Book review: The High-Beta Rich — How the Manic Wealthy Will Take Us to the Next Boom, Bubble and Bust
This review ran in the Nov. 21 edition of the Hamilton Spectator.
By Robert Frank
Crown Business ($30)
Tim Blixseth grew up poor in rural Oregon with a rusty spoon in his mouth. Edra was a single mom at 17 who worked the night shift at a diner. They met back in the 1970s at a restaurant Edra managed.
Fast forward to 2006. The former welfare kid was now one of America’s wealthiest men with a net worth estimated at $1.2 billion. The Blixseth’s had made their fortune on timber and real estate and ran an exclusive golf and ski resort in Montana for millionaires and billionaires.
The Blixseth’s owned seven homes, a private island in the Caribbean, a castle in France, two yachts, Gulfstream jets and his and her Rolls Royce Phantoms. They employed 110 staff.
The Blixseth’s had taken up residence with other freshly minted billionaires and millionaires in a nation that author and Wall Street Journal reporter Robert Frank calls Richistan.
Richistan is home to the high beta rich. They’re the by-product of a financial system that rewards extreme risk-taking, borrowing, speculation and spending. The super-rich no longer make things or own businesses. They owe their fortunes to stocks, deals and financial engineering.
Frank says the fortunes of the high beta rich have become as monumental and seemingly permanent as their 30,000 square foot fortresses that they call home.
But their success and wealth is built on an illusion. The high beta rich are like human tech stocks, prone to wild swings and rapid cycles of value creation and destruction. Back in 2008, the value creation cycle kicked into a downward spiral. The residents of Richistan panicked.
By mid-2009, America’s millionaires had lost about a third of their fortunes in the greatest one-time destruction of wealth since the 1930s. Incomes for the top one per cent of earners in the U.S. fell three times as much as they did for American earners as a whole.
By the winter of 2010, the party was over for the overextended Blixseth’s. The real estate market crashed. The Montana resort went under and was sold for less than 10 per cent of its appraised value. They couldn’t cover a $375 million loan. Their 110 staff were let go. Even the phone service was cut off. Tim and Edna divorced and Edna filed for personal bankruptcy, going from rags to riches to rags.
While it’s hard to shed a tear for the Blixseth’s, Frank says we should all be afraid of what’s happening to the high beta rich. Very afraid.
“While these shocks may seem irrelevant and even amusing to the rest of us, they will increasingly reverberate through our financial and political life as the rich dominate more and more of the economy and funding for governments. Rather than viewing the financial crisis as a narrow escape for the rich, it may have been a warning that the worst is yet to come.”
While trickle-down economics is dismissed in most quarters, trickle down losses are proving very real. “As go the high-beta wealthy, so goes the rest of the country.”
By 2010, the top-earning five per cent of American households accounted for 37 per cent of all consumer outlays. The wealthy are the dominant spenders in the U.S. consumer economy. So when the rich suddenly stop spending by choice or circumstance, the economy takes a massive hit and lots of us wind up out of work.
The high beta rich also backstop governments. In the U.S., the top one per cent of Americans pay more than 38 per cent of federal income taxes while the bottom 40 per cent pay little or no tax.
An increasing share of government programs will depend on the fortunes made and lost by a minority of high beta rich. “The masses at the bottom require increased funding for entitlements and social programs,” says Frank. “But those at the top, who are increasingly paying for those programs, will exert an outsize influence on politicians through their money and will lobby for lower taxes. The result is that governments will have more booms and busts and permanent deficits.”
Unfortunately, there’s no easy fix for high beta wealth. “To solve the problem requires solving two much bigger problems: the financialization of wealth and rising inequality,” says Frank. Governments show little interest in reigning in financial markets and economists can’t agree on a cause, much less a solution, to economic inequality.
“The issues get reduced to oversimplified debates about taxing the rich or shrinking government or punishing Goldman Sachs – all of which may be politically satisfying and maybe even helpful, but far from a solution.”
Frank does offer some survival tips for those of us not living in Richistan.
To better predict where spending, taxes and jobs are headed and avoid nasty surprises, we need to watch the stock market rather than traditional economic measures.
Governments, companies and individuals need to take money off the table, saving more during booms so we can ride out busts.
We need to stop acting rich and being fooled by all that glitters. Wealth doesn’t solve problems; it just creates different ones and not only for the residents of Richistan.
“These tips won’t rid us of high-beta wealth or its contagion,” says Frank. “But they might allow us to build better financial and psychological levees to protect us against the coming storms and floods.”