Private equity is simply a person (or small group of people) owning a company. Basically every small business in the US.
The problem is not private equity, but that private equity engages in corporate raiding--buy up a company, borrow, extract capital, sell it to suckers who don't see the problems. Dig into practically all malfeasance and you'll find it's someone who benefits from making the future value of something look better than it really is and then leaving the problem for somebody else. At the executive level I think the answer is mandating income above a certain threshold be paid over time based on the future value. (Stuff that's actively traded would be easy: Let's say the cap was $1m. Pay the CEO 10m? No, he gets $1m, plus shares currently worth $1m to be delivered in a year, shares currently worth $1m to be delivered in two years and so on.) And while there is pending income they are categorically prohibited from any transaction that benefits from a drop in share price. Inadvertent (say, bought a fund that shorted the stock) it's a 100% tax rate, deliberate and all pending shares are forfeit. I have no idea of an answer with the PE problem.
they increase productivity, which is one of the most important part of the real economy, separates a lot of grueling manual labor while starving (so the Malthusian state) from having so much economic surplus that we have the opposite of starving in advanced economies.
CalPers, the largest public employee retirement system in the US was not getting the kind of returns that they needed. They were restricted from purchasing stocks in certain industries, such as oil, weapons, etc.. However, they recently switched to investing in private equity funds and now they are getting much better returns, without all the pesky moral issues involved with it.
Ah, a classic paperclip maximizer. Pension plans got the goal of multiplying the money so pensioners have more of it. Nobody bothered to mention that they should also make sure there's a world the pensioners can live in, so now that gets slowly sacrificed in the pursuit of the only explicitly stated goal
> Second, that capital is trapped in an institutional arrangement that charges enormous fees to match the performance of a simple index fund, while the money deployed through these intermediaries actively harms the communities pensioners live in: buying up their housing, closing their hospitals, bankrupting their local employers, gutting their newspapers.
This is the same argument that Ann Pettifor has about how the poor allocation of pension funds is because "it’s much easier to make money from gambling and speculating than it is from investing in the land on the one hand, in the broader sense of the word, or investing in labor"
> Larry Summers warned against “moral hazard lectures” and demanded SVB depositors be made whole immediately in 2023, months after calling student loan relief inflationary and unfair. Moral hazard for borrowers, bailouts for banks. Not lost on the public.
I can't believe I'm about to say something that could be construed as a defense of Larry Summers, but here goes: bank depositors are not engaging in risky behavior, they are putting cash in a bank. SVB did not get bailed out, it failed.
And as some of who supports the student loan forgiveness, yes, it is slightly inflationary but I think the benefits out weigh the inflationary effects.
Combine this with the "need" for nuclear (a perfectly cromulent but excessively expensive power source which has cheaper zero-carbon options), in the first paragraph, these comments that are not about the main topic severely undermine my ability to trust the rest of the essay.
The lesson to myself is to be narrow when I write, so as not to bring in a bunch of other positions that also need to be defended.
From first principles public pension funds are broken.
The "Safe Withdrawal Rate" assumed by many private individuals planning for their own retirement assumes a withdrawal rate in the 3 - 4% range based on the "trinity study" - https://en.wikipedia.org/wiki/Trinity_study
Meanwhile, American public pensions are structurally engineered around a 7%+ SWR - this was recently confirmed again by the median goal by the National Association of State Retirement Administrators.
The perpetual "under funded" nature, and all the return hunting etc in pension fund management can be explained by that disconnect.
But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place requiring us to either:
What does it mean for something to be broken from first principles? I would expect some that just cannot work on a fundamental level, like faster-than-light travel or a lightbulb that powers it’s own via solar panel.
3% vs 7% doesn’t seem broken on principle, just, a tuning parameter is off.
Yup, this is the real problem. What he's talking about isn't the real problem. The real problem is we have gone to a "model" of fund less, pretend we can make it up by increasing risk. And rather than face a big problem it gets swept under the rug until it can't be any more.
We also have the problem that paying pensions becomes somebody else's problem. Thus in contract negotiations pushing benefits into pensions rather than current wages becomes attractive. You can agree to more without breaking the current budget.
The old rules worked better because limiting what pension funds could be in also limited the shenanigans that were possible.
The headline intimates that Vanguard, like other investment companies don't have large stakes in private equity firms... the same private equity firms bankrupting hospitals across the country.
Pension funds should have a rule -- invest in technologies, industries and companies that create a deflation (by technology, scale, efficiency, etc). This will create better outcomes for pensioners. If they invested in cheaper housing, healthcare, pensioners can live without the constant fear of running out of money. The absolute first thing to invest in is clean energy which can be super cheap to zero to actually making money by supplying power back to the grid. Once energy is solved, it solves an entire spectrum of problems.
Increasing the money(number), while making everything else costly (a lot more costlier in reality because of fictional inflation number) is not only hard to achieve, but even if achieved, doesn't mean much. ".S. Dollar itself has lost roughly 98% of its purchasing power over the long term" -- random Warren Buffett quote.
Student Loan interest rates in the US can be as high as 9-13%. The government can borrow at 3.36% which even if we assume a 20% overhead is 4.03% to the borrower. Other countries/governments do a scheme similar to this, and it makes repayment realistic.
