The New York Times ran a really scary story the other day. Titled “Mounting state debt stoke fear of looming crisis,” it detailed how a few states such as California and Illinois are in such dire financial straits that they might soon have trouble meeting their obligations — even after steep reductions in state services.
This was spooky enough. But buried in this long piece was a single line that was truly sinister in its implications. Hedge funds,” it read, “are already seeking out ways to place bets against the debts of some states, with the help of their investment banks.”
Hedge funds do a lot of good things for the economy, as do the Wall Street investment banks with which they are often closely linked. But there’s a game that a few hedge funds play that is monumentally destructive. socially and politically as well as economically. This hedge fund gaming, which I view as a kind of financial termite activity, has profoundly and unnecessarily undermined the economies of European countries such as Ireland, and is threatening to do the same soon with Portugal and Spain.
Nobody, absolutely nobody, but the managers of these funds, who sometimes take home a billion dollars or more a year with their gambits, and their investment banker associates, make out well in these deals. Now this crowd seems poised to bring their termite-like behavior home to these shores.
Some of the investment banks that raise money for these termite runs would be out of business today had they not received taxpayer bailouts. Because of a tax loophole, hedge fund managers pay inordinately small tax rates on their incomes. The money raised by investment banks that is passed along to these termite hedge funds largely comes from very wealthy people who aren’t using their lower Bush-era income tax rates to generate jobs in America, but to undermine the economies of other nations — and soon, perhaps, to do the same to our own states.
I don’t think this kind of behavior is very nice. Nor do I think that our tax system should be rigged in ways that not only make it possible, but actually encourage it.
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