You may have noticed I’ve been somewhat quiet about financial stories lately. In large part, that’s because the media is doing a much better covering the economic crises than it had during the housing bubble.
But the other reason has to do with a sort of disillusionment with America’s financial system. You see, I’ve come to understand that intentionally or not, the entire economic system is designed to help the wealthy far more than the average working Joe.
Rather than launch a dissertation, I’m going to keep this simple with two seemingly unconnected stories. The first story touches an issue near and dear to our hearts: gas prices have risen 41 days in a row, reports The New York Times.
As I’m sure you’re aware, high gas prices can have a severe impact on household spending. Besides pumping more bucks straight into your gas tank, consumer prices on all sorts of products usually rise. In January, Americans were spending $600 million a day on gas. Today, gas costs consumers about $1 billion a day.
But here’s how I suspect most Americans see it:
Dawn Cunningham, a sales representative from Elk Grove Village, Ill., was not happy as she spent $45 the other day to fill the tank of her Honda Pilot sport utility vehicle. “My husband and I both took pay cuts recently, and now the rising price of gas is taking even more out of our pockets,” she said.
Economist Adam Sieminski expressed surprise that such an important commodity is increasing in price during an economic downturn. But then he says this: “So hedge funds, sovereign funds, pension funds are investing in futures and oil stocks and commodity indexes.”
Which brings us to the headline of our other story: “Hedge Funds Rebound, Gaining 5% in a Month,” proclaims the Times. Some of the biggest funds were up as much as 20 percent in the first few months of 2009.
Now, hedge funds make their money trading everything from commodities to playing off equity-stock swaps. And keep in mind that bank trading desks and other fund managers also play this game, often piling on any commodity that seems to be going up. While these price spikes are in play, the consumer usually has to open his or her pocketbook until the bubble – large or small – pops. (Note: oil prices are also pushed up by other forces, such as OPEC members keeping supply down.)
And this brings me to my key disillusionment: to a large degree, the financial system is designed to benefit the already wealthy. Instead of keeping oil affordable at a time of great consumer need, the wealthy profit by increasing the cost of basic commodities to the average American.
Oil is just one example of how this happens today, but the best examples actually occurred during the peak of the bubble boom. As the housing market crashed, money piled into the commodities markets, forcing food prices up worldwide. Some of the price increases may have been legitimate – such as corn being used for ethanol – but a lot of it was traders looking for a way to keep the profits flowing.
By the way, a lot of this trading money is coming directly from the federal government bailout programs, and as I just learned, from the U.S. government allowing banks to use increased leverage when speculating on oil. After all, most of the money went to banks with large trading desks and we already know they’re not making many loans.
As I said at the beginning, this is just one example how America’s capitalistic system actually favors a very tiny percentage of the population. Depending on the formula used, 1 percent of Americans earn 38 percent of this country’s wealth. That rate is nearly double of what it was in the mid-1970s.
While the profit motive may be essential for capitalism to work, the system is out of whack. And we’re paying the price.