U.S. Markets closed

Abuse Of Deposit Insurance: The Ethanol Episode

Jeff Bailey

Big banks like JPMorgan (JPM) like to portray themselves as entrepreneurial enterprises. But the fact remains that without federal deposit insurance (a subsidy that allows banks to attract savers’ money at a fraction of the cost they’d have to pay were Uncle Sam not standing behind the deal) and access to the Federal Reserve’s discount window for emergency borrowing, it’s doubtful big banks would exist at anything near the scale or profitability that they are today.

They complain about regulation constantly, but they’re the ultimate welfare queens. So, do we want they taking that government subsidized money-gathering operation and speculating in commodities markets, in the latest instance doing so in a way that seems to be bad for the given market and at cross purposes with the government’s aims for the market?

Ethanol, of course – requiring the corn-made fuel be blended into gasoline – was a pretty bad idea, wonderfully boosting profits for corn farmers and some others along the way, but raising grain prices for everyone and leading to a nutty construction binge of ethanol plants.

US Corn Farm Price Received Chart

US Corn Farm Price Received data by YCharts

But it seems for now we’re stuck with the stuff. And in Sunday’s New York Times, we get a brilliant investigative article on how JPMorgan and others seem to have loaded up on ethanol trading allowances at just the right time, sending the price of said allowances soaring and yet further adding to fuel costs.

All of this comes against the backdrop of, five years on from the financial crisis, banking regulations still not set and the industry seeking to fight off any version of the Volcker Rule with teeth, and to otherwise defang government oversight. Given the risk the banking industry poses to the economy and to taxpayers – and the level of economic subsidy it enjoys – this is one area where erring on the side of more oversight makes sense.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.