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Adam Ford
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http://www.fee.org/publications/the-freeman/article.asp?aid=7894
Advocates of the free market—including those considered “right-wing” and “conservative”—believe it is wrong to violate property rights. Consequently, they oppose egalitarian measures to steal from the rich and give to the poor. Such “income redistribution” represents naked theft and epitomizes the Founding Fathers’ fears of unfettered democracy. At the same time, champions of laissez faire devote much of their time to criticizing the thousands of distortionary and punitive regulations imposed on businesses. Indeed, Ayn Rand went so far as to write an essay in which she described big business as “America’s persecuted minority.”
In light of these tendencies, it is easy to overlook the fact that a large portion of the welfare state is devoted to the rich. Although couched in altruistic language and billed as serving the public interest, much of the government’s redistribution of wealth is from the hapless taxpayer to the pockets of large corporations. This may seem paradoxical to naïve observers whose political views are shaped largely by political campaigns between Democrats (the ostensible friends of the poor) versus Republicans (the ostensible opponents of welfare). But anyone familiar with political economy can quickly recognize that it makes far more sense for politicians to funnel tax dollars into the hands of powerful (not to mention rich) special interests. Big business learned long ago that the easiest way to handle taxes and regulations is to divert “public” money into its own hands and to influence the regulators to enforce measures that disproportionately burden upstart competitors.
I hope to redress the rhetorical imbalance by outlining the numerous ways rich individuals and big businesses manage to siphon off taxpayer money into their own pockets. To keep the article manageable, I’ll focus mainly on actual subsidies, that is, cases where wealthy rent-seekers literally receive cash flows (directly or indirectly) from the government. Beyond these fairly obvious examples there are dozens of clever ways in which rich and unscrupulous special interests use their political influence to enrich themselves at the expense of the public without actually receiving tax dollars. (These would include licensing restrictions and import quotas.) Because of space constraints, an extensive analysis of these subtler shenanigans will have to wait for a future article.
One of the most blatant examples of corporate welfare is the bloated system of agricultural price supports, which started in the 1920s and was institutionalized during the New Deal. The rationale behind the program is straightforward: Under pure laissez faire, agricultural markets would (allegedly) prove extremely volatile. In good times with high prices farmers would borrow money to expand their operations and plant more crops. But this would soon lead to a glut on the markets, forcing farmers to slash prices and go into foreclosure. This tremendous uncertainty, as well as the wild swings in crop supply, could (allegedly) be rectified if the federal government stepped in to purchase surplus crops when the market’s demand proved insufficient. Such policies would presumably stabilize crop prices and the food supply, providing more rational and orderly markets in agriculture.
As with other forms of government intervention, a pure policy of surplus acquisition would lead to disaster. If farmers were assured that whatever quantities of a crop they grew the government would buy it from them at remunerative prices, they would plant the most cost-effective crops with reckless abandon. (Indeed, at the close of 2000 the Commodity Credit Corporation [CCC], a branch of the U.S. Department of Agriculture, held stockpiles of 97 million bushels of wheat, eight million bushels of corn, and five million bushels of soybeans, according to the Food and Agricultural Policy Research Institute. The CCC spent $133.5 million to purchase over a million metric tons of wheat on a single day in 1999.) To avoid the accumulation of stockpiles and yet maintain price supports for certain crops, the government hit on the absurd notion of paying farmers not to grow the crops in question. It is possible to qualify for such subsidies even if an owner of arable land had never intended to grow the crops in the first place.
From 1995 to 2004 the federal government provided agricultural subsidies of over $143 billion, according to the Environmental Working Group. The recipients of these subsidies are not exactly Dust Bowl migrants from a Steinbeck novel, either. Over $104 billion (72 percent) of the loot during this period went to the top 10 percent of the recipients, which were large farming organizations or cooperatives that each received an average of $33,000 in subsidies every year. To further illustrate the phenomenon, in October 2005 the House Agricultural Committee rejected a proposal by President Bush to place a cap on annual farm subsidies of $250,000 per person.
Another classic example of how the well-to-do fleece the taxpayers is the multiplicity of “joint ventures” between the government and big business. Projects such as sports stadiums, railroads, or even amusement parks are deemed “too big for the private sector.” Besides being silly—after all, any money that the government spends on such projects was taken from the private sector—these pork-barrel expenditures represent a transfer from the poor (and middle class) to the rich.
