The New York Times reports that in 2007, the median family made less -- $60,500 -- than it did in 2000 -- $61,000. Meanwhile, that family's costs have spiked -- oil is up 342%; wheat, milk, and egg prices have doubled or tripled. And the dollar has lost 65% of its purchasing power. But no worries -- hedge funds are making out well. DealBook reports that John Paulson, who famously profited from selling subprime short last year, made $3 billion in 2007. I don't know how much he made in 2000, but I'd bet that he's better off now than he was then.
Newsweek reports that people like Paulson are part of a new Superclass that's prospered in the last seven years. The Superclass is a group of a few thousand government and business people who control most of the world. How many and how much? Newsweek notes: "The top 50 control almost $50 trillion in assets. The heads of the world's biggest corporations are also members; the top 2,000 support perhaps 500 million people, generate almost $30 trillion in sales and have well over $100 trillion in assets."
Thanks to tax cuts passed in 2001, Paulson probably paid a lower tax rate on his $3 billion than the median American paid on his or her $60,500. Specifically, Paulson could have paid 15%, the long-term capital gains rate, on his income from shorting subprime. The median family paid a 25% rate on its income. That capital gains rate was 20% in 1997 so Paulson may have paid $150 million less in taxes thanks to that 15% rate. But the most interesting part is how Paulson profited.
DealBook reports that Paulson profited while the typical homeowner suffered. It notes that, "By standing conventional wisdom on its head and deciding that housing prices could decline on a national level, and that investment-grade mortgage bonds would be subject to default in record numbers, Mr. Paulson, 52, set a new record for payouts on Wall Street..." And since he's part of that Superclass, Paulson can afford to hire self-pitying former Fed Chair Alan Greenspan as an advisor.
Meanwhile, DealBook cites an IMF estimate that the loss of value that lined Paulson's pocket may hit $1 trillion. That global loss in value springs from the disaster in the subprime market which will likely result in millions of home foreclosures in America. The Superclass will probably need to find new ways to make its billions this year because the word is out on the subprime short trade.
And for those who voted the current regime into office, if you're not in that top 2,000 people, you voted against your own economic interests. The miracle is that a country of 300 million people was hijacked by a tiny elite that was able to persuade millions of voters to give them power in order to implement economic policies that favored the Superclass at the expense of the average American.
I admire Paulson's prescience and nerve in profiting from the subprime collapse. I just think it's interesting that he is paying less tax on his $3 billion in earnings than the typical American on the losing end of that subprime trade.