Rich Get Richer

I was reminded of this Thomas Nast Cartoon called “The Brains” by the news this morning that several hedge fund managers took home more than $3 Billion last year. John Paulson made $3.7 Billion. Like the era Nast satirized, we have entered a new gilded age and it will take a new Progressive Era to clean up the mess.

Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees. Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.

As I pointed out last month, this new savage capitalism works (in the words of Ben Stein) “not by betting on the markets, but by controlling the markets, by putting so much sell side (and occasionally buy side) firepower in play that they know they will move the markets.” These market manipulations have begun to distort the prices of basic commodities like the aforementioned wheat and oil, leading to the food riots we have talked about in the last few weeks and pain at the gas pump.

My friend James Surowieki (“The Wisdom of Crowds“) in his New Yorker column this week depicts one victim of this particularly brutal crowd, the country of Iceland.

The country’s troubles have made it a potential target for speculators seeking to drive down the value of its currency and perhaps cause a run on the banks. In 1998, hedge funds purportedly worked together to attack Hong Kong’s currency and its stock market, an attack that was foiled only when the government bought up a sizable chunk of the stock market. It’s not clear that a similar cabal is gunning for Iceland—the governor of its central bank insists that one is—but the notion is certainly plausible: with a population the size of Pittsburgh and a central bank whose total reserves are less than five billion dollars, the country makes an easy target for hedge funds flush with cash.

As Nast pointed out in his cartoon, it doesn’t take brains to make money in a world of unregulated capital–it just takes money.

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0 Responses to Rich Get Richer

  1. Andres says:

    An insightful and well written article Jon, unfortunately in this globalized economy, I have no idea of what regulatory body can reign in the power of so many “new” billionaires that populate the world today since the U.S. has lost so much credibility and the dollar is so weak; the robber barons are back and they are not subject the rules established since the last batch were reigned in.

  2. amlistening says:

    I agree with Boing Boing

  3. Richard Baskin says:

    I agree with Andres, there are no controls in place ultimately to stop this kind of abuse or ‘advantage’. When you have an ex investment banker bailing out private banks who are failing because of incompetence and greed in the first place; when you have a president who santifies outrageous corruption; when you have an anesthesized population, is it reasonable to expect anything other than the ‘lawlessness’ that we have? The thing I think about most now, is whether its ever really been any different?

  4. Morgan Warstler says:

    “Iceland’s current woes teach a useful lesson about the interconnectedness of global markets: trouble can come from anywhere. Homeowners default on mortgages in San Diego, and suddenly people in Reykjavík are paying more for gasoline and wondering if their bank deposits are safe. That doesn’t mean that Iceland is an innocent victim. The country went overboard with spending and borrowing—between 2000 and 2007, domestic credit in the Icelandic banking system more than quadrupled as a share of G.D.P. And relying on foreign money to fuel that kind of frenzy is foolish, since it puts you at the mercy of fickle foreign investors.”

  5. Morgan Warstler says:

    “These market manipulations have begun to distort the prices of basic commodities like the aforementioned wheat and oil, leading to the food riots we have talked about in the last few weeks and pain at the gas pump.”

    I think this has a better explanation on food prices:

    “Farewell the age of reason, welcome the idiocracy. Only George Orwell could have invented – and named – the government’s Renewable Transport Fuel Obligation (RTFO) that came into operation yesterday. It is the latest in a long line of measures intended to ease the conscience of the rich while keeping the poor miserable, in this case spectacularly so.

    The consequences of the RTFO have been much trumpeted on these pages. It says enough that one car tank of bio petrol needs as much grain as it takes to feed an African for a year, or that a reported one-third of American grain production is now subsidised for conversion into biofuel. Jeremy Paxman pleaded the cause of this latest green wheeze on Monday’s Newsnight, while the United Nations food expert, Jean Ziegler, screamed for it to stop: “Children are dying … It is a crime.”

    http://www.guardian.co.uk/commentisfree/2008/apr/16/biofuels.alternativeenergy

    Thats why it is one thing to push to reduce dependence on oil for our own security, and quite another to do it for “global warming.”

    I’m sure environmentalists are doing more to cause the price increases and food riots, than the hedge fund guys.

  6. Another Jon says:

    Morgan, the reason one-third of American grain production is subsidized is not because of the evil environmentalists, it is because of a very strong farm lobby. Try and focus your attentions in the right place. This record keeps skipping.

    So much for that free-market now huh?

  7. Rachel says:

    Morgan said: “That’s why it is one thing to push to reduce dependence on oil for our own security, and quite another to do it for “global warming.””

