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Comment by nobodyandproud | Hacker News Reader

So it’s happening.

I was talking about something similar with a family friend (in the high finance space) a few years back.

When will passive investments and indexes be manipulated and carved out for “wealth extraction”?

With the funds locked away for years by law/policy preventing a move to safer territory, without any FDIC guarantees to keep retirees solvent; the plans were a tempting pool of money.

With social security being pushed for insolvency; I think my generation is well-and-truly in trouble.

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Yeah, I really hate the rise of private equity.

So much financial protection comes from public companies trading. But that's also means it's somewhat harder to gamble on the system and manipulate the market.

With companies going private and private equity being more commercialized, we are going to see some nasty stuff. Finance has always had nasty parts, however, no good comes from less transparency.

We need new financial regulations around private equity ASAP. Up to and including making the trade of private equity illegal. Having a private black market for equity is bad for everyone other than insiders.

> Up to and including making the trade of private equity illegal.

How would this even work? "Private equity" just means shares in non-public companies. How would private companies raise capital, which are often are done in the form of trading equity for cash? Should a startup be forced to go public just to raise their series A? Even outside silicon valley or wall st, even something as benign as a neighborhood coffee shop is technically "private equity". Should such business owners be barred from selling their businesses to anyone?

>Having a private black market for equity is bad for everyone other than insiders.

I understand the justification for banning private equity for individual investors on the basis that they can't be expected to discern scams from non-scams (hence the concept of "accredited investors"), but it's far less clear why institutions can't be trusted to do their own due diligence before engaging in a trade.

> How would this even work?

A good question that I don't have a good answer for.

I don't have anything really against individual investors taking a risk on a private business. However, I have big issues with there being a large market for these risks to be traded, swapped, and financialized.

That's where I see most of the danger, it isn't the first hand selling of equity but rather having a literal market for such equity. I shouldn't be able to short kim's coffee shop.

> it's far less clear why institutions can't be trusted to do their own due diligence before engaging in a trade.

Because they, frankly, aren't trustworthy. How much money by VC firms has been dumped into obvious ponzi schemes such as FTX?

The issue I have with institutions is they aren't concerned with due diligence, they are concerned with turning a profit. That means they are more than happy to turn a blind eye to obvious company problems if they think they can get in and out before a meltdown (IE, pump and dump).

The whole rewarding model for these institutions reads like pure scam if you apply any cynicism. Make money win or lose. Make even more money when "win" even if all that win is purely on paper. And if you lose just roll the stuff under some new name that happened to win. Record looks good. Even if other records were losers...

At least with publicly traded stocks you can have substantial market depth so valuations can be "real". But move to private equity and well even that little goes away...

> How would this even work? "Private equity" just means shares in non-public companies. How would private companies raise capital, which are often are done in the form of trading equity for cash?

I think we could start by eliminating the carried interest loophole. This would eliminate an artificial incentive to engage in PE “work” that really shouldn’t exist in the first place.

Of course, in the current environment with fraudsters being pardoned, that’s a fantasy.

> Should a startup be forced to go public just to raise their series A?

Maybe? Going public just means that you have to report certain information about your financials to the SEC. I get why companies don't want to do that, but if VC investments are going to start being traded as part of 401k plans I'm not sure why the public shouldn't get to see that information. It seems feasible and reasonable to maintain an exception for what you might call "true" private equity, where specific people buy and sell specific companies rather than trading them in liquid markets.

“When widows and orphans begin investing, it’s time to get out”. Except that in this case there’s nowhere else to go for the average person.

I absolutely do not want to be involved in a VC scheme because I would lose my shirt.

However, the stock market shrunk over the years as a second tier for the investor class, because VCs are where the real risk taking and wealth generation happens.

The business model of VCs works, in part, because you can offload your radioactive equity to shmucks buying equities.

The sales pitch with passive investing is that it is an anti-decision...there are no anti-decisions. The only way to produce a savings system that works is to recognise that people are shmucks, people who index funds are also shmucks, and that you need a professional to manage those funds cost-effectively.

Almost no individual investor should ever be making a decision about VC investing (why do you think so many VC firms have listed publicly now? You have to fish where the fish are). But this is the job of plan sponsors, there is no why reason why DB funds should be doing all this stuff (and it going pretty well...people think they are smart investing in passive funds, they aren't aware that DB funds are doing segregated account deals with active managers for LOWER fees than passive funds, most passive funds are high-fee in institutional terms) but no-one else can do it? Makes no sense (as long as individual investors are not making these decisions).

