Trading Inside With the Feds

The Symbiotic Relationship of Feds and Insiders…

Since the beginning of time, the insiders have always had an advantage. That’s why people want to be insiders; they know that’s where the money is.

In actual fact there’s a very special form of ‘inside trading’ going on where the feds and the insiders work together.

In business and investment, it is perfectly normal, healthy and unavoidable. The people on the inside always know more than the people on the outside. So, you tend to listen to the insiders. You hope you can trust them. And when an insider wants to sell you something…beware. Caveat emptor.

But along came the feds. They tried to pretend that insiders and outsiders were on a level playing field. They wanted the outsiders to feel that they could give the insiders their money without worrying. There was nothing to worry about.

The insiders give the feds jobs and money.. The feds look out for the insiders too. Putting in place a heavy and expensive regulatory system, the SEC helped them from competition. It also shifted income from productive, profit- making activities to the zombies — the lawyers, administrators, and regulators who, not entirely by coincidence, are the feds themselves.

Since then, the parasites have multiplied…and the insiders have done better than ever. People on Wall Street used to earn about as much as similar people in other industries. Now, they earn far more. As a percentage of the nation’s total for public companies, Wall Street profits rose 3 times — from 10% to 40% since the ’70s. Tyler Cowen reports that in the mid-2000s “the top 25 hedge fund managers combined earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning over $100 million a year was nine times higher than the public-company executives earning that amount.”

And corporate CEOs, who used to earn 40 times as much as their lowest paid employees in the ’70s, now earn 400 times as much.

This field is tilted so far in the insiders’ favor the outsiders can barely stand up.

The Pittsburgh Post Gazette reports:

For the three decades between 1949 and 1979, family incomes in America rose evenly for every fifth of earners, from the bottom 20 percent through the top 20 percent. In other words, a strong economy lifted all boats at about the same rate.

Since then, the rich have pulled away from everyone else. A new study by the nonpartisan Congressional Budget Office showed that between 1979 and 2007, after-tax income for the top fifth of earners went up by 103 percent, compared with 40 percent for the middle three-fifths of earners and just 18 percent for the bottom fifth.

The greatest benefits went to those at the very top. Research by economists Emmanuel Saez and Thomas Piketty shows that the top 1 percent of earners increased their share of pre-tax income in America from 8 percent in 1979 to 18 percent in 2008, the highest level that group had garnered since 1928, the year before the Great Depression began.

There is a hotly contested, unresolved debate over what caused the rich to get so much richer over the past three decades, and whether that is a bad thing.

Intellectuals may be debating what caused the rich to get so rich. No one else cares. They just know they don’t like it. And they want to do something about it. Probably, just the worst thing.

The average person may not sit still for an explanation, but how about you, Dear Reader? Want to know why the rich got so rich?

Well never mind. But if only the feds had allowed capitalism to do its work 3 years ago! It chewed up Lehman Bros and was about to go after Goldman, Bank of America…GM…and then it would have bankrupted businesses, banks, and households all over the world…leaving a lot of CEOs out of a job. Talk about contagion! The whole capital structure was about to get sick.

If the feds had allowed creative destruction to continue…there would be a lot fewer rich people around today. And we wouldn’t be having this discussion.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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