Jasmeet Samra Blog 5

            This article discussed the role of the banks and the price of aluminum and other metals in the United States. Based upon a report published by Thomson Reuters (link below), banks such as Goldman Sachs are making a rather large amount of profit from moving aluminum from warehouse to warehouse for no given reason. By doing so it raised the price of aluminum which is used to make soda cans, house sidings, cars, etc with an overall cost to the economy of 5 billion dollars in just the past three years. This process is described by economists as “rent seeking”. It is when the market is used to make profits but at the same time no new wealth or value is created in the economy. With raising prices of goods, this method also has other economic effects in regards to the rising pay of the CEOs and bankers. The income levels of these positions have become one of the leading causes of the widening of the gap between the rich and the poor in terms of income inequality.  Also, there has been no evidence to show that these CEOS and bankers are being paid a great deal of money for the value that they add to the economy, which has been the argument of the top one percent according to Greg Mankiw (Harvard economist and former economic adviser to President Bush). Instead, there are many accounts of them contributing to the “rent-seeking” method of business. Hence, there is no economic value in purposely influencing commodity prices by simply moving aluminum to different places all day. This shows how banks just because of their status and power in society are able to use the system to their advantage by manipulating markets to inflate prices. In addition, during the financial crises banks already were given the upper-hand by getting access to discounted Federal funds. Thus, the banks are not concerned with the average consumer since they have made it harder for firms to use their metal from their warehouses when they need it because they profit from the high rental fees (the picture below is a warehouse owned by Goldman Sachs). The graph show the increase of profits for banks as metal entered their warehouses. This in turn results with a price increase of metal that the people who are in the actual real economy have to pay for, while the banks and metal producers enjoy profits. It is evident that there is a class inequality here between the people who are in charge at the top and everyone else who is below them due to the power the top percent has to create such artificial market shortages. The people below the one percent do not have equal access to counter these plays by the banks. Lastly, this situation could easily become worse if there suddenly were a sharp decline in manufacturing jobs due to the banks creating artificial markets along with price squeezing.  

 

Source links: http://www.huffingtonpost.com/2013/07/22/banks-aluminum_n_3636254.html and http://graphics.thomsonreuters.com/12/03/BanksFightFed.pdfImage Image

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