An Investment Manager's View on the Top 1%
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Given the immense political connections of the financial class, it is a virtual certainty that any attempt to "level the playing field" would end up falling not on them but on the more productive rich and the upper middle class. In other words, the burden will fall on the people who actually earned it. If anything, the financial elites will find a way to benefit from it at the expense of the "lower rich."
It's not the haves vs. the have-nots. It's the connecteds vs. the connected-nots. The connected-nots with high net worth are just peasants in fancy suits.
Really... doctors, lawyers, engineers, business owners, and executives in productive industries ought to be marching in the streets too. This is not the 99% vs. the 1%. This is about a sophisticated, complex, deeply embedded system of financial con artistry vs. everyone else on the planet. What we have here is a worthless parasite class -- a decadent nobility -- that has buried itself into our civilization like a tick.
What we have here is a worthless parasite class -- a decadent nobility -- that has buried itself into our civilization like a tick
The fact of the matter is you will have a very hard time finding a financial person who defends the current state of things. I never have. Nobody considers bailouts or too-big-to-fail optimal, and nobody likes the regulatory mud the financial industry swims in. And the financial industry, and probably my paycheck, would be smaller if none of this stuff existed. And I wouldn't mind because it'd be made up for by living in a more productive nation.
Of course, you'll still see mega-rich financiers because the economies of scale are unbeatable in this industry. And calling the financial system "con artistry vs everyone else on the planet" is a worthless thing to say because trading, investing, credit, and risk management add value and to say otherwise puts you in a very flimsy position, a position by which you'd have to adopt a wildly heterodox economic view--such as classical Marxism--to reasonably defend yourself.
1) finance, as a whole, is "bad" for whatever reason
2) separate from (1) the people and companies involved in finance are "bad"
I don't think one can reasonably blame the population at large for suspecting something fishy. Between bailouts of "clearing house counterparties" like AIG/Fannie/Freddie, below-inflation Fed Funds rate to which finance elites have exclusive access, a revolving door of GS alumni at Treasury, etc., one could easily be forgiven for suspecting systematic corruption. The only way to overcome this predisposition is an open commitment to transparency and "taking your lumps when you deserve them", which, in my opinion, has not been demonstrated by the finance community vis-a-vis the taxpayer.
A good alternative might be helicopter money. I wonder how well that would do, politically.
I regret mentioning it. I don't want this to become a Federal Reserve or monetary policy debate. My bad. Go in peace :-)
Also, the risk profile idea is: A company's decision makers tend to act in their own self interest. So, when their risk profile is favors high risks followed by a quick exit the company will end taking lot's of long term risks even if it's not healthy for it to do so. EX: There is a continuum of lean manufacturing where each stage is slightly more efficient, but the risk that supply chain issues cascading increases. If everyone is focused on the next quarters profit independent of all other issues then things may be trimmed past the point of reasons. This carries over into every area, if you can get a 6 months supply of a part at significantly below market rates it may be worth it to do so but again risk reward of decision maker informs what the company will end up doing. What separates the financial industry is simply the scale of risks and rewards offered to low level individuals within a company.
The sector is so huge because financial assets, leverage and debt has grown so much.
Moving back to a non bubble economy, where banks and other financial institutions, the shadow banking sector (and government, and individuals) are not hugely leveraged will resolve the profitability and size of the financial sector naturally.
Currently banking regulation seems to be the most efefctive way of doing this; getting to a state where too big to fail does not exist would help. There is little political will and lots of lobbying though to not get to this point.
http://news.ycombinator.com/item?id=2922500 (died quietly)
http://news.ycombinator.com/item?id=2786547 (died quietly)
http://news.ycombinator.com/item?id=2844059 (exploded)
The enemy is a much smaller group of individuals/corporations than that, and perhaps even, the enemy is more of a "process" than it is any group. I doubt Wal*Mart executives sit up at the top of their tower and plan about how they can tear apart society for their own self interest, but rather, there is a whole process and system built up that is doing exactly that.
