The economic diagnosis for middle-class America has long been ominous. Signs of decay, it would seem, are unique in their abundance. In a country that by some measures enjoys the fourth-highest incomes on average, decades of sharply unequal growth have mired median-income adults in stagnation. Economically speaking, the so-called “developing world” has become a much fairer place to live than the U.S. Middle-income Americans now receive a smaller portion of their nation’s wealth than in all other populous countries besides India and China, while among those countries only Russia, Ukraine, and Lebanon have more unequal income distributions. And it’s only getting worse. Since the global financial meltdown of 2008-9, the top 1% in the U.S. have captured all income gains and then some (121% exactly), enriching themselves in the aftermath of a crisis where 99% saw their incomes drop.
Still, these figures are all only symptoms. Underlying the deterioration is a social arrangement in which financial-sector actors profit handsomely from economic outcomes we intuitively recognize as destructive: the shuttering of hospitals and factories; the hoarding of food, oil, and other basic commodities; expropriation of small farmers’ land to create gigantic, monocropped plantations. It is a disease we might call “parasite capitalism,” and it’s slowly bleeding the rest of us to death.
Last week the New York Times published an investigation into the cutting edge of financial parasitism. Building on reports from as early as 2011, the Times piece outlines Goldman Sachs’s immensely lucrative “warehouse play” in the aluminum market, a strategy JP Morgan was just last December approved to replicate with copper. In it, Goldman purchased Metro International, a leading aluminum warehousing firm, deliberately slowed down shipping times more than 20-fold, and gamed regulations requiring at least 3,000 tons be shipped out daily (originally instituted to prevent hoarding) by simply shuffling metal between warehouses. This apparent strategy of releasing as little aluminum as possible benefits the financial giant in a number of ways. As a warehouse operator, Goldman extracts $165 million a year as rent from other actors who store metal. As a commodities trader, the drop in global supply allows the company to profit off rising prices. And as a speculator, Goldman makes money betting on the direction of the aluminum spot price it’s manipulating. Kevin Drum has aptly called it “a money spinning machine.”
Creating a global headache for manufacturers that need the raw material, some 70% of the world’s aluminum inventory is caught up in these types of “bank deals.” Metro’s inventories alone have exploded from 50,000 tons in 2008 to 1.5 million tons today. Financial institutions have made a mockery of market logic, forcing end-users to keep paying more despite rising global aluminum supplies. As the Times points out, each time you “open a can of soda, beer or juice,” Goldman gets a cut.
By inserting itself into a healthy industry producing widely needed commodities, severely degrading functionality, and widely distributing costs while itself benefiting, Goldman here couldn’t fit a more archetypal description of a parasite. Hoarding in aluminum, however, is just one in a bevy of ever-multiplying non-innovations, demonstrating how the leeching of productive society has emerged as finance’s guiding light.
Speculation in agricultural commodities, which rose more than 2,300% in volume between 2003 and 2008 alone, provides another pernicious example. Boosted by the SEC’s recent loosening of commodities regulations, financial institutions have spent immense sums investing in crucial markets like grain and oil, pushing the UN to warn that speculation has artificially inflated and destabilized food prices to the detriment of the world’s more than one billion starving people. Oxfam’s extensive research on grain hoarding (over 70% of the world’s grain market is controlled by four companies) highlights how that practice has created outcomes similar to the market in aluminum — but to literally deadly effect.
Meanwhile, innovations like the interest-rate swaps built into municipal bond deals continue to bleed American cities and states of billions needed to rebuild crumbling public infrastructure. Thomas Ferguson, a political scientist at UMass-Boston, has written extensively on how these instruments have allowed banks to capitalize handsomely on falling interest rates while government bond issuers are left paying preposterous rates to escape the deals. The stories of the fallout are predictably brutal: Hospitals, transit systems, and school boards in bankruptcies engineered by Wells Fargo, Bank of America, Citigroup, Chase, Goldman Sachs, et al.
In aggregate terms, financial sector gains have contributed more to the increase in income inequality than all other sources combined:
This bloodletting-by-finance has had staggering human consequences in the world’s financial capital. Global rankings now place the U.S. 49th in life expectancy and 31st out of 34 OECD countries in child poverty, while for the first time since the Great Depression kids can expect to be poorer than their parents, on average by 12%. More Americans toil through low-wage jobs than in any other industrialized society.
Recent news that the Federal Reserve may revise its landmark 2003 decision allowing banks to trade in physical commodities is hence certainly a cause for cautious optimism. Nonetheless, all evidence suggests the problem goes much deeper and has extensive historical roots. Trade and speculation on physical commodities is only the most visceral, heightened illustration of a parasitic financial sector run amok. Far from servicing ordinary people, contemporary finance has extended extractive tendrils in every pocket of productive society and enriches itself at great cost to working people everywhere. Removing the leeches will be arduous and painful, but it is a necessary path toward shared dignity.