For example, the fiscal 2006 Transportation/Treasury/Housing and Urban Development (TTHUD) Act contained $350,000 for the Yucaipa Valley Regional Sports Complex (in California) and $100,000 for renovations to the National Orange Show Stadium in San Bernardino. The Act also contained $50,000 for the Capitol Hill Baseball and Softball League. Beyond its support for sports fans, the government also subsidized art lovers and conference attendees (not typically drawn from the downtrodden of society). Citizens Against Government Waste points out that this same Act contained $325,000 each for renovations to the Seattle Aquarium and the Fox Theater, $200,000 for renovations to the Fredonia Hotel and Convention Center in Texas, and $100,000 for D.C.’s Friends of Carter Barron Foundation for the Performing Arts.
These anecdotes, though outrageous, are whimsical when compared with other types of corporate welfare. For example, the federal government provides enormous funding for energy research, which attempts to develop alternative supplies and technologies as well as discover better methods of using existing sources. The Cato Institute estimates that in fiscal year 2003, the Energy Department spent $670 million on such projects. Inasmuch as struggling single mothers are not designing ethanol engines, this largess represents yet more welfare for the rich.
In a similar vein, the government spends billions funding scientific research. In FY2005 the National Institutes for Health alone spent over $24 billion on all awards, and over $20 billion of this consisted in research grants. Large pharmaceutical companies certainly benefit from this convenient assistance.
We close this section with the epitome of a failed government/business partnership, the classic case of Amtrak. In 2005 alone Amtrak lost $1.2 billion, according to the Heritage Foundation, a shortfall made up by the hapless taxpayer. What makes this waste even more despicable is that Amtrak doesn’t even fulfill its ostensible purpose, namely, to provide affordable passenger rail service across the nation. In particular, Amtrak doesn’t offer service to Phoenix, Las Vegas, Columbus, Nashville, Louisville, Dayton, Tulsa, or Colorado Springs, even though each of these cities has over 500,000 residents. And as anyone who has ridden Amtrak knows, it is far from cheap. For example, its cheapest roundtrip fare from New York City to Washington, D.C., is currently $135 before taxes, compared to $69 for a similar ticket on an admittedly slower bus.
Government Contractors
Even government projects that might be deemed legitimate—such as expenditures on military vehicles or renovations to the Statue of Liberty—represent hidden subsidies to the extent that the contracts are awarded corruptly. The economic principles behind the cost overruns are straightforward enough. Unlike the shareholders of a private firm, if government departments are careful to award contracts to the lowest bidder (who can still get the job done), the politicians and bureaucrats don’t pocket the savings, for that would be sheer theft of public funds. On the other hand, by awarding generous contracts, officials stay in the excellent graces of the beneficiaries. This comes in handy when officials retire from government work and look for consulting jobs.
Another source of systematic welfare is the “cost-plus” method of payment. Here, the government doesn’t settle on an actual price for goods or services delivered, but rather agrees to meet the contractor’s expenses plus some markup. Naturally, this type of arrangement puts no incentive on the contractor to watch costs, and hence represents a hidden subsidy.
We should also consider the effect of timing and the different outcomes in private versus government settings. Congress can agree to spend, say, $20 billion on a space station that will take ten years to complete. Five years into the contract the suppliers can complain that they will require an additional $10 billion to finish the project because of “unexpected” expenses. By this point the voters don’t remember the previous expenditures, and it would seem a terrible waste not to finish such a grand project. Thus the government often ends up funding boondoggles that would never have been approved had the actual price tag been known all along.
When it comes to welfare for contractors, no other agency can match the Pentagon, with its classified programs and aura of necessity. Besides the notorious $600 toilet seats uncovered in a 1983 audit, probably all the major purchases of hardware occur at inflated prices. (The difference is, nobody knows how much a B-2 Stealth bomber “should” cost, so its 2001 price tag of $530 million isn’t as shocking.) No outsider can really be sure of the exact amount of the hidden subsidy, or what the corporate beneficiary does to win it, but we can be fairly sure that the recipients do not reside in the inner city.