Economists--including progressives, such as Matt Yglesais--often comment on the bipartisan fetishization of small businesses and liberal demonization of large ones. This attitude often seems motivated by isolated incidents--the tendency of any deep pocketed company to attract bad press and lawsuits--not the general effect of large business on people as accounted for by sound economic data. In general, large businesses tend to offer better jobs and more advanced economies tend to have more, larger businesses. Nor should Wal-Mart be constructed as harming the lower class, as their very low prices are especially important for the lower class which they achieve by real efficiencies of scale for which mom-and-pop stores are generally incapable. I don't have time to find citations everything, but for the last claim you can check out http://www.slate.com/articles/news_and_politics/dialogues/fe...
Unions came in to being to fight massive, widespread exploration of workers that today would be considered criminal. Unions are still required for their original purpose across the globe ( http://en.m.wikipedia.org/wiki/Foxconn_suicides)
I agree that the USA has been curiously free of unionisation (having 5% of your population as illegal indentured servants probably helps) but most western countries have had the unions win their important battles and it will take a while, if ever, before unions as they were in late 19c early 20c will be needed again
oddly it feels like movements such as occupy are going to become the new union movement.
Anyway my point was that unions = cancer is such a self evidently wrong thing to say for billions of workers that it even makes cancer cringe.
Also unions in the US have reprehensible tactics such as advocating - card checks for voting (intimidation), unfunded pensions, forcing nonunion members to pay dues, having closed shops, etc.
As for the conditions at Foxconn, I feel for the people - but often it's the best option that people have; i.e. it's better to work at Foxconn than be a subsistence farmer. The suicide rate there is 13.9 which is lower than Finland & Switzerland among many others http://en.wikipedia.org/wiki/List_of_countries_by_suicide_ra... and much lower than US armed forces @ 20.2 http://www.ft.com/cms/s/0/2c662840-9b74-11df-8239-00144feab4...
In general, as a community gets richer work conditions improve. When a community first starts working it doesn't have access to the intangible wealth that richer communies have and thus they need to work more hours to make up for this deficiency. As time progresses the accumulate wealth - build roads, infrastructure, housing, stores, have savings. And so can afford to work less, as they work less they start sending children to school instead of the factory (housing and food can be earned by the parents), which then increases the wealth as they are able to work on tasks that require more specialized labor. The better working conditions achieved in America vs China are the result of capital investment and not unions.
Often times unions use their power to cement the position in industry, and use labor law to decrease competition (think of it as regulatory capture). For example there is the case of LOCHNER v. PEOPLE OF STATE OF NEW YORK:
"The true origins of the Bakeshop Act lie in an economic conflict between unionized New York bakers, who labored in large shops and lobbied relentlessly in favor of the law, and their nonunionized, mostly Jewish and Italian immigrant competitors, who tended to work longer hours in small, old-fashioned bakeries. “A ten-hour day would not only aid those unionized bakeries who had not successfully demanded that their hours be reduced,” Bernstein observes, “but would also drive out of business many old-fashioned bakeries that depended on flexible labor schedules.” The large corporate bakeries joined the union in supporting the Bakeshop Act. After all, it was in their economic interest to favor regulations that crippled the competition." (http://reason.com/archives/2011/09/14/lochner-isnt-a-dirty-w...)
Now this isn't to say that unions didn't accomplish anything or to say that they didn't have a positive impact in some ways; I just think that 1. unions get a lot of credit for things they have a mild impact on 2. people ignore all of the horrible things that they do
Unions get credit for distributing wealth to the workers faster than owners of capital would do, and for defending individuals against exploration ( and the point isthat without unions (or other organised collective action) each of us is an explotable individual)
As for the bad things, I just ask what I would choose to do in that situation. HN top choice is start up a competing foxconn that treats workers better. But I fully understand the other thought process:
if the other guy has an army and enforces discipline it would be foolish of you if you thought individual spirit and the invisible hand were going to be any damn use
so for my money unions are just the more militant end of a spectrum that has co-operatives and workers collectives somewhere in the middle and Cadbury on the far end.
All of the spectrum is about how to distribute the new wealth being generated. It does not all have to go to the owners of capital ( frankly I feel the term Capitalism is misnamed. I would prefer unimpededmarketpricesignalling but is suspect it won't catch on:-)
[edit: can't spell on iPhone plus went off on a tangent. But I would be very interested if anyone knows of research on effect on blue collar wages of the massive influx of illegal workers into USA. This is something the UK as an island has little of.
On the other hand, (at least in the past) when Walmart knew that someone was attempting to start a union, they would bring in a team that would wire the store up with a ton of extra security cameras. Then they would attempt to identify the ringleaders and either fire them or harass them (to encourage them to quit). Is this a business tactic that you approve of?
