochieniewski piece of how the banks and major financial players have become extractive exercises rather than value-building ones. It also illustrates how the major banks torque the economy because of how the Federal Reserve system actually works—a complete mystery, apparently, to the average American. Here is how I put it in Broken. The way the system works today, the Treasury Department is
. . . now essentially giving or loaning federally chartered banks basically free money (the interbank loan rate is zero), with which they often turn around and buy Treasury notes at 3 percent interest. As others have pointed out, this is like the banks charging rent to the government for the right to use its own money. We have a language problem here. When people say “the Fed” did this or will do that, they often suppose we are all talking about a government entity, when we are in fact talking about a consortium of large banks. So when “the Fed” decides on quantitative easing, for example—otherwise known as “printing” or, nowadays, electronically creating, new money—what we really mean is that a small group of key leaders of large banks has essentially decided to give themselves lots of money because their balance sheets are shaky or investors think they are too risky to back, or both. If buying T-Bills were all that large banks did with new Fed money, things would not be so bad. But that isn’t all they do. When the banks then act as agents of investment (which they have been able to do again with alacrity since 1999), they are able to use this virtually free or borrowed-at-zero-interest money to bid up the price of assets: housing, for example, or technology stocks before that, or higher education both before and since. This creates bubbles and distorts markets far and wide. With the enormous sums of Fed bailout money in 2008 and 2009, the same people who brought us the housing bubble and the student loan bubble, both abetted by Federal government tax policies, began to invest big-time in gold, energy and commodities. Gold aside (that’s merely causing the despoliation of the Peruvian Amazon), the result is that we now have, very predictably, significantly higher oil and food prices worldwide.
And now, we learn from yesterday’s New York Times, higher prices for nearly everything made out of aluminum.As the article indicates, what Goldman Sachs is doing only raises the price of a can of soda by a very tiny amount, but it accumulates into a helluva lot of money for Goldman Sachs—and all, remember, without any value-added contribution to the economy as a whole. None, zero, zippo. Too bad Mancur Olson is no longer with us, for a purer example of the logic of collective action would be hard to find.