I had lunch today with a guy I share office space with. He is a partner at a small investment bank and has spent his entire career at various investment banks, helping companies raise capital. He is part of Wall Street, and Wall Street pays for his house and his kids’ private schools. And yet even this insider, when our conversation turned to proprietary trading and hedge fund, he remarked “What do those guys really add to society? They don’t build anything. They don’t allocate capital. They just make money from gaming the market.”
It’s true. When we discussed Renaissance Technologies’ 45% annual return since 1988, I noted that there are 90 PhDs, mostly in physics and computer science, working there. Think of the great things those guys might invent if they were trying to grow something other than their bank accounts.
So all the PhD’s in academic mathematical research – they don’t invent things either. Is their potential “wasted”?
You know how much tax is generated from that 45% return, which comes from those smarts?
Although less tax than there could be, since employees are compensated on carried interest, which is currently taxed as capital gains rather than income.