Sunday, October 28, 2007

Hedge Funds: Ben Stein Finds the Money Machine That Will Eliminate the Federal Debt

While Ben Stein hearts Stephen Cohen of SAC Capital, Dean Baker has a closer look. I sense a tie to the Social Security debate!

Ben Stein writes:

magicians like Steven A. Cohen, founder of SAC Capital in Stamford, Conn., can regularly earn 40 percent a year - often more - on their capital. But why waste our time on envy or disbelief? Let’s put Mr. Cohen to work for the greater good. Let’s have the federal government issue about $10 trillion in Steven A. Cohen National Debt Retirement Fund Bonds. After interest is paid on the bonds, if Mr. Cohen makes 40 percent on the money, the fund will return 36 percent a year. That means that in only two years, he will have made roughly $10 trillion for the taxpayers, with which he can pay off the entire United States federal debt.

As I read this, I had to wonder about my belief in the Efficient Markets Hypothesis. But then Dean Baker brought a little reality to this discussion:

Well Cohen's modus operandi is to make bets ahead of the market. He finds the winners just before they start winning and dumps the losers just before they start losing. The economic benefit from Cohen's actions is that prices adjust somewhat quicker than they otherwise would ... Mr. Cohen's gains come from other shareholders. If he buys IBM stock before it rises, he helps to bring the stock price to its proper level, but he gets the gain rather than some other potential stock purchaser. By being faster and better informed than other traders, Cohen is able to garner earnings that would otherwise have gone to other shareholders. Higher returns for Cohen mean lower returns for everyone else.

OK, this may be a very small departure from a perfectly efficient market but Ben Stein’s 36 percent return is not a measure of the benefits from exploiting inefficiency. Rather it is the benefit to SAC Capital from exploiting others. But isn’t this kind of wealth transfer the real agenda for those who wish to privatize Social Security?


Shag from Brookline said...

How much will it cost the US to come up with the $10 trillion to fund Mr. Cohen? What may be the tax losses sustained as a result of investors buying high and selling low so that Mr. Cohen can make his 36-40% returns? With the answers to these and other economic questions, will the US be better off as a result of Mr. Cohen's performance? And what if Mr. Cohen makes mistakes?

It is not quite time to raise a Stein to Ben for his suggestion, only eyebrows. By the way, when I read Ben's columns in my mind I hear his monotone made famous in what the name of that movies he had a role in.

Robert D Feinman said...

What does it say about our culture when a professional clown is given a column in the business section of the NY Times?

The choice of guest business columnists is truly strange. Two of them are libertarians (Stein and Tyler Cowan). There are no representatives of other non-mainstream philosophies. People like Robert H. Frank are liberal, but mainstream.

Where are the socialist, communist or anarchist economists?

Where are any representatives of the ecological economics school such as Herman Daly?

There is no room for anyone who doesn't buy into the current capitalist/consumerist model. The only differences between the liberals and conservatives is over the best way to achieve the goals of continuous growth.

You can't have continuous growth on a finite planet, but let's not bring this up and spoil the parade...

Bruce Webb said...

Actually pgl I never bought the idea that Social Security privatization was about wealth transfer. Sure Wall Street will go along and get what they can if it happens but I don't sense a big drive from the big players on this, the headaches of running a couple hundred million relatively small accounts not really being worth the bother.

Privatization has always been ideologically based. I googled 'Alf Landon Social Security' the other day and was fascinated by the fierceness of the language, a certain faction of the Republican Party has always hated Social Security on the simple basis that they can't distinguish it from Socialism. And of course in those terms they are right, that people like me call ourselves Social Democrats shouldn't fool anyone.

A constant theme of my posting on this topic is that the Social Security debate is not about retirement security, it is not about producing a better result, and indeed on inspection the plans in play do not in fact present better results at lower costs for most workers. The worst nightmare for the folk at the Cato Privatization Project is that the system will be found to be solvent long term as is. It is why Bush took a tax based solution off the table right from the beginning. They didn't want Dale Coberly doing the math. Whoops, that cat is out of the bag.

I am convinced that Social Security 'Crisis' is the foremost barrier remaining against Universal Coverage. For twenty four years Social Security as been used as a weapon by the 'Big Government is the Problem' folk. It was the poster child for well-intentioned but ultimately doomed government intervention. Well now the barrel is slowly but surely being turned around on them and they don't like it.

But it is not about the dollar, it is all about pissing on the grave of FDR. And the stream is drying up.

Shag from Brookline said...

" ... all about pissing on the grave of FDR." This is proof that the Republicans' trickle down theory just hasn't worked.

ProGrowthLiberal said...

Bruce - I see multiple agendas within the GOP zeal for Social Security "reform". The reason I fear that part of these multiple agendas is that the GOP has nothing else that would significantly impact the General Fund crisis they have so willfully created.

Anonymous said...

Isn't there a major need on the part of Republicans, and many Democrats who pander to the lower income tax band wagon, to continuously trump up the crisis debate in order to more effectively hide their interest in transferring the "trust fund" excess into the general treasury? Whatever machinations may be dreamed up in the effort to privatize the existing system has got to leave many avenues by which to lose those IOUs that Bush and his predecessors have been stuffing into the trust fund. In effect what I'm trying to get at is that by utilizing the "crises" argument and recreating a new social security system, those people get an opportunity to hide what they've been doing with the trust money.

ProGrowthLiberal said...

Jack - it is for the GOP but which Democrats are scheming to do the same? I heard some claim from Senator Obama that Senator Clinton was not being honest about Social Security but from the press coverage, I have no clue what this beef is about?

Anonymous said...

The Democrats are not so much schemers, I think, but more to the point is that they are unfocused. They too often refuse to take an identifiable stand. As such Obama can make claims about Clinton's stand on Social Security and it would be difficult to identify where he is right or wrong. Nothing in Democratic politics seems to be definitive. They seem too afraid to take a firm position on significant issues. We'll deal with the future. Is an example. Maybe their position on Social Security is meant to obfuscate. If you can't tell what they think then you can't criticize them. I'd feel more comfortable with a Democratic candidate that actually appeared to represent the best interests of the mass of the voting public.

Anonymous said...

if you grease the info flow, 'reverse desk', 'take the street', initiate short squeezes, and if you're very good at it and have sufficient capital, you can make the price...which doesn't have much to do with even a weak EMH or 'proper price' but relatively short-term max return.
SAC has been very good at appropriating from the casino.

Bruce Webb said...

I think that Hillary at least has an inkling as to the real numbers, while Obama doesn't seem to have a clue.

It is one of the oddities of Social Security finance that every amount of actuarial improvement makes it less likely that the principal in the Trust Fund will ever have to be paid out. Under Low Cost Income including Interest continues to strongly exceed Cost through the 75 year window with the trend after 2060 actually being up and the Trust Fund balooning to absurd heights. There are outcomes between Intermediate and Low that would have total Income matching Cost with the Trust Fund stabilizing at a lower level.

The Trust Fund is real enough but in the future may operate much like an old-fashioned utility bond, each month the system collects interests but never has to 'sell' the underlying portfolio.

Anonymous said...

People like Stein should know of what they speak before they float propositions that could be quite dangerous. It is bad enough to have this element influencing the markets, it would be catastrophic to expand it. Juan has it right.