CT Blue

One of the hallmarks of our age is the propensity of our government to adopt Rube Goldberg solutions to problems that invite simple solutions. Obamacare could have been invented by Rube himself, and while there may be practical political reasons that justify the complexity, the fact remains that had we simply adopted Medicare for All, or something similar, we would be a lot better off, and it would have been a lot harder for the Republicans to demonize the program.

Most of the time, of course, the resort to complexity is a cover for an intent to do unto the rich as they would want to have done unto them.

A short time ago the New York Times published an article in which it established beyond much doubt that the bankers were manipulating the price of commodities, and that, among other things, the fact that they were allowed to own and “sell” commodities was at the root of the problem. The specific example involved Goldman Sachs manipulating the price of aluminum, to its own profit, and to everyone else's detriment.

Now, the obvious solution to the problem is to simply bar banks from engaging in this sort of business. Problem solved. But the Fed, which regulates banks (and is required by law to have representatives of the regulated involved in its decision making) can't bring itself to do something effective about the problem, though of course it wants to make both the public and the Congressfolks who are pressuring it think it is doing something. So, taking a lesson from Rube Goldberg:

An excellent report at Quartz explains how an anodyne-seeming response from the Fed is actually another huge gimmie to the banks:

Last week, Federal Reserve officials leaked to the Wall Street Journal their tentative plan to limit the ability of Goldman Sachs and big banks to own metals warehouses, power plants, and other physical commodity assets.

But experts say that, if implemented, the policy the Fed is floating would actually expand the rights of all banks to enter these physical markets, by creating an official entrance instead of locking the door shut. Presented like a deterrent, it would also be a novel enabler.

According to the Wall Street Journal, the Fed’s plan would call for balancing out the new right to hold assets with a requirement that banks hold more capital to cover the potential risks posed by these activities…

Some experts believe that this additional cost will lead most banks to abandon these lines of business. But it’s an unsafe bet. Not only is it not clear how the Fed would structure these surcharges, there is no guarantee that a steep fee would push banks out. “When you have regulatory costs associated with highly lucrative businesses, the banks just typically pass them through to customers and end users,” said Josh Rosner, managing director of Graham Fisher & Co, who testified in July on a Senate hearing about whether banks should be doubling as oil refiners and coal miners.

The Fed’s given the public no insight into its thinking on this crucial decision, but a surcharge generally works like a tax, meaning it makes sense for banks to continue these businesses if they bring in significant revenue. In other words, a surcharge could actually encourage banks to scoop up warehouses and refineries any time profits from trading metals and oil soar. As Marcus Stanley, policy director at Americans for Financial Reform, explained, “Next time there is a commodity boom, you could get very nice returns even with capital surcharges.”

Rosner’s and Stanley’s concerns are spot on. The Fed officials, if they are at all competent, should recognize that a tax is the wrong remedy for this sort of situation. First, we’ve already seen that Goldman was able to act as an oligopolist through its control of warehouses. Taxes don’t undermine the ability of oligopolists to push prices higher than where they would be otherwise. Second, in general, the alternatives for dealing with a situation like this is to consider prohibition versus taxation. Which you favor depends on which party bears the greater costs. In this case, the answer is clearly prohibition.

via Naked Capitalism

Read the whole post for the whole story. Here's the summary in a nutshell:

Sports fans, the “should we give too-big-to-fail banks more running room in commodities land?” is as clear cut a case as you will ever find in the Weitzman framework. There is NO policy reason for letting the banks in save their own profits. We have efficient and well functioning physical commodities markets without their participation. So when we are considering “private benefit”, it is the additional profit to a handful of firms that are already too powerful, too sprawling, and have repeatedly demonstrated their tendency towards predatory behavior, rule-breaking, and regulatory arbitrage. There isn’t an obvious reason why they should get any breaks at all, save the Fed is working on their behalf, not the public at large.

On the “social benefit” which might also be framed as “public costs avoided” we have systemic risk and higher commodities prices. The stunning part of the New York Times article is that that market participants had firm estimates of the price impact, and across the market it was $5 billion. Aluminum is not an essential commodity, but even so, the harm in dollar terms was considerable. Banks can seek to find similar ways to either gain price advantage or use key choke points to manipulate prices.

In an even smaller nutshell: the Fed has concocted a plan to allow banks to divert even more money from the economy in exchange for providing nothing in the way of social benefits.