The Dangers of Democratic Hedging (not about Iraq)

It has become a source of some amusement in the media that the burgeoning hedge funds have become a core source of funds for the leading Democratic presidential contenders (while also pouring money on the top Republican candidates).

Prominent locals in Greenwich, Connecticut, where many hedge fund managers reside, now brag about candidate scuff marks on their basketball courts, according to the New York Times.

Hedge fund money is gushing into Hillary Clinton’s coffers; Chelsea Clinton has taken up employment at one major Democratic-leaning firm.

John Edwards cashed in and made connections while working briefly as a hedge fund adviser until announcing his bid for president.

And Barack Obama appears to have taken in more bucks from the hedge fund industry than any of his Democratic competitors.

It’s time to tamp down the hilarity, however, and give this phenomenon a bit more scrutiny.

Consider this: The lead story in last Friday’s Financial Times was titled not so subtly: “Hedge funds attack US banks for aiding subprime borrowers.”

The story reported on a letter by 25 hedge funds complaining about bank practices to enable mortgage borrowers to avoid foreclosure. The hedge funds have invested in various derivative instruments that pay off when borrowers default and get thrown out of their homes.

With the housing sector in crisis and unsustainable subprime loans crashing, the lending banks are actually working with borrowers to help them keep up with payments. This is what the hedge funds object to.

Of course, the hedge funds have larger political and economic interests as well, which are antithetical to national and global well-being. At the top of their list, they seek to avoid any kind of regulation — even though their exotic investments and high-stakes gambling pose enormous systemic risks that they cannot possibly absorb, even if they were to go bankrupt. So too hedge fund managers making more than a billion dollars a year may resist efforts to crack down on tax manipulation that enables them to avoid paying regular income tax rates — let alone calls for an effective raising of the top marginal rate for the super-rich.

The United States has been down this road once before. Goldman Sachs’s Robert Rubin directed the Clinton administration to prioritize Wall Street over the general interest — ensuring Democratic assistance with what Jeff Faux rightfully calls The Global Class War of big business and allied elites against workers everywhere.

Hedge funds are representative of a new world of finance even more disconnected from regular people’s well-being than the traditional Wall Street firms. There’s no doubt that these funds and their managers have tremendous amounts of money to bandy about, but it is political folly — and a policy nightmare in waiting — for the leading forces in the Democratic Party to be cozying up to the hedge fund elite.