What work do we value most?
In 2009, the worst economic year for working people since the Great Depression, the top 25 hedge fund managers walked off with an average of $1 billion each. With the money those 25 people "earned," we could have hired 658,000 entry level teachers. (They make about $38,000 a year, including benefits.) Those educators could have brought along over 13 million young people, assuming a class size of 20. That's some value.
Apparently the 25 hedge managers did something that is even more valued in our society. But how valuable was it, really? To assess that, we need to answer a few basic questions:
1. What do hedge managers do?
They run funds into which very rich people put money to make even more money. Hedge fund managers move the money around in very risky ways to get the most enormous yields possible. (Wealthy investors believe they are entitled to double digit and even triple digit returns.)
Because hedge funds are considered playthings for the rich, who presumably are fully aware of all the risks, they are exempt from most financial regulations. (We'll soon see if the financial reform bill now moving through the Senate changes this in any substantial way.)
The wealthy will have placed an estimated $2 trillion into hedge funds by the end of this year. (That's about $6,500 for every man, woman and child in the U.S.)
2. Where does all that hedge fund money come from?
It's mostly excess cash the super-rich have in hand now that their tax rates have dramatically declined. In the 1970s the marginal rate on those with incomes above $3 million (in today's dollars) was 70 percent. Today, the effective rate on the 400 richest Americans is 16 percent, according to the most recent IRS data.
The wonderful thing about putting your money in a hedge fund (or managing one) is that the income you get from it is not taxed as income (say, officially at the rate of 35 percent). Instead, it is treated as a business investment, something that's good for the economy and that we need to encourage through a low tax -- a "capital gain." The tax rate on capital gains is 15 percent. This is one reason that Warren Buffett can say that he pays a smaller percentage in taxes than his secretary.
3. How do hedge funds make money?
Some hedge fund managers use computerized modeling to decide where to invest or to make investments automatically. Other managers claim they just make good judgment calls. They also make enormous bets using lots of leverage and deploy an arsenal of derivatives.
It's a dicey business, but it's not supposed to put the larger system at risk... until it does. In the late 1990s, the hedge fund known as Long Term Capital Management, run by the brightest bulbs in the financial universe (including a couple of Nobel laureates), found itself with over $100 billion in assets but only $4 billion in capital. When that upside down pyramid began to crumble, the effect was systemic. So systemic that the Federal Reserve, fearing a major meltdown of the financial markets, forced Wall Street banks and investment houses to bail out the fund's investors. Some economists argue that risky gambling by hedge funds did not cause the current crisis. But no one has conducted an impartial investigation into that question.
The $1 billion each those 25 hedge fund managers netted (for themselves) was impressive -- but doing it in the year 2009 was also slap in the face of struggling Americans. That's because hedge funds would have earned little or no money at all in 2009 had the government not bailed out the financial sector with trillions in loans, asset guarantees and other forms of financial assistance. It was, in effect, a generous gift from we the taxpayers. Much of that money was "earned" by betting that the government would not let the financial sector collapse. Smart bet.
In principle hedge funds would do little harm if they were not implicitly backstopped by the taxpayer in this way. Here's how one sage financial expert put it to me recently:
Personally, I do not care whether hedge funds and other pools of unregulated funds gamble in opaque derivatives rated by incompetent ratings agencies. But I do want them to fail when their bets go bad. Nor do I want them to be rescued in the event of a run to liquidity. If they are leveraged and cannot come up with cash, they should fail. It will be painful for their creditors. So be it, the more pain, the better. That is the downside to private property. Greed is good, but must be balanced by the fear of failure. Without failure there is no fear.
On the other hand, I want to have a protected and closely regulated portion of the financial sector for those who do not want to take excessive risks. And any institution that bets with "house money"--that is, that has access to the Fed in the case of a liquidity problem and to the Treasury in the case of insolvency--must be constrained. That is the direction that true reform ought to take.
4. Do hedge funds create real value that is essential for our economy and our society?
Here's a test: Imagine what would happen if they disappeared entirely. People working at the 8,000 or so hedge funds -- a relatively small number of people -- would lose their jobs. But it's unlikely that the national or world economy would suffer at all. The wealthy would simply move their money to other investments. They might even decide to make longer term investments that would be used to produce real goods and services.
But wait, aren't these piles of money a valuable source of funds for investment in the real economy? Don't hedge funds make our markets work more efficiently? By betting against overvalued currencies and bogus balance sheets of toxic-chocked banks, don't hedge funds police the bad guys? Aren't they the essential glue for rebuilding America?
