The rich under attack

[ray245]

The Economist

STONES thrown through a banker’s windows in Edinburgh, workers “bossnapping” executives in France, retrospective 90% tax rates proposed in Washington, and now a riot in London as G20 leaders arrived for their summit (see article). A sea change in social attitudes that could have profound effects on politics and the world economy is under way.

The rich are certainly not the only targets in the current populist backlash. Frightened by the downturn, people are furious with politicians, central bankers and immigrants. But a rising wave of anger is directed against the new “malefactors of great wealth”. Today’s villains are a larger and more global bunch than the handful of American robber barons Teddy Roosevelt denounced a century ago; and most of them are bankers and fund managers, rather than owners of trusts and railroads. Yet the themes are similar to those at the end of that previous gilded age: rising inequality—the top 0.1% of Americans earned 20 times the income of the bottom 90% in 1979 and 77 times in 2006—and a sense that the greedy rich have cheated decent working people of their rightful share of the pie.
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Some of this cheating has been of an old familiar sort: building Ponzi schemes and bribing politicians to secure favourable deals. There are greyer areas, in which the rich hide their cash in tax havens and get tax law written to their advantage—witness the indefensible treatment of private-equity profits. But what makes the rich’s behaviour so galling for many critics is that their two greatest crimes were committed in broad daylight, as they were part of the system itself.
The two great cheats

The first charge is that the rich created a new form of heads-I-win-tails-you-lose capitalism. Traders and fund managers got huge rewards for speculating with other people’s money, but when they failed the parent company, the client and ultimately the taxpayer had to pay the bill. Monetary policy contributed to this asymmetry of risk: when markets faltered central banks usually rescued them by cutting interest rates.

The second charge is that the bankers and fund managers were not doing anything useful. Unlike the “deserving” rich entrepreneurs who set up Microsoft and Google, the “undeserving” traders and brokers just shuffled money around the system to nobody’s profit but their own. The faster the money went round, the larger the financial sector loomed in the rich countries’ economies. At its peak it contributed 41% of domestic American corporate profits, more than double the rate two decades ago. As finance grew, the banks got ever bigger—too big to fail, eventually, so when they tottered taxpayers had to prop them up. Far from epitomising capitalism, the undeserving rich undermined it: it was socialism for the wealthy.

These two charges run together, but the second has much less justification. Enormous though the cost of bailing out the banks has been, there is nothing inherently undeserving about finance; even in their flawed state, more liquid markets have brought huge benefits to the rest of the economy. The lower cost of capital has made it easier for industry to invest, innovate and protect itself against interest and exchange-rate risk. Trying to single out financiers from entrepreneurs is a fool’s errand: you will end up hurting both.

The heads-I-win charge is not entirely proven, either: some of the people who ran banks did lose when they went bust. Yet even a newspaper as inherently pro-business as this one has to admit that there was something rotten in finance: the basic capitalist bargain, under which genuine risktakers are allowed to garner huge rewards, seems a poor one if taxpayers are landed with a huge bill for it all. Hence the anger.
A time for correction and brown paper bags

Periods of excess, when inequality has grown, tend to be followed by eras of reform: Roosevelt bust the trusts and shortly afterwards Congress moved towards introducing a federal income tax. Part of the genius of capitalism is its ability to adjust to disruption from within and attacks from without.

Indeed, the system is already beginning to correct itself. As our special report this week points out, the rich are not as rich as they were: some $10 trillion, around a quarter of the wealthy’s assets, has been lost. Inequality will decline. Investment banks and hedge funds are shrinking; private-equity groups are struggling to finance takeovers. Having discovered how volatile markets can be, banks will be less keen on trading in the future. There is even a correction going on in conspicuous consumption: Net-a-porter, a pricey website, offers to deliver designer outfits to its customers in brown paper bags.

The market’s self-correction will not be enough, however. Higher taxes will eventually be inevitable, since so many governments have lurched heavily into deficit. But politicians must tread carefully. Tax rises right away would be a rotten idea, since for the moment fiscal stimulus is needed. And even when governments raise the money, they should first get rid of deductions and reverse unmeritocratic measures (such as George Bush’s repeal of America’s death tax) rather than jacking up income-tax rates to punitive levels. Squeeze the rich until the pips squeak, and the juice goes out of the economy.

As for heads-I-win capitalism, the problem of asymmetric risk should shrink, because the rule changes needed to make the financial system safer will also remove unwarranted profits. Contra-cyclical capital requirements, forcing banks to build more reserves during good times, will leave them less cash to splurge on bonuses. Many of the sweetest sources of profit sprang up in the cracks between regulatory systems; governments are now filling in these gaps. If central banks focus on asset markets when they rise as well as when they fall, they will remove much of the froth. Treat a bank that becomes too big to fail like a utility, and it will make less money.

Curbing the excesses of wealth, then, will be a side effect of regulations designed to make capitalism work better. Such measures will not provide the lyrics to revolutionary anthems, but they are going to be better than going after the wealthy. The rich are an easy target. But when you try to bash them, you usually end up punching yourself in the nose.

From what I understand, the Economist is basically saying that if a bubble for work us once, it will work for us again and again? That no one should be blamed for creating and bursting a bubble?