I absolutely detest it too, but private equity is the result of institutional clients and very-wealthy individuals; but also a degree from 401k retirement plans

401k plans aren't primarily to blame, but the (real) investment class will try and pin the blame to the rank-and-file investors and retirees.

All this because there's pressure to find source of short-term-growth, hell or high-water.

It’s happening already. Indexing propelled the Tesla scam, by shoveling lots of dumb money into it.

If you’re a boglehead with your money in VTI, you have 1.5% of your money in a meme stock. Big scammy companies like Tesla drag the whole market down when they pop.

Most of my generation doesn't even consider "passive investments" because the previous generations have ruined any chance of owning a home let alone building wealth outside of a few very lucky individuals showered with VC money. Not sure you're going to find sympathy nobody

I can’t speak for most of my generation because I always lived beneath my means; my first and only home was right after the Great Recession, because home prices just grew to insane levels. I would still be renting otherwise.

The problem of housing is real, and this should be solvable because it’s first and foremost a policy problem which causes a supply problem.

For example I live in an area that encourages the rebuilding of single family homes into townhouses.

It’s a nice compromise and more cities should be adopting this; yet it’s certain states like California that represent a bi-partisan problem with outdated policies grandfathered in.

Certain segments of the population won’t vote against their self-interest; but these individuals will be the least impacted by destroying 401k, ironically enough.

> it’s first and foremost a policy problem

It's not though, at least at the scale that it matters, it's an economic problem brought on by a decrease in individual's relative capex. If in 1970 a person (let's say carpenter because I like biblical analogues) could purchase a truck for $2,600, even if their entire yearly salary was $10K, they had a 2/3 left over after a major life changing purchase. If in 2025, someone makes $50K, they may be in a higher income bracket in their relative area, but the truck costs 50k and must be financed over ~"time(indebt)", that's happening across all sectors and is the issue

It is. Housing prices doubled or tripled between 2000 and 2007, and your generation (and mine) are still dealing with the aftermath.

If you're willing take a journey with me: Near the end of Bill Clinton's second term, a bi-partisan bill was passed in 1999: https://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bl...

For Republicans, this represented a long-term desire by the WSJ crowd, to free-up money and assets locked in commercial banks; and make it available into the Investment Banking side.

For Democrats and the DEI crowd of then, relaxing the lending rules was considered a win for minorities who had a hard time buying property--mostly because of strict but impartial lending requirements, which was still pegged as "racist".

Around that time, China joined the WTO and by the early to mid 2000s the US was flush lenders wanting to get in on the mortgage-backed security action. This is when home prices doubled or tripled in value, in the span of 6 to 8 years, and was a nation-wide phenomena. It's only risk adverseness and a quip from a mortgage lender, when my family was denied many years earlier because we were quite poor, that saved me from a major financial mistake.

After the bust--which hit minorities the hardest, by the way--there should have been a price correction and this peaked in 2009: For a brief time in the early 2010s there was, with a supply of distressed properties, but strangely enough prices never corrected nationwide to the levels they should have and this is because of the long influx of cash from tech, which delayed things for another 10-12 years and kept the prices growing in areas that had jobs.

Your generation was responsible for the last 4-6 years of prices not getting corrected; when I pushed for unions and trade guilds at the cost of spiky income--proudly been doing so since the late 1990s, thank you--you can absolutely bet that I was shouted down recently as back in the 1990s and 2000s, whenever the topic steered near that direction.

Today, what we're left with are: Homes continuing to be built for those flush with money or nearing the highs of their career; and overpriced homes purchased during the early 2000s that at best are losing value through inflation.

Edit:

> Your generation was responsible for the last 4-6 years of prices not getting corrected

Pushing back here, what kind of idiot thinks integrated economics over dissociative political topology works, this problem was festering when I was in diapers courtesy ya'll

People hake been saying variations of that since long before you were born. The generation and other details change but the root is the same. Ignore the fud and make small investmets when young and you too can have a nice nest egg.

i can't get you Gates level rich but you can do well strating young when it looks impossible.

Perhaps because I'm a parent, I worry about the younger generation. For the Gen-Z and younger, how would they build a nest egg?

Social security? Not a nest egg, always under attack, and always under pressure to move the age higher. Pensions? Long out of fashion. Real estate? Out of reach, except in distressed areas. 401ks? Was only ever for the upper-half of the middle class, and even this is under attack.