    Oh, look, over there, another straw man …

  8. Jon Taplin says:

    Morgan -I made a bet with my wife that even you wouldn’t rally to the defense of $3 billion paychecks for speculators. I lost.

  9. Azmanon says:

    This may be a long shot bet, but is anyone willing to gamble on, if Morgan is paid or not to write his comments? ;)

    Actually I feel that the current incarnation of the class of super rich has been living in the past, for at least a decade or so. As you’ve pointed out numerous times, Jon, many of these people are living in a pure fantasy lands of limitless economic horizons seemingly unconstrained by physical reality. While this was often true of the rich in the past, the difference now is how increased information flow, allows new forms of transparency. One has to wonder if the age old tricks of market manipulation are now exposed more readily. Its safe to say that we threw out ideological politics in the early 90s and since then, analysis of certain trends is something perceived on a mass scale, rather than by “trained specialists”.

    I look at places like Dubai and wonder if they really are only as sustainable as the “unregulated” market systems that allow that kind of development. Are they merely emerald cities constructed by free market wizards or something more?

  10. John Hurt says:

    Azmanon I would not take that bet. He has a lot of time for this.

  11. STS says:

    Azmanon:

    … the current … class of super rich has been living in the past, … many … living in a pure fantasy land … unconstrained by physical reality.

    The fantasy is that a $3.7 billion payout for a well-timed bet is 100% earned money– as if poor Paulsen had been out in 103 degree heat digging ditches — rather than a profit which depends on a simply enormous capital stock of physical, intellectual and legal infrastructure. Infrastructure which requires at least a *little* maintenance.

    I’ve heard more self-awareness from some Russian oligarchs than from most American billionaires — the knowledge that their privilege gives them enormous responsibility for ensuring that the system continues to function. In a long-standing aristocratic class this would be termed noblesse oblige. But in the land of Henry “history is bunk” Ford, our aristocrats (hereditary or otherwise) invariably blink at the camera with a look of “who, me? I’m not responsible for your stupid republic. I buy politicians to get my taxes back, not to worry about some scrap of paper in the National Archives!”

    Folks, there’s no damn use in noblesse if they ain’t got no oblige. That’s why — sooner or later — the peasants wheel out the guillotine. I wish our guest “conservatives” would go look up Edmund Burke and reconnect with a less exclusively Fox News-scripted political identity.

  12. Azmanon says:

    I have to watch my sarcasm, especially if I stay up too late.

    STS I quite agree with you although I see the developing guillotine of the current times as being something quite unlike those of the past.

  13. JR says:

    Jon, The only reason I checked the comments on this story was to see how Morgan spun this one. Your wife’s no dummy!

  14. Morgan Warstler says:

    I hope you paid up!

  15. Zhirem says:

    STS, I must state: nicely done. Loved the post. More of this type of thing please.

    – Zhirem

  16. john says:

    Money is always going to be a dictator.

  17. pond says:

    The growing inequality does scare me about the future stability of the society in the States. A recent UCLA study indicates that if people feel they are on the short end of the stick they feel the impulse to tear the whole system apart, even if they also got smashed in the chaos. That’s a bit of an overstatement of their results, but it’s what has happened in history.

    The experiment gave one subject (A) some cash, and let him offer a piece of that cash to a second subject (B). The second subject could accept the cash offered by A, in which case they both would get the money; or reject it, in which case neither would get anything.

    So A gets $10 and offers B $5; B takes it and both make $5 out of the experiment. But if A gets $25 and offers B $5, B will refuse. A will get nothing — and neither will B. ‘Cut off your nose to spite your face’ seems to operate here. (It seemed to take an act of will or calculated reason on B’s part to override this impulsive reaction to the unfairness of the $25 A’s offer, and see that after all, $5 is better than nothing for B, no matter how much A makes.

    In addition, they looked at B’s brain scans, and found activity in an area of disgust when A made a lopsided offer, and activity in the ‘reward’ part of B’s brain when he accepted the more even-handed offer — even though no more money was involved.

    This online article sums it up:

    http://www.psychologicalscience.org/media/releases/2008/tabibnia.cfm

  18. Morgan Warstler says:

    pond,

    This is the stuff that matters.

    It shows why negotiations are always fair. B many times refuses in the market – it happens often. A is always looking for the perfect number, the littlest amount B will take and still let the deal go through.

    It is always why it is imperative to question folks who try and rile up the B’s and try and convince them they should be after even more than they themselves feel is fair.

    Because there is a moment when A will no longer think up the stuff that cause $25 to come down the shoot, our goal is to find those A brains scans and figure out exactly when A stops doing the thinking.

    No one needs riled up, we just need brain scans.

  19. Jon Taplin says:

    STS-I second Zhirem’s motion. Hear Hear!

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