The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust Hardcover – Deckle Edge, Nov 1 2011
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“The High-Beta Rich is one that deserves to be read, and not just because it provides the rest of us with a cathartic dose of schadenfreude at the expense of the super-wealthy. Robert Frank makes a new, contrarian argument with important implications for economic policymaking: modern wealth is a far more volatile substance than is commonly believed.” ¯The Economist
“Frank writes in a pleasingly breezy style and makes a convincing argument that the volatile earnings and spending of the high-beta rich have wound up distorting communities, the economy and government.” ¯Bloomberg
“While the recession continues to wreak havoc in the economic lives of the nation’s middle- and low-income population, Frank provides a cogent explanation of how megabillionaires have contributed to today’s economic conditions and heightened economic inequities. Furthermore, he shows that few are genuinely interested in job creation or the long-term prosperity of others.”
“When most people write about the very wealthy, they cannot stop themselves from either sneering or drooling with envy. Robert Frank is different. He writes with great panache -- and insight, and curiosity -- about a slice of Americana whose behavior affects the rest of us more than we might think. A great read."
--Stephen J. Dubner, co-author of Freakonomics
“Robert Frank has uncovered one of the most important new forces shaping our economy: the increasing volatility of the wealthy. Filled with gripping human stories and ground-breaking analysis, The High-Beta Rich will change the way you think about wealth and the American economy. Funny, smart and memorable.”
--Nouriel Roubini, Economist, author of Crisis Economics
“Lively and insightful. Money, a primitive but useful motivator, also exacerbates the most basic human tendencies and amplifies a society's characteristics and cycles, like the US's overconsumption binge. The High-Beta Rich gives an excellent portrait of these excesses.”
--Nicolas Berggruen, billionaire financier, philanthropist
“The High-Beta Rich vividly illustrates how the wealthy and those they employ have become increasingly tied to the vicissitudes of the stock market and the macroeconomy . It is a cautionary tale for all."
--Steven Neil Kaplan, professor of entrepreneurship and finance at the University of Chicago Booth School of Business
"If you, like I, have had it up to here with the rich, you will love the chapter about the repo men who specialize in yachts."
--Joe Queenan, Columnist, author of Closing Time
About the Author
ROBERT FRANK is the Wealth Reporter for The Wall Street Journal and the author of the New York Times bestselling book, "Richistan." His blog, The Wealth Report, was named by Time magazine as one of the nation's most influential business blogs. He is one of the nation's leading authorities on wealth and is a frequent contributor to NPR, ABC News, and Fox Business.
Top Customer Reviews
Frank spent two years tracking some 200 families of America's noveau riche who made millions and billions in the bubbles outlined in the chart above. The trouble is that 'quick-come on big leverage' has meant 'quick-go in spectacular collapses' in many cases. The real life stories are fascinating (albeit common).
The broader thesis of the book is how our economy has become more vulnerable and volatile as wealth, and frequently mismanaged, fleeting wealth, has pooled into a few and away from average households. One of my favourite lines from the book comes when Frank is telling the story of two tough and scramble New Jersey brothers who grew up on the cargo docks and made themselves billionaires by building up the family docking business, here is Frank:
'Even the toughest dock workers in New Jersey, however, couldn't prepare them for the wealth managers of Wall Street and the hundreds of millions of dollars they lost in just a few months.'
Most Helpful Customer Reviews on Amazon.com (beta)
Robert Frank advances the Plutonomy theory further by tying Ajay Kapur's work with the working paper of two Northwestern University economists, Jonathan A. Parker and Annette Vissing-Jorgensen titled "The Increase in Income Cyclicality of High-Income Households..." Fusing those two works, Robert Frank states that since 1982 the rich have become risk takers and gamblers. This is because starting in 1982 government policies have favored risk taking by lowering interest rates, inflation, and taxes, and deregulating the financial markets. The combination of those policies contributed to an excessive extension of real estate credit and a succession of real estate and stock market bubbles caused in part by the High-Beta Rich exploiting the mentioned government policies.