If any of those good things happen, they're an accidental byproduct. The real job of hedge funds is to allow very rich people to make more money as quickly as possible, preferably without tying up the cash for too long. Use hedge fund money for a leveraged buyout that can be flipped quickly for big profits? Sure. Use it to speculate on the value of currency or to make a quick dash in and out of a credit default swap? You betcha.
If we step back and look at the big game, we can see that hedge funds are hard at work skimming profits from the financial sector, which in turn is living off the largess of the American taxpayer. It's all part of the great financialization of the U.S. economy that began in earnest when the financial sector was deregulated in the late 1970s. Over the years, financial sector profits have risen to nearly 40 percent of all corporate profits. And sadly, it's not because financial firms helped our economy grow. It's because they figured out how to run a very profitable casino for the wealthy. And then hedge funds came along and figured out how to skim the skim from those casinos.
5. So how can 25 hedge fund managers be "worth" $658,000 new teachers?
They aren't. And I bet the leading hedge managers themselves would admit it.
But our economic system isn't rewarding real value. While the hedge fund 25 are living large, teachers everywhere are getting the axe. Why the layoffs? Because state and local governments aren't collecting enough taxes -- not since Wall Street investors crashed the economy.
In our New Jersey town, we are laying off 85 teachers. Instead we ought to be hiring 85 more to reduce class size and improve support programs for those students who desperately need them. It's obscene that we're shoveling money to the super-rich even as we force teachers to join the ranks of the unemployed. Already 29 million Americans are without work or forced to work only part-time.
How to tame these runaway paydays? Just institute a financial transaction tax or a windfall profits tax. The fix is technically simple but politically complex. It's going to take a lot of political will -- over a long period of time -- to reorder our most basic economic values.
In the meantime, try explaining to your kids why school programs are being cut while 25 shrewd gamblers are living like Pharaohs.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
Simon Johnson: Fix The Dodd Bill -- Use The Kanjorski Amendment
At the heart of the currently proposed legislation on financial reform there is a simple premise: Key decisions about exact rules going forward must be made by regulators, not Congress. This is a mistake of breathtaking proportions.
When you are rich you are able to avoid taxation as you are able to afford the most expensive tax lawyers and accountants and they only get rich by gambling other peoples money ,remember they make money when you make money - But and here is the rub they still make money when you lose money.
Secondly, the system is not so much at fault as the greed in the system. Any ideas on how to eliminate or outlaw greed?
Thirdly, rather than a graduated tax on income, what if a graduated sales tax were to be implemented nationwide? (Details forthcoming). Collect taxes at the local level where the local governments exact the revenues they require to function. Send what's left to the state government where they exact revenues for their functioning. Anything left from that is sent to the federal government. As far as setting the tax rate, begin with 1% and work it up from there. To really sink the blade, require public referendum of 60% approval prior to any tax increase.
Lastly, a person is paid not for the work they perform, but for the responsbilities they assume with their job. This should explain how a manager sits around doing nothing while employees work their butts off. Decide what's worth what from that.
In closing, how many billions or millions does a person need? It seems absurd to find elderly gentlemen in their seventies and eighties worth mutiple billions pursuing ever greater wealth. Is it that they would never dare to invest their retirement savings in the very funds they manage???
25 hedge fund guys averaged $1 Billion apiece. That's $25 billion total for the top 25. Wild ass guess: let's just double that figure to represent the whole industry. (Somehow, in my mind, I'm properly using the 80/20 rule here.) So, the whole industry was paid $50 billion....
16% tax rate on $50 billion is $8 billion paid.
"In the 1970s the marginal rate on those with incomes above $3 million (in today's dollars) was 70 percent..."
70% tax rate on $50 billion is $35 billion. (The $150 million below the 70% rate is insignificant for this analysis.)
So, there's $27 billion in play based on historical figures, back to when no one was calling Dick Nixon, Gerald Ford, or Jimmy Carter a Socialist.
How much of that $27 billion could be deployed effectively today, without us turning Socialist? Conceivably, this industry makes these wages every year, so it's an amount than can be deployed again and again.
