It is a nicely written piece.
First, modern inequality isn’t about graduates. It’s about oligarchs.
Apologists for soaring inequality almost always try to disguise the
gigantic incomes of the truly rich by hiding them in a crowd of the
merely affluent. Instead of talking about the 1 percent or the 0.1
percent, they talk about the rising incomes of college graduates, or
maybe the top 5 percent. The goal of this misdirection is to soften the
picture, to make it seem as if we’re talking about ordinary white-collar
professionals who get ahead through education and hard work.
Now That’s Rich - NYTimes.com
When Krugman says,
ReplyDelete"Once upon a time, you might have been able to argue with a straight face that all this wheeling and dealing was productive, that the financial elite was actually providing services to society commensurate with its rewards. But, at this point, the evidence suggests that hedge funds are a bad deal for everyone except their managers; they don’t deliver high enough returns to justify those huge fees, and they’re a major source of economic instability."
I think the same can be said about the banking industry, where Jaime Dimon and Lloyd Blankfein are making millions while everyone else suffers. However, I somewhat disagree with the notion that hedge funds are a source of economic instability. I think the big banks are the real problem, not hedge funds. The author of "The Banker's New Clothes", Anat Admanti, once joked during an interview that the only difference between a bank and a hedge fund is that banks use more leverage.
I also agree with the point that hedge funds inferior to many of the other asset classes. In fact, most hedge funds actually underperform the market. Passively managed index funds do so much better than hedge funds as Jack Bogle always says.*
*http://www.youtube.com/watch?v=B7lizGrBAXM
I agree that banks probably pose more of a systemic risk than hedge funds do, but I do believe that banks add more value and services to society than do hedge funds. Despite how crooked the industry has become, the banks still do provide loans and hold savings for ordinary people. Hedge funds on the other hand, in my opinion, are just leeches in the market that make all their money for already rich people through trading. I do not find trading to be a very productive activity other than for making money.
ReplyDeleteI have more of a concern with how banks operate than with the hedge funds. It seems that hedge funds would not create them if there were not incentives that cause them to place their interests before their customers.
ReplyDeleteI am somewhat in agreement with what's been said--banks pose greater risks than hedge funds. I think that Sanjay and Hikaru are right that Krugman overstates them as a source of instability.
ReplyDeleteI don't think that hedge funds are just leeches though. Indeed, hedge funds take the most aggressive (and often unsuccessful) market positions, but their clients aren't always the ultra rich as institutional investors still buy-in in some cases.
More importantly though, hedge funds are private enterprises with consenting adults all entering into what they know is typically a riskier agreement. On average they pose relatively little systemic risk, largely because of their highly private structure. I think a group of private investors taking on risk **for themselves** should be allowed to do whatever they want--even if it adds nothing to society.