401k covers more people than pensions ever did. For your kids invest in a 529 and make sure they get on the college path in school. the general poorer class has never had good retirement options. a good degree (there are many bed degrees) goes a long way.

You’re pretty cooked if you’re under 40. The new alignment seems to be devaluing the dollar and you need to be worried about things like US treasury default.

I’d prepare for a rough decade. Focus on paying off the mortgage more than than the advice that you typically get in the past.

I think the most impacted will be those between 30 to 55, because they have the most locked into 401k plans.

Otherwise, I agree it will be rough.

I agree — but I suspect juicing the market will probably help the older people, at least for awhile.

I would love to see a multi-decade model of 4 scenarios measuring quality of life, economic growth, and wealth distribution specifically around the re-allocation of this $12T.

1. Baseline Status quo - no changes.

2. Move all $12T into reducing the $36T of US debt. 1 time payment. All 401k’s are reduced to $0.

3. Allow for PE to productize into this $12T, siphoning off various amounts over time.

4. 401k holders can choose their own non-traditional investments.

I’m not advocating for any specific outcome because I know nothing on this topic but as a starting point, show me what happens with each, normalized and compared.

So with #2, steal everyone's money, even people contributing into 401k while making dogshit pay, and pay off the country's debt bill ran up by someone else?

I can tell you this scenario results in french revolutions

Everybody loves to quote french revolution or 2nd amendment but all these revolutions are all centrally lead (by somebody/group performing a power grab).

Whose leading the revolution against 401k theft? Is Vanguard going to invite people with 401ks to a rally in DC?

when you put it like that, it might actually works. Specially now that the people stealing the 401k will be ones shadowbanning all the angry tweets.

also: see the preemptive strike on revolutions https://gking.harvard.edu/files/gking/files/censored.pdf?mod...

The French revolution wasn't lead centrally, it was a higher classes which boiled over to grassroots explosion of public discontent that ran away from everyone, had a life of its own, and devoured its children.

Economically, little changed for the regular people. The church was ruined, and so were many high class families. Socially, a lot did (there was an expectation of humans having rights, the church was forever relegated to a secondary role and out of governance, etc).

Most social revolutions (changing the social order, so the US war of independence doesn't count) have a grassroots component that is often highjacked by educated professionals (lawyers are a bit overrepresented) for their own social and economic agenda (which, to be clear, is a net positive compared to the previous order)

You’re advocating that the household quality of life of the masses is worth considering. That precept is not held by private equity, and that taints the otherwise neutrality of the question. (I am strongly against neutral positions, but it weakens your argument as presented to have invalid neutrality, and I’m even more strongly against private equity, so.)

I’m not following this. Can you explain a bit more plainly?

> I would love to see a multi-decade model of 4 scenarios measuring quality of life, economic growth, and wealth distribution

“Spending money studying quality of life is a waste of good money that could be making us wealthier.” - Private Equity

“Wealth distribution doesn’t need to be studied. Distribute your wealth to us, obviously.” - Private Equity

Claiming that those deserve studies is to suggest contradiction of those two beliefs, which I’m representing here as quotes based on my best-faith summary of their industry’s actions to date. People tend to react with hostility when someone suggests that their beliefs might be mistaken, especially when peacefully allowing debate to occur might reduce their future earnings.

> I’m not advocating for any specific outcome

Your question itself advocates for a reevaluation of the validity of those two beliefs, an outcome that you value as higher importance than complying with Private Equity’s values, so this declaration of “not advocating” is false. And since simply posing your question alone is enough to antagonize Private Equity, some of which is here on HN participating, any attempt to avoid doing so is impossible if you want to question their beliefs. (I support this!).

It’s plainly apparent that you have an opinion, or else you wouldn’t be interested in these questions at all. Consider reworking your approach to more clearly state why this matters to you personally and what you’re advocating for. For example, ‘I think private equity is operating under the false assumption that they benefit quality of life, aka trickle down, and that we should disprove that’. (My example is not intended as a valid expression of your opinion, it’s just a stylistic sample.)

I actually find the parent much clearer than your criticism of their lack of clarity!

You assume that they are secretly advocating for something, on the basis that quality of life isn't something private equity cares about (according to your own assumptions). Even if it isnt, so what?

I took would be interested in seeing the proposed model of the different scenarios and I am also not secretly advocating for any particular outcome.