[Illuminatus Primus]

Periods of excess, when inequality has grown, tend to be followed by eras of reform: Roosevelt bust the trusts and shortly afterwards Congress moved towards introducing a federal income tax. Part of the genius of capitalism is its ability to adjust to disruption from within and attacks from without.

Ah yes, even when it is intervention by a democratic government in the market - but it is a good thing, mind you, you can give credit to...capitalism's GENIUS! What a slobbering love affair.

Squeeze the rich until the pips squeak, and the juice goes out of the economy.

Just like the 1950s? Oh wait...

[Stargate Nerd]

The article contains a nice alternative to the "the ones that caused the mess already left the company" meme. "Don't punish anyone or you'll punish us all."

[Covenant]

Putting the fear of the masses into the rich is healthy and warrented. The one restriction a businessman should never be free from is fear of reprisal from customers he's fucked over intentionally. That pressure, to avoid misconduct and act in good faith towards your consumers, is the essential driving pressure behind a functional capitalistic state. Devoid of such compulsions, a "buyer beware" system will take the place and be bad for everyone.

What they're experiencing right now is what happens when you act stupidly, in places, wrongly, in others, and malignly, in some. And the customers in question were nearly the whole economic market. Like politicians, businessmen should fear their consumers, not the reverse. That leads to higher quality, better competition, more effective business practices, and general peace and prosperity. "The Rich" as a whole are not a single group, and for these types of people to all circle wagons together just shows a degree of ignorance on their part about what really makes people angry. They're not mad they have money, their favorite sports and music heroes have that. They're angry that they are making money while screwing things up for everyone else. The "poor me" attitude needs to be chucked out the door. If "the market" is so wily and unpredictable that we can't hold them accountable for these fluctuations, then what are they being paid these extreme fees for, why are we all being encouraged to put our life's savings there, and why did they play so risky?

[Big Orange]

Bill Gates is more reviled for his virtual monopolisation and stagnation of computer software, than for his boundless wealth, but at the end of the day at least he produced something for society instead of nothing (with his fortune invested into foundations). What the public dislike is being punished by rich people who mainly destroy or outsource jobs to the detriment of the wider community, while giving little back in the way of services and products. How else can you eventually buy products and services from companies that impoverished their customer base by drying up the jobs for chronically short-sighted gains?

[Broomstick]

Someone like a Bill Gates or Henry Ford might be reviled and hated for various personal flaws and shortcomings, not to mention a ruthless approach to business, but on a certain level they are also respected because the produce real products and really do build businesses that provide jobs and livings to thousands. Everybody hates the boss but no one wants to see anything bad happen to him. You may not like your job but if it allows you to provide your family a place to live, food to eat, in other words, the tools for a decent or better life you put up with it. Some of the ickiness of business is tolerated for what business/employment brings. You, the rank and file and little people, do actually get something out of it.

The bankers/financial analysts/etc. that are currently reviled created few to no jobs, produced nothing tangible, and deprived people of their livelihoods and resources. They took and gave nothing back. That's a significant difference, and why certain rich people are "under attack".

[aerius]

3 words. Boo-fucking-hoo.

I'm at the point where I'd be jumping for joy & breaking out the champagne if I found out Ken Lewis, Ed Liddy, or James Dimon got lynched. They sure as hell deserve it.

[Pablo Sanchez]

These two charges run together, but the second has much less justification. Enormous though the cost of bailing out the banks has been, there is nothing inherently undeserving about finance; even in their flawed state, more liquid markets have brought huge benefits to the rest of the economy. The lower cost of capital has made it easier for industry to invest, innovate and protect itself against interest and exchange-rate risk.

This is a really equivocal argument. The developments that made credit so profitable to give and hence so easy to get created the bubble that crashed the world economy. Moreover, since work in the financial sector was so remunerative, it could be seen as having drained other industries of brainpower (as in, why leave Harvard and work for GM when you can make millions more at some financial job, whether you turn a profit or not!), and since more money could be made from sleight of hand like the housing "boom" than from bread-and-butter entrepreneur loans, a quite large proportion of the credit that was supposedly freed up went right back into feeding the bubble.

Indeed, the system is already beginning to correct itself. As our special report this week points out, the rich are not as rich as they were: some $10 trillion, around a quarter of the wealthy’s assets, has been lost.

Really? That explains the stuff I've read about people backing off from buying their third yacht. I feel so sorry for the Patek set.

There is even a correction going on in conspicuous consumption: Net-a-porter, a pricey website, offers to deliver designer outfits to its customers in brown paper bags.

A "correction" would be people no longer buying these items; the word you're looking for is "shame".

And even when governments raise the money, they should first get rid of deductions and reverse unmeritocratic measures (such as George Bush’s repeal of America’s death tax) rather than jacking up income-tax rates to punitive levels. Squeeze the rich until the pips squeak, and the juice goes out of the economy.

Thanks for asserting that as truth instead of trying to demonstrate it.

The rich are an easy target.

O RLY? They're such an easy target that they might accidentally hear a critical snippet of NPR programming while tuning the radio in their fucking golden limo. How about you fucks wait to complain until somebody actually gets tarred and feathered?