Goldman Sachs, JPMorgan Chase, and Morgan Stanley have become modern-day robber barons. This term originated in the late 19th century to describe businessmen who accumulated wealth through exploitative practices. They controlled national resources, exerted significant influence over the government, and kept wages low. Although financial institutions are not necessarily contributing to today’s stagnating wages, they certainly have an outsized influence on the government. Since 1999, these financial service corporations have been expanding into different commodity markets and driving up prices on essential raw materials.
For example, in July The New York Times reported that Goldman Sachs is making millions off aluminum by artificially lengthening storage times. According to market rules, aluminum warehouses must move at least 3,000 tons out a day. To get around this rule, Metro International, the company Goldman Sachs owns, moves its aluminum from one warehouse to another. Wait times have gone from six weeks to 16 months, and the production cost of 1,000 cans of soda has increased by $2. Of course, that cost gets passed on to consumers, who industry executives and analysts estimate have spent $5 billion over usual market prices in the last three years due to the increase. The same article touched on JPMorgan’s expansion into the copper market, which has been strongly opposed by a consortium of copper users.
Wall Street has also made a market out of ethanol credits. The ethanol credit program began eight years ago and required refiners to mix ethanol into gasoline or buy ethanol credits. Because demand for gasoline is declining, the blending quotas for refiners are exceeding the amount of ethanol that can be blended into gasoline, and refiners are forced to buy credits.
Financial institutions such as JPMorgan bought up millions of credits and caused the price to rise from $0.07 in January to $1.43 in July. They are now trading at $0.60. The Environmental Protection Agency, which manages the market, has no disclosure requirements. When the program was created the government dismissed fears of Wall Street capitalizing on an opaque market. Again these costs are passed on to consumers at the pump.
It is debatable if banks should be allowed to own companies dealing with commodities. In the wake of the Great Depression, laws were passed specifically prohibiting banks from owning companies that deal in commodities in order to protect consumers. In 1999, the Gramm-Leach-Bliley Act removed these restrictions and let today’s financial giants form. After the Great Recession, the risks posed by combining investment and commercial banks with insurance companies are obvious.
But in this era of financial deregulation, even non-financial regulations can have financial impact. The ethanol credit program highlights the problem of unintended consequences. Perhaps if the EPA regulators had developed stronger protections against financial speculation, the cost of credits would not have increased 20-fold in six months. When financial industries are allowed to incorporate themselves in virtually any market, regulators need to consider the consequences. But writing financial regulations into environmental regulation is not what the EPA is meant to do or even knows how to do.
A review of the Georgetown course catalog reveals that there is not a single course dedicated to regulation, either its theory or its application. Of course, regulation is a rather specialized field of law, but it would make sense to cover the fundamentals of regulation and how to prevent financial corporations from getting around it for those going into the industry.
Georgetown does offer a Master’s-level accounting course, ACCT-565, on tax strategies for firms to maximize benefit and minimize risk for shareholders. The only course that comes close to what is needed is GOVT-437, Economics Morality and Law: Justice in a Global Order, which according to its syllabus “explores the moral values underlying economic activity.”
Regulation, especially financial regulation, is not a topic that would interest most students. But it is a sign of the economic order when, rather than having classes teaching students how to regulate an industry, there are classes about maximizing a firm’s profits in a given tax structure. Even two or three classes offering the opportunity for exposure to the ideas behind regulation would be a huge benefit not only for future policy makers, but for anyone who wants to be an informed voter.
Until the financial firewalls of the Glass-Steagall Act are restored and banks are just banks and not players in every market from oil to cotton, students interested in working in and bettering the industry need to be able to learn how to prevent financial institutions from gaming the system for their own benefit.