I wonder if the increase in inequality is scale invariant, or if you end up seeing some kind of kink at some point in it.
Most dictators enjoy their peoples' misery, and they get more out of the power than they would out of the 1-10x bump it would give their financial status (they have enough money, and unlimited means to get it) to be leading a healthy nation instead of a failing one. Kim Jong-il? While he was alive, I bet he was one of the happiest fuckers out there. And the U.S. corporatist-fascist oligarchy isn't morally superior in inclination; it's just that there are social structures (like laws and elections) in place retarding their progress.
Some people judge wealth and prosperity in absolute terms: what we can do, experiences we can have. That's how most of us on HN feel: it's a positive-sum, win-win mentality. But a lot of people see these things in purely relative terms: they like elitism and exclusion, and that others are suffering from bullshit they don't have to deal with. It makes sense when one considers that excessive financial ambitions are usually sexual in nature, and the sexual benefits derived from obscene wealth are based solely in relative social status (being "alpha").
The OP needs to be read by a lot of people (who probably won't read it): people who conflate $400k/year neurosurgeons who got "rich" and startup new-money by working their asses off (who are generally held to deserve their good fortune, and I agree) with an entrenched, culturally underaccomplished, fascistic, and depraved aristocracy of indolent, manipulative parasites that society should be getting rid of+ through whatever means necessary.
(+ To make it clear, I mean we need to get rid of the aristocracy as an institution, not "get rid of" the individual people. I'd find it quite morally acceptable to solve society's problems in a way that finds them bad, if they weren't willing to decline peacefully and gracefully, but I also think revenge is an utterly stupid impulse and find it most useful to not care either way what happens to them, as long as they're removed from power.)
I know this is going to sound like rainbows and unicorns but its hard for me to understand why the mega rich aren't all motivated to diligently invest a significant portion of their money and efforts into humanistic efforts. It seems like they understand money and investment in monetary terms but they fail miserably at understanding the non-materialistic and 'big picture' returns.
Leisure is freedom-to (travel, be educated), Comfort is freedom-from (housework, annoyances), and Status is mostly about the ability to maintain maxed-out Comfort (about $2-3M per year, post-tax) without doing anything of value, i.e. being able to get all that just for being "special" (the narcissist's dream). Power is the ability to dick up and down peoples' Status on a whim, because a lot of people who've maxed out the other tiers get bored and need something to do.
Of course, these tiers are fuzzy. Most of us would find business-class travel to be enough Comfort, but some people require a private jet. Also, people with severe psychological issues (which can manifest as greed, which is slightly more glamorous than crippling panic attacks, I guess) will never be comfortable, which is why they soar into the Status and Power tiers but are (internally speaking) still trying to achieve basic Comfort.
Some people love the game and it's a way to keep score. It provides a rush, and seems to provide a high similar to drugs or gambling. Then there is the obvious power trips (probably secondary to the money at that point) that come along with continuing to win.
And for some people it's simply all they know. If I suddenly became beyond wealthy tomorrow I imagine I would still program every day and continue to be interested in technology because it's what I do.
The article specifically mentions the "financial services or banking industry" in this context so that's who I assume you're talking about. Now, this sounds great when you use a vague sound bite, but are you really prepared to say that society should strive to "get rid of" anyone who makes a lot of money in the financial sector?
People get all bent out of shape about pro athletes making too much, but it seems like the financial elite are by far the most overpaid people on Earth. Many of them seem to create negative value -- the systems that they run are liabilities.
The people I'm talking about come from a closed, powerful social network. They're not part of a social network because they're rich. They're rich because they're part of a scumbag old-boy network. And they get their wealth the same way corrupt government officials (notice that corrupt politicians are always rich) do: they steal it from society.
By the way, it's not arbitrageurs (which is what many hedge fund traders are) who are destroying society. Actually, most of them make markets more efficient in a way that's rather harmless. It's investment banking/M&A types-- people like Meg Whitman who make fortunes spinning IPOs (that is, robbing companies during the IPO process). That's another rant however.
How much value does the banking industry really create? A whole lot of what this industry does could be replaced by algorithms and put on autopilot.