On this topic we must mention the case of Halliburton, for this is one issue on which the leftist conspiracy theorists make a decent case. Regardless of the motivations for the invasion of Iraq, it cannot be denied that Halliburton benefited greatly from it. According to a report by the Center for Public Integrity (which required six months and 70 Freedom of Information Act requests to assemble the data), Halliburton received over $2.3 billion in reconstruction contracts in Iraq and Afghanistan. In second place was the engineering and construction firm Bechtel Group, Inc., with just over $1 billion. International American Products, Inc., finished third with a nonetheless-respectable $526 million in contracts. (For those interested in conspiracies, Halliburton and Bechtel contributed roughly $2.38 million and $3.3 million to President Bush, respectively, while International American Products only contributed $2,500.)
The “War on Terror” has been a bonanza for defense and related contractors. According to Robert Higgs, Department of Defense outlays excluding payments to military personnel rose from $217 billion in FY2001 to $366 billion in FY2006. In this same period the number of companies with federal homeland-security contracts grew from nine to a whopping 33,890, a jump so large that it renders typical percentage figures—in this case, a growth of 376,456 percent—rather meaningless.
Small Business Administration
The Small Business Administration (SBA) is another agency with an apparently noble mission that nonetheless acts in reverse-Robin Hood fashion. In 2005 the SBA announced that $79.6 billion in federal contracts were awarded to “small businesses.” However, according to the New York Times, some of this money went to mom-and-pop organizations such as Northrop Grumman, Boeing, Bechtel, and General Dynamics. Indeed, the Christian Science Monitor reports that almost $5 billion of the contracts classified as “small business” were for the 13 largest government contractors.
Beyond winning contracts theoretically intended for small businesses, there is another way big business benefits from the SBA. In a scheme that Doug French (himself a Las Vegas banker) calls “welfare for bankers,” the SBA guarantees loans for qualifying businesses. Banks are then able to pool such loans and sell them in secondary markets. Now in a simple model of perfect competition, the SBA guarantees would benefit only the loan recipients, because they would acquire funding at lower interest rates. But in the real world, savvy banks acquire “PLP status,” meaning they are preferred lenders. This allows them to issue SBA-guaranteed loans without as much paperwork and other hassles as other banks would need to suffer, and so allows these privileged banks to earn a net income from the entire process. To the extent that PLP status represents a hurdle that has nothing to do with merit or business performance, the process is a form of subsidy to certain (rich) bankers.
The Government National Mortgage Association (GNMA or “Ginnie Mae”) is a public corporation in the Department of Housing and Urban Development. Ginnie Mae boosts the secondary mortgage market by guaranteeing principal and interest payments on mortgage-backed securities. In a typical case, a bank or other institution will acquire dozens of individual mortgages from homebuyers and place them into a single pool, then issue securities to other investors based on the cash flows from the mortgage payments. In the event of unexpected defaults by the homebuyers, Ginnie Mae would step in to guarantee the payments to the secondary investors.
This pledge obviously makes the guaranteed securities more attractive, lowering their promised rate of return. This in turn lowers the mortgage rates faced by the original homebuyers, but also provides liquidity in the secondary mortgage market and no doubt higher commissions for politically savvy middlemen. (As Ginnie Mae’s Wikipedia entry puts it in an unintentionally humorous line, “This arrangement seemingly benefits everyone involved.”) Naturally the loser is, as always, the U.S. taxpayer, who must assume the losses from mortgage loans made at rates that do not reflect the true risks involved. Although in recent years Ginnie Mae has itself earned more in service fees than it paid out on defaults (and thus did not use any public funds), this is only possible because the taxpayers are ultimately liable for the outstanding collection of guaranteed mortgage-backed securities; total potential exposure in 2004 was $453.2 billion.
Other Guarantees and Bailouts
The same analysis applies to other government loan guarantees. For example, suppose the federal government guarantees that it will make good on bonds issued by the Mexican government in the event of a default. Such a pledge undoubtedly showers benefits on both the Mexican government and the (typically wealthy) investors in its bonds, while the source of these benefits is undoubtedly the American taxpayer. This is true even if the Mexican government does not default on its bond payments. After all, if the taxpayers pledged to pay all costs associated with a fire at any of General Motors’ factories, this would certainly be a subsidy to GM, even if no such fire ever occurred. (This is obvious; with the federal guarantee, GM would save the money it otherwise would have spent on fire-insurance premiums.) In a similar fashion, even if the Mexican government doesn’t default, it still benefits from borrowing money at lower interest rates than would otherwise be the case.