One of the most powerful insights from this book is that the High-Beta Rich are very vulnerable and associated with a rapid turnover among their ranks. Among the top 1% of American earners (income > $380,000), only half made the cut more than once over a ten-year period (pg. 217). Frank also shows two charts early in the book that compare the gains and losses in income of the top 1% in the U.S. vs all taxpayers. Before 1982, the fate of both groups was similar. Then, after 1982 the two groups diverged radically. Whether up or down, the changes for the top 1% became a high multiple vs the norm. The top 1% boosted their income a lot more during expansions. But, their loss was also far greater during contractions. This is because the High-Beta Rich have a surprisingly low savings rate and are very leveraged. Their leverage does multiply both their gains and their losses. The mentioned economists uncovered that before 1982, the top 1% had a Beta of less than 1 (meaning they took less risk than the general population and their fortune was less volatile). But, after 1982 their Beta jumped to between 2 and 3 as they took on far more risk than the general population. Their high Beta is due to a greater concentration of their wealth in volatile assets such as stocks and real estate and a greater leverage.
The High-Beta Rich volatile income causes chronic Budget Deficits at all levels. In California the top 1% of earners were paying 41% of taxes during the dot.com boom in the late 90s. Capital gains taxes accounted for a large share of tax receipts. When the dot.com Bubble burst California tax revenues tanked and it experienced chronic State Budget deficit crises in the early 2000s. However, by 2007 the top 1% of earners were accounting for an even greater share of CA State tax receipts at 48% (nearly half!). This was due to a recovery in the stock market (capital gains tax) and the housing boom (property tax). The ensuing financial crisis caused the rich income to drop by three times as much as the general population (Beta of 3). By 2011 California tax revenues cratered associated with a $26 billion budget hole. The same is true for New Jersey, New York, and Connecticut with many High-Beta Rich. It is true at the Federal level as the top 1% earners pay more than 38% of federal income taxes.
Frank states that the financial behavior of the High-Beta Rich contributes to exacerbating business cycles with more bubbles and ensuing crashes of greater magnitude and greater frequency than otherwise. Large concentration of wealth may be both a cause and effect of bubbles. Speculative asset bubbles correspond to periods of highest inequality. By 2007, the US top 1% controlled 34% of the nation's residential real estate. Between 1989 and 2007, they increased their relative exposure to real estate by 50% by quadrupling their mortgage debt level over the same period.
If you want to further study the impact of deleveraging, the best book on the subject is Irving Fisher The Debt-Deflation Theory of Great Depressions. Originally published in 1933, it also better explains the current financial crisis than most current books.
The stories are scary - a reminder of how easily fortunes are made and lost. The book is peppered with quotations, statistics and charts. "In 2007,..., the richest 1% of Americans held more than $3.5 trillion in residential real estate, or about 34% if the nation's total." The author highlights the spending differences between rich and poor Americans. The top 1% earn 20% of the US's income and pay 38% of federal income taxes.
A particularly sad story is the demise of stores in the Rocky Mountain resort of Aspen and the corresponding drop in house prices. From a small town, the author moves to the state of California. The analysis of state income follies and overspent budgets is shallow, but highly readable.
Finally the author gives some ideas for surviving in highly volatile stock markets. He encourages savings and rainy day funds.
This books dire warnings and heartbreaking examples should be read by all who want to avoid a financial catastrophe. Thorough research and clear writing makes this a great book for anyone interested in wealth, from butlers to billionaires.
Where Frank comes up short is in his attempts to tie these personal stories to his thesis that the wealthy today are far less risk averse in their investing than those in the past. They are "high-beta" rich, making more money during boom years and losing more money during recessions. His examples don't come from a broad swath of the wealthy. All of them are real-estate based tycoons. The Great Recession was hard on real estate, which unlike the stock market has yet to recover. The unanswered question is how common and widespread is the catastrophic wealth loss detailed in this book. I believe that those that invested in travel related real estate - time shares and vacation homes for the rich, which was the source of wealth for the handful of people examined here - suffered greatly. But those in other sectors of real estate and finance seem to be managing just fine by and large. Frank may be cherry picking to try to make his point.