I'm certain someone will respond telling me the difference between Subsidized, Unsubsidized, PLUS, and private loans which completely missing the point: There shouldn't be a private entity that needs to turn a profit on the backs of students begin with, it is immoral. If you remove the private for-profit entity, the loan-type distinction goes away.
It isn't uncommon to read stories from people, who graduated and are in good jobs, and had no gaps in repayments that are now on 300%+ of their original borrowed amount.
Isn't the main problem with pensions today the dramatic increase in life expectancy post-retirement? They were never intended to support decades of retirement: in the old days, you retired at 65 and there was a good chance you'd be dead by 70, at most 75. (When Social Security was established in the 1930s, life expectancy was only 61.) Nowadays, there's a good chance you'll live beyond 90, with expenses increasing disproportionately towards end-of-life. Combine that with a shrinking birthrate, and no feasible increase in ROI/worker contributions can sustain pension-funded retirements of 25+ years.
No, the problem was that increased contributions [that would've ensured solvency with lower market returns and/or extended life expectancy] would've cost more sooner, and no one wants to pay more. So, we "extend and pretend" using generous return assumptions and when those assumptions are not borne out in reality, we simply shrug. Similar to $39T in US treasuries someone will need to pay back. Only the top 40% of Americans have enough income to have a federal tax liability, so who is going to pay this debt back? Different sides of the same coin. What is a debt after all besides a promise to pay.
> Pension capital is money that will not be needed for 20 to 40 years.
Is it though? Much of the article talks about public employee pensions, and many of those are ridiculously underwater. People tend to think of pensions as deposit accounts that grow a bit while you wait to retire, but in reality many of them pay out a portion of your pension deposits directly to retirees, because the money those retirees deposited has already been spent.
I'd like to see more public banks. Municipalities, and even states, are holding balances in commercial banks but there's nothing stopping them holding this in their own bank to direct capital for public benefit. California has a law allowing it, although despite a campaign in LA I don't know if it's been used. North Dakota has a state-wide public bank. It works!
> There is roughly $6 trillion of it, sitting in American public pension funds, currently being allocated in a way that serves nobody.
Yeah. That's what pension funds do. They accumulate money and hand it out to people who think they damn well better be able to withdraw upon it.
In 1960, the birth rate in the US started to decline. It hasn't had a meaningful rise since. [0]
Markets can experience natural growth - typically through birth rates, sometimes through immigration - or they can begin to more thoroughly monetize capital as to create growth from fewer people.
The Baby Boomers thoroughly broke the ability to grow through natural means, and it's been that way for 25-30 years.
This is a problem, because you need that natural growth to fund the retirements that the Boomers planned on having, along with the entitlement state in the US, which focuses almost exclusively on people over the age of 65 with OASDI and Medicare.
So how do you solve this problem?
If you're investing the hospital business, for example, you can no longer expect the same sort of growth that you used to if your plan is to have a current customer birth their 2.1 kids in your maternity ward. You now need to do other things to monetize the current customer, like charging him more for his next procedure, or - even better - looking to developing markets like India (or China 25 years ago) and focus your investment there. It's a lot easier to bring a rural clinic "up to spec" in China than it is in the US, because one started out with far cheaper needs to meet. X-ray machines are easy to install; cancer centers with advanced imaging machines and academic medicine practitioners are expensive.
And that's what the investors do. They find ways to get in on deals that aren't in the US. It's not just medicine, either. That capital that built Shenzhen into a tech mecca came from the US.
In the meantime, they need to find ways to exist in the American market, so they do what I mentioned earlier: they monetize the hell out of customers they already have. If that means closing a hospital and making the "customer" (read: guy having a heart attack) go to one twenty miles further away that has a better business value, then they do exactly that.
Or, they find ways to monetize the younger generations more, since they're not drawing on pensions and IRAs yet. Otherwise they risk gobbling up the returns they handed back to their members with increased costs.
23 comments
[ 0.21 ms ] story [ 44.8 ms ] threadThe problem is not private equity, but that private equity engages in corporate raiding--buy up a company, borrow, extract capital, sell it to suckers who don't see the problems. Dig into practically all malfeasance and you'll find it's someone who benefits from making the future value of something look better than it really is and then leaving the problem for somebody else. At the executive level I think the answer is mandating income above a certain threshold be paid over time based on the future value. (Stuff that's actively traded would be easy: Let's say the cap was $1m. Pay the CEO 10m? No, he gets $1m, plus shares currently worth $1m to be delivered in a year, shares currently worth $1m to be delivered in two years and so on.) And while there is pending income they are categorically prohibited from any transaction that benefits from a drop in share price. Inadvertent (say, bought a fund that shorted the stock) it's a 100% tax rate, deliberate and all pending shares are forfeit. I have no idea of an answer with the PE problem.
https://www.nber.org/system/files/working_papers/w26371/w263...
the finding is that on average, target firms add jobs and see improved labor productivity
I can't really see how it would happen and that I suppose is part of the fun.