Of course, if and when the U.S. government has to make good on these types of pledges, the transactions involve funneling taxpayer dollars to wealthy investors both at home and abroad. Sometimes these subsidies are particularly subtle. For example, during the Mexican “peso crisis” of 1994, the Clinton administration contributed some $20 billion to the international bailout effort by providing loan guarantees and currency swaps. This latter move, executed by the Treasury’s Exchange Stabilization Fund, swapped cash flows denominated in dollars with those denominated in pesos. Inasmuch as the dollar flows originated (at least partly) with the government Fund, and also because the whole purpose of the intervention was to engage in currency swaps that the private market considered unprofitable, President Clinton’s decision used U.S. tax dollars to shield the Mexican government from its irresponsible monetary policies. In short, yet another example of welfare for the rich and powerful.
The celebrated fate of Long Term Capital Management (LTCM), a huge hedge fund that had Nobel laureates Myron Scholes and Robert Merton on its board, presents yet another case of corporate welfare. Because its trading strategy took advantage of slight (but theoretically “irrational”) overvaluations of newly issued bonds (versus older “off-the-run” bonds), LTCM was highly leveraged, sometimes with a leverage ratio of over 30. When the Russian government defaulted on its bonds in 1998, this set in motion a chain of events that proved catastrophic to LTCM’s positions. In the course of a few months the amazing success story had lost over $4.6 billion. Citing the potential disruptions to the entire financial community if LTCM itself defaulted, the New York Federal Reserve Bank intervened. Though it technically did not use public money in the bailout, the Fed nonetheless used “moral suasion” (backed perhaps by implicit pressure?) to get LTCM’s major creditors to allow for an orderly liquidation. Supporters of the move claimed that it prevented a financial meltdown, while critics pointed out that the “too big to fail” mentality would only encourage large institutions to take risky positions in the future, and that the ultimate fallback to the government-sponsored rescue allowed LTCM to reject a private-sector bailout effort led by Warren Buffett. (Under Buffett’s plan, the managers of LTCM would have been fired and the shareholders would have fared much worse than they did under the “necessary” Fed-brokered arrangement.)
We cannot leave this section without mentioning the post-9/11 federal bailout of the airlines. The Air Transportation Safety and System Stabilization Act (signed on September 23, 2001) gave $10 billion in loan guarantees, as well as $5 billion in direct “relief,” to the airlines. Now even libertarians may differ on the justification for this bailout. After all, the federal government hampered the ability of the airlines to prevent 9/11 (through gun bans and other interventions) and also forced them to lose business by the mandatory flight ban immediately after the catastrophe. Nonetheless, the entrepreneurs involved in the airline industry certainly did not live up to their task of anticipating the future better than others. In a truly free market the consequences of poor preparation are losses. When the critics ask, “If the free market is so good, why did the government need to take over airline security?” the defender of laissez faire can reply, first, that government was involved in security before 9/11 and, second, that airline executives did not actually face the full pressures of the profit-and-loss test. When their inadequate security measures allowed disaster, they didn’t bear the full brunt of these shortsighted decisions.
Government Deficits and the Federal Reserve?
Though not as clear cut as some of the other examples in this essay, the annual issuance of hundreds of billions of dollars in new government bonds may qualify as welfare for the rich. If one agrees that the federal guarantee of Mexican bonds represents goodies to the wealthy at the expense of the taxpayer, then by consistency one must also condemn massive federal deficits for the same reason. This is because all Treasury bonds are “guaranteed” by the full faith and credit of the U.S. government as a matter of course. This practice allows the Treasury to obtain loans at low rates of interest and undoubtedly showers income on politically connected banks and other financial brokers. As always, the losers are the taxpayers (who must ultimately pay off the Treasury’s debts) and the smaller banks that do not enjoy the privileges of Fed membership.
When it comes to the “moral hazard” of federal relief, the standard illustrations are the Federal Deposit Insurance Corporation and federal checks to property owners after natural disasters, such as hurricanes and earthquakes. By insuring checking deposits (up to $100,000), the FDIC provides an incentive for banks to invest in riskier projects because on the margin the (expected) costs of doing so are reduced. In a similar manner, when the government provides massive relief to owners of beachfront condos and hotels after a hurricane, this encourages more development in disaster-prone regions than would otherwise occur (if the owners had to pay full market insurance premiums). To the extent that owners of banks and beachfront property tend to be above-average income earners, these programs represent yet more examples of subsidies to the rich.
