The American Interest
The Middle East & Beyond
Published on July 22, 2013
Still Broken

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.

  • Pave Low John

    This article just reinforces my opinion (which I’ve shared before) that signing TARP into law in 2008 was a huge mistake. Why rescue institutions that have no regard for laws, regulations or even just plain human decency?

    By the way, Goldman Sachs received about 10 billion dollars in TARP funds, according to Forbes (http://www.forbes.com/sites/investopedia/2012/05/23/4-tarp-recipients-that-made-a-profit/).

    But I’m glad to see articles like this one and the original story on the aluminum can scam. It looks like P.T. Barnum was right all along…

  • http://kavanna.blogspot.com Kavanna

    Yes, it’s too bad Olson isn’t with us today. As a student, I had the privilege of hearing him talk once about his theories of interest group paralysis and “rent-seeking” behavior. And thanks to the Fed and other public entities, it’s a lot worse than 20 or 30 years ago.

    One correction to an otherwise excellent piece. The Fed isn’t equivalent to the banking industry. It’s a publicly-chartered, but non-governmental entity, that originally was supposed to smooth out business cycles by providing a variable and offsetting liquidity (converting collateral into cash) to banks and (later) capital markets.

    The Fed is organized into the Fed “central” in DC and the regional banks, all with their own boards and presidents. This decentralization was supposed to prevent the emergence of another profit-making “Bank of the United States,” the same that Andrew Jackson got rid of.

    The Fed has made many policy mistakes over the years, in particular in 1929-33 and 1967-79. Its charter was unable to prevent the rise, in the 1990s and 2000s, of “Greenspanism,” an implicit alliance of the New York regional Fed and large Wall Street banks and another alliance of “Fed central” in DC and the Treasury Dept/Congress.

    The Fed today serves these masters and has thrown away the independence that was re-won by Volcker in the 1980s. It serves the borrowing needs of big government and the speculative appetites of the large New York banks and the mortgage-real estate complex. (It also helps to bail out overleveraged European banks, but that’s another story.) It screws pretty much everyone else, with artificially low interest rates, by depriving them of interest income and discouraging lending to anyone who isn’t the federal govt or a large corporation (unless it’s government-backed debt, like student loans or agency mortgages).

    • http://www.the-american-interest.com Adam Garfinkle

      I never meant to imply that the Fed is the banking industry, as such. But as I explain in Broken, the Fed’s board is made up of bankers, not government employees outside the Chairman, as with the central banks of many other capitalist democracies. Little wonder that the policy board meetings turn out as they do. As to the rest of your comments, right smack on the money — no pun intended.

      • http://kavanna.blogspot.com Kavanna

        Got it. Perhaps I misread what you wrote.

        Having business people on the Fed boards is generally not a problem. The “Fed central” in DC has too many academic economists in any case.

        But there is a specific issue with the large “money center” banks in New York and the way they steer the New York Fed’s policy and the influence they have on the main Fed board and the FOMC. It’s the “Fed central” in DC and the NY Fed that are the problem.

        The regional Fed boards and presidents are essential to maintaining the decentralized character of the Fed, the only real offset to the NY-DC axis. And having business people is essential to that function, as they provide the raw information about the real economy out there in the provinces, as opposed to the navel-gazing fish bowl of the imperial centers of NY and DC.

        This regional structure has been imitated in a few other countries. But most countries’ central banks are more centralized than the Fed and even more entangled with their overlarge, overleveraged banks.

        Remember the Bank of the United States :

        • http://www.the-american-interest.com Adam Garfinkle

          Well, perhaps I simply was not as clear in the post as I am in the book.

          I agree with your assessment again, except that we both know that business people are not the same as bankers. I also agree about the wisdom of the de-centralized system, and indeed I have heard the same argument from someone I know who used to chair the Fed in St. Louis. And I agree about other countries–Britain and France and many others all being cases in point.

          As for Jackson and the Bank of the United States, here I wonder. True, the Bank was a plutocratic nest of major proportions. But it was also a means to monetarize the economy at the time, to create a capital pool for investment that did not come from London, to bring the economy into isomorphism with the size of the country, and–and here is the kicker–had a bank existed in 1860,it might have enabled President Lincoln to raise the money to deal with the slavery issue short of a disastrous war. As it was, the US government dispossessed, expropriated, the entire South of the most valuable economic asset it had, and paid zero for it. Had there been a national Bank, there might have been another way. So this is a complicated issue.

          See my private email to you, please; and favor me with a response.

  • http://TAI Billy Godwin

    So, what is the answer? Do we stop buying stuff (deleverage), or wait until this collapses, and we cannot buy stuff (currency is worthless)?

    • http://www.the-american-interest.com Adam Garfinkle

      Beats me. Not my specialty, and anyway not something, it seems to me, to tackle in a blog. Much too serious for that.

  • Anthony

    At bottom, essay brings to mind distribution of power within American society and social context by which it operates. American capitalism represents more than just an economic system; it is an entire cultural and social order. It is not enough to just highlight the systemic misalignments; it is also necessary to understand the connection between them. For it is the way wealth is organized that creates issue raised in essay. By its very nature Goldman Sachs is compelled to exploit the resources of society for purpose of maximizing profits. Equally, public-private authority as conferred upon Federal Reserve helps to maintain systemic interest. Consequently, “A Shuffle of Aluminum, But to Banks, Pure Gold” provides only a hint into plutocratic operations.

  • Pingback: Adam Garfinkle At The American Interest: ‘Still Broken’ | Chris Navin

  • http://www.politicalcommunity.us Peter Bearse, Ph.D.

    ADAM: I’ve just discovered your e-book and read it online. Good work! My colleague, Carmine Gorga and I have anticipated your critique of the FED and the banksters and helped to found a citizens group, Credit to the People (CttP). We’re about to put out a petition calling for reform of the FED in this, its centennial year.

    More to the point (hoping to begin an ongoing conversation), I also put out an e-book at the same time under Amazon entitled “1% + 99% = 100%: How “We the People”, altogether, can occupy politics, change Congress and renew the American Dream”. It’s a good companion/ complement to your own, overlapping but not a substitute. My approach is bottom up and much more “how to” so citizens,politically, can make the changes we’d both like to see. Check it out and then let me know how to interact with you more directly. PETER

    • http://www.the-american-interest.com Adam Garfinkle

      Will do and thanks very much for getting in touch.