The New Yorker has a profile of Ray Dalio, the manager of the Bridgewater Associates hedge fund, which starts, ritualistically, by noting, "Dalio is rich—preposterously rich. Last year alone, he earned between two and three billion dollars, and reached No. 55 on the Forbes 400 list." Much lower down the article reports, "Forbes estimates his net worth at six billion dollars." One has to read pretty far down into the piece to find out that he started the firm in 1975, at age 26, after being fired, operating it out of his two-bedroom apartment.
That's the thing about rich people often forgotten by those who want to raise their taxes or complain about how preposterous their wealth is; many of them didn't start out rich. They got there by taking risks and by working hard for long periods of time. That two or three billion that Mr. Dalio earned last year represents in some sense a return on something that Mr. Dalio spent 30 years building.
The New Yorker article goes on to accuse Mr. Dalio of protesting too much against descriptions of Bridgewater as a "cult":
Dalio may protest too much. The word "cult" clearly has connotations that don't apply to an enterprise staffed by highly paid employees who can quit at any moment. But Bridgewater's headquarters are in the woods, isolated from any other financial institution; Dalio is a strong-willed leader;...
Well, there, that proves it; any institution with headquarters in the woods must be a cult, or at least somehow suspicious.
Toward, the end, the article devolves from a profile of Mr. Dalio into an attack on hedge funds, referencing "the argument that hedge funds, through their herd behavior, have contributed to speculative bubbles, in tech stocks, oil, and other commodities."
The New Yorker goes on:
Because hedge funds use a lot of borrowed money to magnify their bets, they are subject to rapid reversals: the history of the industry is littered with blowups. This wouldn't matter much if other parts of the economy weren't affected by the actions of hedge funds, but sometimes they are. In 2008, hedge funds had hundreds of billions of dollars on deposit at investment banks, which acted as their brokers and counterparties on many trades. When the Wall Street firms got into trouble, a number of other hedge funds demanded their money back immediately. These demands amounted to a virtual run on the banks and helped to bring down Bear Stearns and Lehman Brothers....Hedge funds have also contributed to the radical increase in income inequality.
The article doesn't mention where this "borrowed money" comes from (hint: the investment banks themselves, which, unlike the hedge funds, can borrow from the Fed on favorable terms and which are also leveraged, in some cases more highly leveraged than the hedge funds, and which in some cases also are funded via FDIC-insured deposits), nor that there are some hedge funds that don't use a lot of borrowed money to magnify their bets. I've heard the collapses of Lehman and Bear blamed on hedge funds shorting the firms, but not on withdrawals. In any case, it wasn't just hedge funds who were disentangling themselves from Lehman and Bear in the closing days, but also competing firms, other customers, and individuals. Blaming the financial crisis on hedge funds instead of on the government or on mortgage-holders or on the banks themselves is like blaming income inequality on hedge funds. By what dynamic does hedge fund compensation affect payment to rock music stars or baseball players? The New Yorker doesn't say. Nor does it say whether it's talking about post-tax, post-transfer income inequality, or about some other version.