Unknowingly, more likely; not ‘secretly’. I don’t think there’s any intent to withhold an opinion, but the willingness to question precepts at all is itself an opinion (and one that I agree with regardless of topic). Literal religious wars have been fought over that sort of willingness, so I tend to state it more plainly than is typically comfortable.

Got it, thanks. So stating "quality of life is also an important factor, this should be part of any analysis" would be a more up front way to motivate the request.

Yeah!

Interesting, steal everyone's 401k ... Great idea.

That appears in the cards already. In reality, it’s a question of when the money will end up with PE?

What I’m curious about is if you moved all of it to cutting the national debt by 1/3, what happens? Is there a new lifeline for the nation’s economy?

I put my hot takes here: https://news.ycombinator.com/edit?id=43528306

I love how you’ve decided that my property, because I chose to invest in a tax privileged account, is somehow in the scope for you appropriate/seize and hand off to some third party. Steal my meager savings to avoid currency devaluation and inconvenience some uber rich people.

I regret that I lack the vocabulary to express my position on this. “Go fuck off” doesn’t capture it.

Alternatively, raise taxes on billionaires to pay down the debt.

Discouraging the over-accumulation; or better yet, encouraging that the wealth--once you "make it"--is used for legacy (of the country) is the bargain in the US.

Taxes and institutions could help achieve this, but I also like how Bill Gates has been doing things; but the scale of effort like this and by the billionaire club is paltry and usually political to our collective detriment.

Isnt #4 already possible? My understanding is that you can just move the 401(k) funds to an IRA, and invest as you like.

Expecting anyone to model and quantify in a hacker news comment is borderline unrealistic.

But hot-takes are another matter:

4 is basically #1: Every "non-traditional" investment can be made into an ETF (and for that matter, mutual funds) provided it aligns with SEC and/or exchange rules. Still, PE funds probably won't get a lot of takers by individual company's fund admins even if they're allowed. They're quite conservative, and rightly so.

2 & 3 would both cause the equivalent of modern bank runs. American financial institutions would be in tatters.

And as an individual why not? I can withdraw from a 401k, with just a 10% penalty plus income tax. Rationally, this is still better; especially if the highest tax brackets are favorably cut-down thanks to our conservative madmen. Which means the safest course of action is to withdraw it in chunks; then place it into safer investment vehicles and nations.

Of course, what would really happen is something more catastrophic as this withdrawal dovetails from thousands to millions.

Finally, with so many nations and wealthy also invested into the US, this then turn into more than just a US problem as it becomes hard/impossible to offload US financial assets.

Passive equity investments have close to the worst risk/reward, largely because they are so accessible so effectively support the creation of vast amounts of worthless equity (the return on the average US stock is 0% and has been for many decades). Also, most equity indexes are nonsense, in most of the world the state is heavily involved in which companies list so they are and have always been historically and culturally contingent.

The reason why this is happening is because some institutions have been extremely successful doing this. I assume you are familiar with the ones like Ontario Teacher's (because they seem to own everything) or endowments but has also been true for Superannuation funds in Australia. In the latter case, they have (I believe) the highest levels of average wealth (higher than the US) but incomes that are lower, largely because of Super funds.

Speaking generally, one of the biggest drivers of wealth inequality is that the rich have access to financial products that go up in a straight line, and other people do not...despite "other people" in aggregate holding most of the wealth. Germany is one of the most famous examples of this, GDP per capita is very close to the top ten, median net financial wealth equal to Greece. Saving options are non-existent so everyone is funneled into deposits, and the banks take that money and give it at -2% to a billionaire (whose family got suspiciously and suddenly very wealthy in the 30s). China is effectively the same model but Germany is a bit more notorious...because people continue for vote it.

The alternative is Singapore, everyone knows this model cannot work with US politics (to keep it brief). So what is happening is the obvious thing to do.

Same thing is happening in the UK under a left-wing government btw. The US is already somewhat ahead of the curve in that their exists a deep pool of people who have decades of experience running funds for savers and institutions this way (again, people in the US miss this context...the UK is doing a similar thing, the issue is that there is almost no-one with this experience). It is right to say plan sponsors should do this, the statements by Biden and Trump quoted are both correct (and not contradictory). As the article points out, DB plans have used these for decades shrug

However, there is also stuff here that is also known bad: it sounds like they want to incorporate this into funds that offer daily liquidity...how did CEFs work for PE funds pre-08? Not good (the solace with this kind of thing is that PE funds lose out just as much doing this, it is a bad idea that has failed every time but they just can't resist).

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