And how does this Hedge Fund guy make out after we've taxed him even the whole 70%? He's left with $300 million, which over a 2,080 hour work year (52 weeks * 40 hours) comes to $144,231 per hour. That's an hourly rate equal to 4 or 5 times what the average family earns after taxes in a year. Nice work if you can get it.
http://www.lowellrocks.com/forum/thread/25897
An educated and informed society sitting around and discussing at the dinner table just how badly we are all being screwed is not in the interests of those who own this country. They want to keep us barefoot, uneducated, unarmed, dumb, and stupid. If 25 very wealthy hedge fund managers can help in that effort that is wonderful for them. The only advantage that average Americans supposedly still have is one citizen and one vote. That won't last. Now we have the super citizens (i.e. corporations) that have money and more votes.
This war between classes is wrong and does nothing positive to attack another group.
While I know there are good teachers, as an active parent with three kids in the system, I am seeing more and more teachers that simply do not care anymore. Plus, I have seen far too many teachers that are under qualified for their position.
I am not saying this to upset or hurt those in the teaching profession. I am extremely supportive of teachers but the good ones are being hurt by those that don't care.
Remember, the value of teachers is and will always be what they can provide to help train those who fuel the economy.
QUOTE: "The fact is that teachers mean nothing if they cannot help improve our economy. Knowledge in of itself has no value if it cannot be utilized to further our economy. I love the pursuit of knowledge but unless it can be used to provide direct benefits to society, it has little use."
I don't mean to attack you directly FoundersFan but I must strongly attack what you saying here. You are so bowled over by, so caught up in, you have drunk so much kool-aid that you can no longer tell fantasy from reality.
(cont' below)
If someone gains knowledge, that is an end in itself. It is our lives that are real. It is we that are real. It is not money that is real. Money is a means to enhancing ourselves and not the other way around! The economy is a means to an end, not the other way around! The Tea Party crowd makes this one simple mistake, and now we are on a road to fascism.
In fact, Facism symbols are already incorporated into Capital Hill!! Just hve a closer look !!
And BrokeGrad, Your calculation is really interesting!! The actual thing is, they don't even pay the 16 % tax rate- they can offset it all!! Rich people do not pay tax- That is reserved for the hard working people!! It is the hardworking people who ensures that we public education, not the wealthy hedgefund managers!!
GIVE BENEFITS ONLY TO THOSE WHO CANNOT HELP THEMSELVES!!!!
The shotgun approach to giving benefits is careless and foolish.
In the neocon world, only the people who make or play with lots of money have any value.
I'm not sure any one of them realizes what real workers and service providers are worth.
Unfortunately, many Americans who fall into the right economic class still haven't figured out who's screwing them and blame government.
$25,000,000,000 - Hedge Fund Manager Income
16% - Effective Tax Rate on the $25B
$4,000,000,000 - Taxes collected off of $25B
Divided by $38,000 - Average Teachers Salary
105,263 Teachers Paid by Hedge Fund Manager Taxes
So...how many teachers did you and 24 other people who earn the same as you, employ? I'm guessing less than fifteen.
The system has been corrupted to the benefit of a select few. Through the acquisition of extreme wealth they have manipulated the process and gained political power that outrageously not only keeps them very wealthy, but requires the rest of us to pay for it.
Two sectors in our country stand out as being exorbitantly rewarded, with questionable benefits.
First.... is the obvious financial services sector whose primary function of raising capital for productive enterprise has instead become one of a self serving gambling casino that develops complex gaming products to enrich the dealers and so-called casino owners. Every American in the private sector has felt a cut-throat compensation squeeze except for Wall Street (and CEOs) . This sector as do the CEOs have more of a tribal philosophy where they are all in the club together with a mission of getting rich together and gaining the political power necessary to stay rich.
Second.....is the celebrity-entertainment-media sector that includes sports at various levels and Hollywood and TV media (and all that encompasses). They are heavily subsidized by taxpayers. We subsidize their movies, give them the use of public airwaves, and build their places of business (i.e. coliseums and arenas) which removes the mundanity and burden from having to actually fund their business and allows outrageous compensation to be paid. The recent SCOTUS ruling on unlimited corporate campaign ads is a windfall for them at our expense.
It relegates a persons worth to monetary acquisitions. If only it really was the cream of humanity that rose to the top, unfortunately effluent does that as well.
Because, hedge fund managers are among those who sell the only thing the U.S. has to sell these days -- debt.
Let's see... make someone wealthy so I can sit and watch them shoot hoops for a couple hours... or folks who give my children the education they need to survive in the world. Gee, I wonder who deserves it most!