Frank relies on data that show, on average for the last 30 years, the wealthiest one percent of this country have done worse during recessions and better in good times than the rest of the population. But those are averages and they mask details. A small percentage of billionaires losing it all (and making it all during economic booms) could easily skew results.
High fliers have always existed in America. I've seen them in real estate (my childhood best friend's father went boom and bust in real estate in the 1950s). I've seen them in finance. What is different today in comparison to the 1970s is that conspicuous consumption is considered to be not only socially acceptable but desirable. The nature of investing has changed dramatically as well. Frank would like you to believe that the way the billionaires of today invest puts this country in peril. But that isn't quite right. It isn't individual investing that's the real driver. It's the institutional investors representing charities, pension funds, et al. That's where the money driving the markets is principally coming from and to the extent that they buy risky investments they put both this country and their benefactors in peril.
Frank documents all the lavish spending taking place among the mega-rich in a lively way. He makes their lives sound both comical and tragic. The attempt to go from the particular examples shown here to the nationwide implications of the spending and asset loss of the wealthiest one percent is probably mostly hyperbole.
Franks uses examples of a few Beta-rich people who overextended themselves through arrogance, foolishness or plain stupidity and managed to lose all or a substantial amount of their wealth. The author shows how this small assortment of wealthy people and their rise and fall as millionaires is entangled with the prosperity and welfare of those they employ and the communities they live in.
Many of these new millionaires succumbed to what Frank so amply describes as being "caught up in the status race and spending binge of the 2000s with little regard for the long-term costs or consequences." However, a large amount of those who are counted as the wealthiest barely felt the bump in the road. Frank writes "Most of them recovered from their crash with minor damage, thanks in part to the government bailout of Wall Street and the Federal Reserve's support of financial markets, which largely benefited the wealthy."
Frank does not overburden the reader with statistics, yes there are graphs and data to back up the text, however, this is a book that also displays the human side of wealth accumulation and conspicuous consumption of the High-Beta rich, this book is in no way an economic exposition.
Frank maintains an impartial attitude throughout the book, being neither critical nor gracious to those he interviewed as he attempts to show us how the rich may be responsible for the cyclical economic growth and bust of the American dream.
"The High-Beta Rich" was interesting and gives a glimpse into how far some wealthy individuals managed to fall in this latest round of the economic downturn we are experiencing. If you like to read about how some managed to squander millions of dollars in a short period of time and perhaps have had an effect on your own life, this book may be for you. I give it 4 stars, it was a fast read, and held my attention.
However, its analysis is quite shallow, depending on conclusions based on anecdotes that really don't support the conclusions.
Frank is right about the "financialization" and speculization of our economy, and he's right about certain localities that have very high concentrations of very great wealth depending too much on the continued prosperity of the wealthy to meet their budgets. But his anecdotes have nothing to do with this - his stories are about people who simply blew their money, spending way beyond their means (debt) for things they didn't need. Out of this pretty normal human foible, he creates a national problem - when the actual problem (mentioned then ignored several times) is that an ever greater percentage of Americans have income/assets that are going nowhere, or are going down. And he mentions then ignores the fact that government policies are a seriously large part of the cause of this. But he pretty much ignores the huge, looming, uncorrected fact that government deregulation of the financial sector has not only allowed it to grow to 33-44% of GDP, it has also given people who are at best a little, uh, "sharp" a license to steal.
When it comes to solving the problems he ignores, he throws up his hands and declares them insoluble. This occurs on P. 208, and it's beyond weak, it's pathetic. To solve the problem he has proclaimed, high beta, but has not really illustrated or demonstrated, he advises (a) for individuals, governments and institutions: tracking the stock market to see if the rich are making out or are losing (b) saving for a rainy day (c)stop blowing your money, stop going deeply into debt (d) be mindful that money isn't everything and that (e) money won't buy you peace of mind.
In other words, after giving us a few schadenfreude inducing human interest stories and failing to address our actual problems, he falls back on the old home truths, aka, bromides, aka, cliches.
I enjoyed it but in the end was quite disappointed.
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