One of the many problems related to our nation’s proliferation of too-big-to-fail banks is that it distorts our otherwise market-based financial system. The largest financial firms are so big and risky that the federal government has no choice but to provide them a taxpayer-funded guarantee against failure. This isn’t hyperbole, it really happened, and those same banks have grown hundreds of billions of dollars bigger since they got their bailouts. The result—privatized gains and socialized losses—further incentivizes risky behavior and provides outsized competitive advantages to the megabank oligopoly.
It’s a vicious cycle of high-risk behavior and government influence in the financial markets that would have Adam Smith spinning in his grave. Meanwhile, it leaves consumers and taxpayers increasingly at risk of another financial crisis.
So recent news of anticompetitive Wall Street behavior in the commodities markets should surprise no one, though it is yet another illustration of the too-big-to-fail problem. The New York Times recently reported that megabank control over industrial warehouses—and a well-choreographed transfer of aluminum slabs to artificially drive up rents—has led to billions of dollars in Wall Street profits, literally out of the pocket of Joe Six-Pack.
The anticompetitive practice amounts to a game of industrial keep-away played by Wall Street on companies such as MillerCoors and Coca-Cola. But the impact is not limited to beverage manufacturers. According to the report, Wall Street maneuvering in markets for oil, wheat, cotton and other commodities has led to billions in profits while forcing consumers to pay more every time they fill up their gas tank or turn on a light switch. In fact, JPMorgan Chase is on the verge of reaching a settlement in the neighborhood of half a billion dollars on charges that it rigged electricity prices. This comes a week after Barclays PLC paid a record fine to the Federal Energy Regulatory Commission. But don’t worry about them. These fines are just decimal dust, the cost of doing business in a financial behemoth that made $6.5 billion last quarter.
The bottom line is that these huge financial firms have grown so large and become so interconnected in our economy that they are demonstrating classic signs of monopoly power: collusive and anticompetitive behavior that pushes prices up and reduces the social surplus provided by free markets. Not only are these institutions driving up consumer costs, they are doing so with the insurance of a taxpayer-funded backstop if their businesses ever sour. And make no mistake about it, the time will come again. As bank analyst Joshua Rosner said in sworn testimony before a Senate Banking subcommittee this week, Congress must put an end to this monopolistic power or “2008 will be the first financial crisis, but not the worst.”
This is why too-big-to-fail firms should be downsized and restructured to rekindle the free-market spirit of our financial system. We must support a system in which financial institutions compete for customers instead of manipulating markets, one that promotes free markets and consumer choice instead of monopoly power and government favorites. And we better do it quick. Hang on to your pocketbooks because JP Morgan Chase has quietly bought up $1.5 billion in copper, more than half of the available amount in all of the warehouses in the copper exchange. The price of your pennies is next.