The final example we shall discuss is one of the most blatant and economically unjustified: the Export-Import Bank. It is worth quoting the Bank’s own mission statement in its entirety:
The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States. Ex-Im Bank’s mission is to assist in financing the export of U.S. goods and services to international markets.
Ex-Im Bank enables U.S. companies—large and small—to turn export opportunities into real sales that help to maintain and create U.S. jobs and contribute to a stronger national economy.
Ex-Im Bank does not compete with private sector lenders but provides export financing products that fill gaps in trade financing. We assume credit and country risks that the private sector is unable or unwilling to accept. We also help to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters.
Ex-Im Bank provides working capital guarantees (pre-export financing); export credit insurance; and loan guarantees and direct loans (buyer financing). No transaction is too large or too small. On average, 85% of our transactions directly benefit U.S. small businesses.
With more than 70 years of experience, Ex-Im Bank has supported more than $400 billion of U.S. exports, primarily to developing markets worldwide.
As with most descriptions provided by the agencies themselves, the Ex-Im Bank’s statement seems innocuous enough. Yet Henry Hazlitt, in his wonderful Economics in One Lesson, long ago exploded the myth that subsidizing exports is good for the economy. For example, when the Ex-Im Bank “levels the playing field” by “matching the financing that other governments provide to their exporters,” what does this really mean? It means that the federal government gives money to foreign governments or companies which they then use to purchase products from American exporters. To clearly see what is going on, it would be simpler if the U.S. government first bought the products from domestic producers (using tax dollars, of course) and then handed them over for free to the foreign organizations. Yes, this practice benefits the workers and shareholders of the privileged exporting firms, but these gains are more than offset by the losses to the taxpayers. After all, as Hazlitt pointed out, the country as a whole doesn’t get rich by giving goods away.
Similar to the Ex-Im Bank is foreign aid in general, to the extent that the recipient governments spend the money on U.S. exports. For example, according to the Cato Institute, in FY2003 $3.7 billion in federal money was used to finance weapons purchases for foreign governments.
Free-market enthusiasts often rail against welfare for the poor, and rightly so. However, as both experience and political economy suggest, the welfare state also redistributes wealth into the hands of the rich and politically powerful. To offer a consistent message—as well as attract support among more-egalitarian observers—advocates of laissez faire should condemn the billions of dollars in annual subsidies for the rich. |
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Tue Apr 15, 2008 8:36 am |
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Public D
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Nice to see you're getting warmer, Adam. But we can thank laissez-faire economics' core myth, that deregulation is unquestionably good, for the current housing mess, the current airline mess, the telecommunication ownership mess, the offshore tax shelter mess, the trade mess and on and on and on. When anyone proselytizes the benefits of 'no rules' economic policies, you have to ask yourself what they stand to gain. Watch your wallet, fastened your airline safety-belt, turn off your TV and never put blind faith and trust in the markets' 'invisible hand' to regulate itself. There's no financial incentive to.
It's funny the way many conservatives here are ardent supporters of strict rules for citizens and rigid adherence to rules of engagement for police officers, but want no rules for corporations and no policing of them whatsoever. Cherry picking standards to match your self-interests - even when they aren't in your best interest - simply because they are part of the 'rules' for being a good hard-ball conservative (established and policed by the infallible wisdom of O'Reily, Rush and Milton Freidman disciples) is inconsistent, at least, and institutional waffling, in fact.
http://mcs.sagepub.com/cgi/reprint/25/1/125.pdf?ck=nck
http://www.sunsonline.org/trade/areas/environm/06100094.htm |
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Tue Apr 15, 2008 10:14 am |
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Adam
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Actually if we had a laissez-faire the crisis may have been prevented. Our bubbles typically come after the Federal reserve artificially lowers interest rates.
There is a major incentive to laissez-faire style government. It's called lower taxes, more freedom, more economic growth.
Strict rules for citizens? You mean not killing babies?
I support free and fair trade but it's very difficult and almost impossible to put into place with varying levels of socialism and subsidies around the world. |
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Tue Apr 15, 2008 1:07 pm |
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Adam
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Tue Apr 15, 2008 2:00 pm |
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Public D
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quote:
Adam schreef:
This explains some of the madness of interventionism economics. http://www.spiegel.de/international/business/0,1518,547317,00.html
Regulation is not socialism, Adam (incidentally, laissez-faire is not a form of government - unless economic anarchy is a form of 'government.') Attempting to say so should be a signal to all that you are pushing a small-minded, big business agenda that most now understand is not an answer to our problems, but indeed the cause.
