Thursday, April 17, 2008

Hypercapitalism in overdrive

In yesterday's New York Times, Jenny Anderson reported:
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.
To provide some kind of context, consider that $3.7 billion equals $10,136,986 per day, $422,374 per hour and $7,040 per second. Paulson's income for each second is equal to that of a wage earner who works for five months at $8 per hour. Anderson continues:
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.

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.

To put that in perspective, each year Paulson earns as much as 61,157 "median" families. While his hedge fund creates wealth for a select group of investors, he creates no "product" that has any social utility. His company employs only 45 people, but it manages some $12 billion in assets. Its market activities, in fact, may be socially and economically harmful:

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.


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.


Despite the explosive growth of the industry — about 10,000 hedge funds operate worldwide — it is relatively lightly regulated.

Hedge fund managers can easily defer taxes on their vast incomes by depositing unlimited amounts of money in offshore accounts. Investors in hedge funds generally pay taxes at the capital gains rate of 15%, which is much lower than rates for ordinary income taxes.

Meanwhile, worldwide prices for basic food commodities like wheat, corn, soybeans and rice continue to rise astronomically. Today, for example, rice futures soared to record levels on the Chicago Board of Trade, a preview of global increases yet to come. India and Vietnam have restricted rice exports. Desperate rice importers like the Philippines have offered to pay up to $1,200 a ton, a price increase of roughly 500% since 2005. Rice prices have increased by more than 50% in the last few months. Thailand, Vietnam and the U.S., in that order, are the largest producers of rice on the planet.

The big winners in the futures markets, including the hedge funds, have been the managers who wagered that rice and oil prices would riseand that the subprime mortgage market would go into meltdown because borrowers would default on their payments. It hardly seems to matter to these global speculators that their strategies would, in themselves, increase market volatility and contribute to the planetary misery quotient.

In response to criticism, a few hedge-fund companies have followed up on the Bush administration's ludicrous proposal that the industry adopt a system of "voluntary guidelines" in an effort to preempt any regulatory action by Congress. But they hardly need to worry about aggressive regulation, since their generous contributions to both parties ensure that Congress will remain (in the words of an economist interviewed on NPR today [1]) "asleep at the switch."

No doubt John Paulson would be unembarrassed to learn that his $3.7 billion paycheck would provide a modest daily ration of rice to the entire population of Bangladesh for a whole year, even at $1,000 a ton. But the real embarrassment should be reserved for the political classes in Washington, who have done nothing to stabilize much less reverse the increasing concentration of wealth in a minute percentage of the population. And on a scale that equals or surpasses the years before the Great Depression.


[1] Day to Day, National Public Radio, April 17, 2008.

[2] The 2006 tax cuts only facilitated this massive transfer of wealth. Consider:
  • "In 2006, households in the bottom fifth of the income spectrum received tax cuts (averaging $20) that raised their after-tax incomes by an average of 0.3 percent.[...]
  • "The top one percent of households received tax cuts in 2006 (averaging $44,200) that increased their after-tax income by an average of 5.4 percent.
  • Households with incomes exceeding $1 million received an average tax cut of $118,000 in 2006, which represented an increase of 6.0 percent in their after-tax income."
GRAPH: Congressional Budget Office (with data from 1979 to 2004).

UPDATE (April 18th): The International Herald Tribune reports:
Politicians are facing the wrath of angry voters, government budgets are being stretched to pay for increased food subsidies and the potential for civil unrest looms, especially if the cost of essential items like cooking oil and rice continues to climb...

Singaporeans on average spend only 8 percent of their income on food, compared with 15 percent in Malaysia, 26 percent in Indonesia and Thailand, 28 percent in China, 33 percent in India and around 40 percent in Pakistan and Vietnam, according to the U.S. Department of Agriculture...

Arroyo, the Philippines' president, and many other leaders across the region have blamed hoarding by traders and millers for the price increases. Thai Grade B rice, a widely traded variety, reached $854 per ton last week from $322 a year ago, a rise that appears speculative as much as driven by market fundamentals. [My emphasis.]
The rice market, in sum, seems to be taking its cues from the oil producers and refiners.

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