Maybe I'm ignorant, but it really looks to me that the smart and courageous decisions about allocating capital are being made by entrepreneurs, angel investors, and wealthy individuals who earned their money in value-producing industries (Bill Gates, Jeff Bezos, and Elon Musk come to mind). The banking industry seems to just squat over a lot of toll bridges, and doesn't seem to even do much in the way of bridge maintenance.
Absolutely, and most of them will admit as much.
The banking industry seems to just squat over a lot of toll bridges, and doesn't seem to even do much in the way of bridge maintenance.
I have a lot more respect for traders, quants, and quant developers (who do an honest job, if a socially useless one) than for investment bankers ("eye-wankers") and private equity douches.
Large-scale prosperity is far more likely when more America's smartest and most charismatic are leading instead of wheeling-and-dealing. Decline was inevitable as soon as high-finance ceased being the province of the boring and bookish.
US is the largest consumer market out there, but when the credit bubble bursts, Asia will provide a pretty good replacement with tons of disposable incomes concentrated there.
To put it another way I'm sure Apple's operations in the UK are self-funding by now, so if Apple earns money in the UK and moves it to the US it is taxed by the US, where if a UK company transfers money earned in the UK to the US it isn't taxed. What's the justification for that? It seems nuts.
So basically for a team of 2-3 tech founders raising a series A round is the entry ticket to becoming part of the 1% (on paper at least).
$6,000 is a lot of money, but it's not that much money. An iPhone, for example, costs approximately $2000-3000 by the time it is all said and done and I see a lot of them out on the street in the hands of normal Americans.
With enough time, $1.2M can be made with a regular job. Nobody said you had to be in the 1% of net worth holders by the time you turn 25, or it doesn't count.
I admit, I come with a biased perspective. Everyone I know born in the 40s were farmers. They all pretty much lived a life of poverty, putting all their income into appreciating assets. They're now all sitting on multi-million dollar fortunes.
Assuming you are in the mid-to-high end earning range of the 99%ers, if you want to live a life of poverty, there's a good chance you'll make the 1% list someday too.
That's the problem with blanket statements. I would think someone who made their millions through questionable banking tricks is quite a bit different to the poor dirt farmer who sold his farm at retirement, no?
1. Time value of money. $1.2 million in 40 years will be about $2.65 million then, assuming 2% inflation.
2. 5% average savings. As far as I can tell, interest rates are no longer exceeding inflation, and haven't been for quite a long time in market-time. I would count on your interest to barely have you breaking even, all in, unless you're taking risks with the money.
I ask because a $50k/year pension is not unknown.
$1.67 Million @ 3% (1 / .03 * 50,000)
$1.25 Million @ 4% (1 / .04 * 50,000)
$1.00 Million @ 5% (1 / .05 * 50,000)
Put another way, if you have X Million, how much could you safely withdraw each year at 3% per year?
$1M: $30k / year
$2M: $60k / year
$3M: $90k / year
$10M: $300k / year
Keep in mind you will pay tax on these figures (15% Long Term Capital Gains tax if you're lucky, or more if it's regular income). And this does not account for inflation, so assume the value of money gets cut in half every 25-30 years.
Do you mean the valuation of the private company that takes place as part of the Series A round typically gives the founders some level of paper wealth that puts them in the 1%? If so, this makes sense. (Of course, it generally takes a lot of work to convert that into something that can actually be realized in a liquidity sense.)
And for the wealthy people who have pledged 50%+ of their wealth to charity - where do they fall in all this classification?
With the exception of really tremendous exits, let say a pretty successful cofounder gets between .5 million and 5 million (I'm making these numbers up but Id assume these are pretty reasonable guesses for a majority of moderately successful exits). So if thats the case you have a nice chunk of net worth but after an exit you may not have much cash flow to keep up with the big hitters who have a tremendous stream of cash coming in consistently.
Im certainly not arguing that the co-founder with the successful exit is in a bad position - just that their cash flow may be comparatively low compared to someone else who has an ongoing "money printing machine" so to say.
This is one of the top financial blogs currently.
Look at articles regarding fraction reserve lending like this one: http://globaleconomicanalysis.blogspot.com/2011/03/central-b...
http://www.tradersnarrative.com/the-best-investment-advice-y...
I don't share all his leftist proclivities but his research has been very eye opening and informative (and paradoxically made me a bit more libertarian).