This explains the madness of laissez-faire economics:
http://www.naomiklein.org/shock-doctrine/excerpt
PS: When I first heard about this book, my first reaction was that it was over-the-top, making connections that weren't there, etc. - but after having read the almost excessively sited & documented sources and exacting examples, the factual accuracy and its implications are real – and shocking. |
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Wed Apr 16, 2008 9:30 am |
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Demeralda
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The best response you can muster to Public D's analysis of your article is to throw out ABORTION?
Gimme a break.
Not to mention that the best article you can find to support you is from Germany.
How does THIS fit with your theories? Pay special attention to the end. (The part where it talks about unparalleled non-regulation and comparisons to the Gilded age and the Depression.)
Wall Street Winners Get Billion-Dollar Paydays
By JENNY ANDERSON
Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.
One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.
Mr. Paulson, the founder of Paulson & Company, was not the only big winner. The hedge fund managers James H. Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.
Hedge fund managers have redefined notions of wealth in recent years.
And the richest among them are redefining those notions once again.
Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.
Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”
The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.
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. Five of the top 10, including Mr. Simons and Mr. Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds’ returns and the fees that they charge investors, and then calculated the managers’ pay.
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 early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.
Then, over the next two years, Mr. Paulson established two funds to focus on the credit markets. One of those funds returned 590 percent last year, and the other handed back 353 percent, according to Alpha. By the end of 2007, Mr. Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier.
Mr. Soros, one of the world’s most successful speculators and richest men, leapt out of retirement last summer as the market turmoil spread — and he won big. He made $2.9 billion for the year, when his flagship Quantum fund returned almost 32 percent, according to Alpha. Mr. Simon, a mathematician and former Defense Department code breaker who uses complex computer models to trade, earned $2.8 billion. His flagship Medallion fund returned 73 percent.
Like Mr. Paulson, Philip Falcone, who founded Harbinger Partners with $25 million in June 2001, cast a winning bet against the mortgage market. He pulled in returns of 117 percent after fees in 2007 and made $1.7 billion. The trade thrust him from relative obscurity to hedge fund heavyweight: he now manages $18 billion. Harbinger recently won agreement from The New York Times Company to add two members to its board.
Hedge fund managers share their success with their investors, which include wealthy individuals, pension funds and university endowments. They typically charge annual fees equal to 2 percent of their assets under management, and take a 20 percent cut of any profits.
With a combined $2 trillion under management, the hedge fund industry is coming off its richest year ever — a feat all the more remarkable given the billions of dollars of losses suffered by major Wall Street banks.
In recent months, however, scores of hedge funds have quietly died or spectacularly imploded, wracked by bad investments, excess borrowing or leverage, and client redemptions — or a combination of those events.
“To some degree it’s a very gigantic version of Las Vegas,” said Gary Burtless, an economist at the Brookings Institution.
As Alpha’s list shows, managers who reap big gains one year can lose the next.
Edward Lampert, the founder of ESL Investments and a member of the 2007 Alpha list, was absent this year. His fund fell 27 percent last year, according to Alpha. About 60 percent of ESL’s equity portfolio is invested in Sears, whose shares plunged 40 percent last year. ESL is also a major holder of Citigroup, whose abysmal performance matched that of Sears.
A manager who ranked high in the 2007 list and fell off in 2008 was James Pallotta of the Tudor Investment Corporation, who was 17th last year and earned $300 million. Mr. Pallotta’s $5.7 billion Raptor Global Fund fell almost 8 percent last year, according to Alpha.
A few who did not make the cut still made buckets of money. Bruce Kovner of Caxton Associates and Barry Rosenstein at Jana Partners didn’t make the top 50. But Mr. Kovner earned $100 million, and Mr. Rothstein earned $170 million, according to Alpha. Spokesmen for the hedge fund managers either declined to comment on Tuesday or could not be reached.
Since 1913, the United States witnessed only one other year of such unequal wealth distribution — 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.
“For a recovery to be robust and sustainable you can’t just have consumer demand at Nordstrom,” he said. “You need it at the little shop on the corner, too.”
Despite the explosive growth of the industry — about 10,000 hedge funds operate worldwide — it is relatively lightly regulated. On Tuesday, two panels appointed by Treasury Secretary Henry M. Paulson Jr. advised hedge funds to adopt guidelines to increase disclosure and risk management.
And Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry.
“Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way,” Mr. Gross said. “We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold." |
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Wed Apr 16, 2008 10:53 am |
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Adam
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Wed Apr 16, 2008 11:22 am |
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Adam
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quote:
Demeralda schreef:
The best response you can muster to Public D's analysis of your article is to throw out ABORTION?
Gimme a break.
Not to mention that the best article you can find to support you is from Germany.
How does THIS fit with your theories? Pay special attention to the end. (The part where it talks about unparalleled non-regulation and comparisons to the Gilded age and the Depression.)
I could have come with other examples but I like to be brief.
http://www.financialsense.com/fsu/editorials/renaissance/2004/0729.html
Why don't you try and become a hedge fund manager and make billions of dollars? You could still be a "good person" and give all the billions of dollars you make away. What about the hedge funds managers that lost money? If we're mad at the successful managers shouldn't we feel sorry for the ones that didn't make it? Do you know why these managers made such good money? If it was so easy why don't they all make that kind of money. I guarantee there are hedge fund managers that get fired every year.
Have you not noticed the lack of jobs in Flint? Don't you think we could use jobs? If you became a hedge fund manager and made billions of dollars think of all the jobs you could create in Flint and Genesee County.
http://www.townhall.com/columnists/JohnStossel/2006/04/26/greed_is_good
"Who's John Stossel?"
That was Virgil Rosanke's reaction when "20/20" interviewed him for one of my TV specials. Without Rosanke and others like him, I couldn't have a steak dinner tonight, but I and most of the people he makes dinners possible for are unknown to him. He makes our dinners possible anyway.
Is Virgil Rosanke a philanthropist? No. Is he a government worker? Not that either. He's just a guy who delivers propane to heat water for cattle to drink. Why does he do it? To make money.
If pursuing profit is greed, economist Walter Williams told me, then greed is good, because it drives us to do many good things. "Those areas where people are motivated the most by greed are the areas that we're the most satisfied with: supermarkets, computers, FedEx." By contrast, areas "where people say we're motivated by 'caring'" -- public education, public housing etc. -- "are the areas of disaster in our country. . . . How much would get done," Williams wondered, "if it all depended on human love and kindness?"
Greed gets people to cooperate. If you want to benefit from other greedy people, you have to make sure they benefit from you. Consider one of the wonders of our age, the supermarket. There are thousands of products on the shelves. How'd they get there?
When I posed that question about just one of those thousands of products -- a piece of beef I bought for my dinner -- I found a trail back to an Iowa farm. That's how I learned about Virgil Rosanke, and how he learned about me.
We taped David Wiese and his family, farmers in Manning, Iowa, as they put in 14-hour days fixing fences, digging ditches, harvesting hay, and feeding the cattle. They don't do it for me and my neighbors -- but I'm glad they do it.
"Do you think it's because they love people in New York?" Williams asked. "No, they love themselves. And by promoting their own self-interest, they make sure New Yorkers have beef."
The Wieses are just the first in a long series of people who, by caring about themselves, make sure I get my steak. Wanda Nelson keeps the packing house clean. Rosanke delivers propane. Other people slaughter the cattle and butcher the beef; they rely on people who make their knives, their overalls and their protective gear. Then there are the people who make the plastic that seals the meat, who run the machines that do the sealing, who pack the meat in boxes, make the boxes, inspect the boxes, and run the freezer facilities. Still other people track orders by bar code, which means they need the people who make the bar code machines. Eventually, packed steak is delivered to Randall Gilbert, a truck driver, who hauls it to New York.
No one person made my dinner possible. It took thousands of people to get me the food. And none of them did it for me. As economist Adam Smith put it, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."
Rosanke and the others don't particularly care if some TV correspondent gets his steak, yet they cooperate to make it happen, motivated by self-interest -- what many call greed. Think about that next time you listen to my colleagues sneer at the "greed" and "selfishness" of private business. They don't realize that the institution they celebrate, government, is far less effective at serving humanity.
"In a free market, you get more for yourself by serving your fellow man," said economist Williams. "You don't have to care about him, just serve him. I'd feel sorry for New Yorkers in terms of beef. If it all depended on human love and kindness, I doubt whether you would have one cow in New York."
