Category: News and Opinion

It looks like the hedge fund bubble may be about to burst. With more competition in the industry spreads are shrinking, leaving many funds with no greater gross returns than on conventional mutual funds, but with far greater fees. We are heading for a housing bust, with foreclosure rates soaring as a result of exploding cost loans peddled to, among others, sub-prime borrowers. Rumor has it that in order to get higher interest rates, hedge funds were buying the most risky pieces (tranches) of groups of these loans – the piece that becomes worthless if more mortgages than expected don’t pay. Other rumors say the hedge funds were gambling on commodities, and have been caught when commodity prices suddenly dropped. Some may have been trading derivative instruments without the hassles of a formal exchange – hassles like showing you have enough money in reserve to pay off your counterparties if your bets go bad. The last firm to do this on a large scale: Enron, which would have gone down much sooner without the fraud. Far from “hedging,” that is accepting a lower return but limiting the potential for loss, most of these firms are leveraging, borrowing big so that a trend slightly in your favor yields a big payoff, but one slightly against you delivers a massive loss. It is likely that some of these firms could use a greater fool. They may have just found one.

The dominant political philosophy of New York City and State is not liberalism, conservatism, capitalism or socialism. It is feudalism, American style. Under capitalism, you get what you earn, at least in theory. Those who believe that people need an incentive to work and innovate can agree with that. Under socialism, you get what you need, at least in theory. Those who believe that we are all part of one human family can agree with that. But over time, when you have the same group of people in power, both capitalism and socialism degenerate into feudalism, under which the privileged expect to continue to get what they have been getting, and perhaps a little more, whether they need it or not, deserve it or not. For those who have real needs, and who produce real earnings, it's just tough luck. The feudalism of unearned privilege explains much about the state of the State of New York, where all past deals are set in stone, and more are added every year. The most recent case in point: the City's residential property tax system.

Recent reports highlight the low value placed on consumers of public services in New York City relative to other interests, some outside the city. The New York Post reports that statewide 94.5 percent of core classes, such as English, math and science, were taught by teachers deemed by federal requirements to be highly qualified in their subject area, compared with 87 percent in New York City. The Daily News reports class sizes as high as 46 kids per class in schools attended by poor NYC kids, with most 30 or higher according to the data they cite. Also reported by the News, fewer, less qualified police officers as a result of the 40% reduction in starting pay. The Post says that in order to offset this, the city is allowing police officers to work massive overtime, further padding their pensions. This looks like failed state and local policy, but it is actually successful state and local policy. You wouldn't know this, because the News and Post fail to identify the winners.