Saturday, May 28, 2011

Too Bad the Institutional School Of Economics Is Dead

Quotes from two Friday readings

Item one:

The entire article “Pensions Leap Back to Hedge Funds,” WALL STREET JOURNAL, May 27, 2011 by Steve Eder, Gregory Zuckerman and Michael Corkery is worth reading. However, for those without access, here’s an interesting quote:
“Public pension plans are lifting hedge-fund investment, seeking to boost long-term returns despite losses suffered in some funds in the financial crisis.
Also, pension officials are using the historically strong returns of hedge funds to justify a rosier future outlook for their investment returns. By generating more gains from their investments, pension funds can avoid the politically unpalatable position of having to raise more money via higher taxes or bigger contributions from employees or reducing benefits for the current or future retirees.”

Item two:
The article worth reading is “Fire your hedge fund, hire your congressman” BARRONS, UP AND DOWN WALL STREET, May 26, 2011 by Randall W. Forsyth, subtitled “House members outperform the stock market, though not as much as Senators, study finds. The ultimate insiders?” Again, however, the interesting quote is:
“You'd think that Republicans would have the better investment results since the GOP is seen as the party of Wall Street. You'd be wrong. The Democrats did four times as well as the Republicans, generating excess returns of 73 basis points per months versus 18 basis points.
The study's authors' interpretation: during the period covered by the study, Democrats controlled the House for 10 of 17 years. ‘Furthermore, Democrats were deeply entrenched in the leadership of the House for decades prior to the study. Thus when Republicans finally took control in 1995, they arguably had far less experience at handling the reins of power and may therefore have been unable to immediately enjoy all its perquisites,’ the academics write.”

The Hedged Economist’s observation:

With a little observation of institutions, the academics wouldn’t be so naïve as to believe Republicans are the party of Wall Street. As hinted at in item one, some Wall Street industries would hardly exist without Democrat public sector pensions. The hedge fund industry is a prime example. Absent pension funds and academic endowments, the hedge fund industry would be much smaller. Further, a strong argument can be made that hedge fund fees would be lower, but that’s a theoretical argument while the capital flow from pensions to hedge funds is a fact. In general, pension funds are a blatant example of just turning money over to Wall Street, and who are the traditional defenders of defined benefits pensions? It’s not the Republicans.

The Democratic Party’s ties to Wall Street go way beyond hedge funds. If the author of the study read a few histories of investment banks, they’d recognize a long history of Democratic ties. More recently they might learn something from the difficulty Republicans have had recruiting Wall Street types. It was close to traumatic for Henry Paulson to cross party lines to go from Goldman to a Republican administration. Even in commercial banking, it’s hard to find a Republican at the executive level in a Wall Street bank; community banks yes. They’re far more representative of the voting public in general, but we’re talking Wall Street.

If the authors of the study approached the finding objectively they wouldn’t need an elaborate years in control / entrenched power explanation. There are deep philosophical reasons for the relationship. Both Wall Street and Democrats thrive on other people’s money, both believe in entitlement, and both believe in their superiority to the masses. In the authors’ defense, the authors state that Republicans “may therefore have been unable to immediately enjoy all its perquisites.” Perhaps that is just a polite way of saying Democrats are better crooks because they had more time at it. A Republican would respond that it isn’t time; it’s philosophy. Now there’s a debate for a political blog. Let’s hope any such debate is based on facts, analysis and observation not the blind acceptance of mistaken conventional wisdom.

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