This is the same argument that Ann Pettifor has about how the poor allocation of pension funds is because "it’s much easier to make money from gambling and speculating than it is from investing in the land on the one hand, in the broader sense of the word, or investing in labor"
https://annpettifor.substack.com/p/on-pensions-and-the-globa...
I can't believe I'm about to say something that could be construed as a defense of Larry Summers, but here goes: bank depositors are not engaging in risky behavior, they are putting cash in a bank. SVB did not get bailed out, it failed.
And as some of who supports the student loan forgiveness, yes, it is slightly inflationary but I think the benefits out weigh the inflationary effects.
Combine this with the "need" for nuclear (a perfectly cromulent but excessively expensive power source which has cheaper zero-carbon options), in the first paragraph, these comments that are not about the main topic severely undermine my ability to trust the rest of the essay.
The lesson to myself is to be narrow when I write, so as not to bring in a bunch of other positions that also need to be defended.
The "Safe Withdrawal Rate" assumed by many private individuals planning for their own retirement assumes a withdrawal rate in the 3 - 4% range based on the "trinity study" - https://en.wikipedia.org/wiki/Trinity_study
Meanwhile, American public pensions are structurally engineered around a 7%+ SWR - this was recently confirmed again by the median goal by the National Association of State Retirement Administrators.
The perpetual "under funded" nature, and all the return hunting etc in pension fund management can be explained by that disconnect.
But this then belies a very uncomfortable acknowledgement which is that we cannot afford the government workforce currently in place requiring us to either:
(a) Raise taxes to increase contributions.
Or
(b) Somehow make due with less government :)
3% vs 7% doesn’t seem broken on principle, just, a tuning parameter is off.
We also have the problem that paying pensions becomes somebody else's problem. Thus in contract negotiations pushing benefits into pensions rather than current wages becomes attractive. You can agree to more without breaking the current budget.
The old rules worked better because limiting what pension funds could be in also limited the shenanigans that were possible.
Increasing the money(number), while making everything else costly (a lot more costlier in reality because of fictional inflation number) is not only hard to achieve, but even if achieved, doesn't mean much. ".S. Dollar itself has lost roughly 98% of its purchasing power over the long term" -- random Warren Buffett quote.
Usually it's not implemented as a rule though, but rather by creating tax cuts for certain kind of investments.
E. G. In France you get tax cuts if you invest in green energy, housing in poor neighborhood, and a trillion other subcategories.
The problem with US student loans is usury.
Student Loan interest rates in the US can be as high as 9-13%. The government can borrow at 3.36% which even if we assume a 20% overhead is 4.03% to the borrower. Other countries/governments do a scheme similar to this, and it makes repayment realistic.
I'm certain someone will respond telling me the difference between Subsidized, Unsubsidized, PLUS, and private loans which completely missing the point: There shouldn't be a private entity that needs to turn a profit on the backs of students begin with, it is immoral. If you remove the private for-profit entity, the loan-type distinction goes away.
It isn't uncommon to read stories from people, who graduated and are in good jobs, and had no gaps in repayments that are now on 300%+ of their original borrowed amount.
Is it though? Much of the article talks about public employee pensions, and many of those are ridiculously underwater. People tend to think of pensions as deposit accounts that grow a bit while you wait to retire, but in reality many of them pay out a portion of your pension deposits directly to retirees, because the money those retirees deposited has already been spent.
Yeah. That's what pension funds do. They accumulate money and hand it out to people who think they damn well better be able to withdraw upon it.
In 1960, the birth rate in the US started to decline. It hasn't had a meaningful rise since. [0]
Markets can experience natural growth - typically through birth rates, sometimes through immigration - or they can begin to more thoroughly monetize capital as to create growth from fewer people.
The Baby Boomers thoroughly broke the ability to grow through natural means, and it's been that way for 25-30 years.
This is a problem, because you need that natural growth to fund the retirements that the Boomers planned on having, along with the entitlement state in the US, which focuses almost exclusively on people over the age of 65 with OASDI and Medicare.
So how do you solve this problem?
If you're investing the hospital business, for example, you can no longer expect the same sort of growth that you used to if your plan is to have a current customer birth their 2.1 kids in your maternity ward. You now need to do other things to monetize the current customer, like charging him more for his next procedure, or - even better - looking to developing markets like India (or China 25 years ago) and focus your investment there. It's a lot easier to bring a rural clinic "up to spec" in China than it is in the US, because one started out with far cheaper needs to meet. X-ray machines are easy to install; cancer centers with advanced imaging machines and academic medicine practitioners are expensive.
And that's what the investors do. They find ways to get in on deals that aren't in the US. It's not just medicine, either. That capital that built Shenzhen into a tech mecca came from the US.
In the meantime, they need to find ways to exist in the American market, so they do what I mentioned earlier: they monetize the hell out of customers they already have. If that means closing a hospital and making the "customer" (read: guy having a heart attack) go to one twenty miles further away that has a better business value, then they do exactly that.
Or, they find ways to monetize the younger generations more, since they're not drawing on pensions and IRAs yet. Otherwise they risk gobbling up the returns they handed back to their members with increased costs.
[0]https://www.macrotrends.net/global-metrics/countries/usa/uni...