Does anything get done based on "human love and kindness"? Well, a nonprofit group called City Harvest collects donations of restaurants' surplus food for the poor. But where does that food come from? Greedy people like Virgil Rosanke produce it, and greedy restaurateurs buy it. Kindness can only give away the goods self-love provides. |
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Wed Apr 16, 2008 11:55 am |
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Demeralda
F L I N T O I D
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Seriously, HAVE YOU LOST YOUR MIND???
Hedge fund managers are not smarter than others, nor better educated.
THEY ARE GREEDY AND UNREGULATED. Their buddies in government help keep them that way.
I'd like to know what the average blue collar person is supposed to do to ever ascend to such wealth. We could combine all 300,000 or so incomes in Genesee County and I bet we still don't have a 29 billion dollar economy.
Are you actually trying to tell me that this is okay in your book? The rest of the country IS IN A RECESSION BECAUSE OF THESE PEOPLE and you have no problem with that?
I guess then one must conclude that you have no concept whatsoever nor regard for any form of social justice. Racism, sexism, whatever, let it all fly, right? Who cares, right? As long as YOU AND YOURS are the winners. The problem there is that most people are so stupid they actually think they're upper middle class or upper class, usually because they make some chump change of about 500K a year. So they think that puts them in the lot with the truly wealthy, and therefore they must start toeing the line on behalf of their socioeconomic status.
This kind of wealth is a manipulation of "free markets" and should be treated as such.
I have tons to say on this subject, but I don't have time to finish. You get the gist of it. |
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Wed Apr 16, 2008 12:25 pm |
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Adam
F L I N T O I D
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There are some blue collar workers in Flint that do invest in their stock market. Some of them may even invest in the stock market. Although I agree the salaries seem very excessive there are people that will pay a lot of extra money for experience and results. There's nothing that stopped blue collar workers from sending their children to school to become a hedge fund manager or to take the classes themselves. In addition they can also start a business themselves.
The country is heading towards another DEPRESSION because our level of socialism is bankrupting us which I do have a problem with. The Iraq war is definately not helping things.
Are you aware how well intentioned liberal policies can help "marginalize" (discriminate agiants) minority groups and women? I'd be pretty well if it wasn't for taxes.
Are you sure you understand what free market economics truly is? |
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Wed Apr 16, 2008 5:56 pm |
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Demeralda
F L I N T O I D
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I know I do, but you don't seem to.
There is no such thing as a totally free market, nor should there be, nor can there be. We've seen throughout history what happens when there is no regulation. Back when telephones were invented and folks started putting up the wires, there was no regulation and many competitors. They say you couldn't even see the sky over New York because competing companies had wires everywhere.
A totally free market would have to allow for insider trading. You think that's ok? We also see the results of that -- Ken Lay walks away with millions, lies to his employees, and they end up with nothing. That is not a free market, that is market manipulation.
If we could trust in the good and honesty of ALL people, then maybe we'll talk about free markets.
You can't have it both ways.
Seriously dude, your position comes off as totally naive and sophomoric. |
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Thu Apr 17, 2008 7:30 am |
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andi03
F L I N T O I D
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| Why do I envision Mr. Potter from "It's a Wonderful Life" when I review this thread.....<sigh> |
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Build a bridge and get over it! |
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Thu Apr 17, 2008 7:43 am |
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Steve Myers
Site Admin
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Name one Welfare Rat that has created a job.
Selling druga and pimping prostitutes doesn't count.
I would rather my tax money go to help some old rich guy, than a Flint Welfare Rat any day!
Single mothers, kids, elderly, the infirm and people needing temporary assistances are not welfare rats by my definition.
BTW People living on grant money are no better than Welfare Rats!
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Steve Myers |
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Thu Apr 17, 2008 8:10 am |
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Demeralda
F L I N T O I D
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While your point may or may not be valid, would you go so far as to say we should have no regulation of markets?
Those billionaires are taking more jobs out of the economy than they are creating.
Oh yeah, and one more thing, those "stupid programs" you mock are what got us out of the Great Depression, not what got us in. |
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Thu Apr 17, 2008 8:11 am |
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twotap
F L I N T O I D
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quote:
Single mothers,are not welfare rats
I dunno Steve those mommas living in gov housing who keep having kids with different daddys( who split the scene right after the sperm deposit) every year or so are in my opinion Welfare Rats. |
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Thu Apr 17, 2008 8:14 am |
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